What are Deductibles and how they differ from co-pay and co-insurance?

Terms like deductibles, co-pays and co-insurance in health insurance plans often confuse students who go from countries like India to countries like the US, UK, Canada or Australia for higher studies. This is because the practice of cost sharing between the client and health insurance provider is quite alien in India. The cost for the insurance buyer is only limited to the payment of annual premium.

In contrast, in the US, insurance buyers, including international students who purchase Student Health Insurance Plans (SHIP) sponsored by the respective universities or colleges, not only have to pay a hefty premium but also share the cost of treatment with the insurance provider in terms of deductibles, co-pays and co-insurance.

In this blog, Student Cover tries to explain what a deductible is and how it differs from co-pay and co-insurance.

What are deductibles?

Deductible is that cost of treatment which an insured person has to pay from his or her pocket for covered services before the health insurance plan starts paying. For example, the Student Cover’s health insurance plan for International students studying in the US such as SC Basic, SC Essential, SC Plus and SC Elite each has an yearly deductible of $100. This means that all students with any of these plans will have to bear the first $100 of medical expense from their own pocket before the plan gets activated i.e. provides coverage. Once the $100 limit is crossed, Student Cover plans will cover for the additional cost (though not fully in some cases. Read below to know more about this)

Illustration 1: Let’s say Ram who has purchased the Student Cover Elite plan with an option yearly deductible of $100. After a month, he falls sick and has to undergo treatment in a hospital. He goes to a network hospital (PPO) and gets treated. The total medical bill comes out to be $500. Now since he is getting the treatment for the first time, he will have to bear $100 from his own pocket. For the remaining $400, SC Elite plan would step in and pay 90% (SC Elite offers 90% co-insurance at network hospitals) of $400 i.e. $360. Hence, at the end, Ram has to pay $100 + $40 = $140 out of $500.

Illustration 2: Let’s say, after a couple of months later, Ram again falls sick and similarly, he goes to a PPO hospital to get treatment. As in the previous case, let’s say this time too he is handed a medical bill of $ 500. However, since he has already paid $100 as deductible during his previous treatment. The insurance plan is already active and will pay 90% of the entire amount of $500 i.e. $450 and Ram has to pay only $50 from his own pocket. This time, he won’t have to pay any deductible.

What are the different types of deductibles?

Deductibles in case of individual student health insurance plans in the US can be broadly classified into two categories:

a. Annual Deductible – These are deductibles that a student has to pay only once in a year. Once the deductible is paid by the insured person, he or she does not have to pay any deductible for the rest of the plan period. These types of deductibles are relatively high and may range from $100 – $500 per year depending on the plan.
Note: In case of Student Cover plans, students who undergo treatment in health center in their respective colleges or universities get their deductibles waived off. This unique facility may or may not be offered by other health insurance providers in the US.

b. Per Event Deductibles – These are deductibles that an insured person has to pay each time he or she undergoes medical treatment or alike. These are relatively very low and may range from $5 – $10 per event.

Deductible – Premium Tradeoff

Almost all health insurance plans offer students a range of deductible options to choose from in their plan. For example, Student Cover Elite gives choice to students to either opt for a $100 deductible plan or $500 deductible plan. Those plans with higher deductibles have lower premium as compared to those with lower deductibles.

However, having said that, it is not necessary that a plan with higher deductible but lower premium would be better than a plan with lower deductible and higher premium. If a health insurance plan premium is say, $1,300 per annum with an annual deductible of $100, a plan with $500 might cost $1,150. In that case, a person might save $150 on premium but he or she also has to pay up to $500 as deductible for the health insurance plan to step in.

In simple words, low premium high deductible plans are better in case of high annual treatment bill and vice versa.

Difference between Deductibles, Co-pay and Co-insurance

While deductibles, co-pay and co-insurance are all part of what is called cost sharing, there are sharp differences between them.

As mentioned earlier, deductibles are annually charged and have a one-time limit for the policy year.
Co-pay on the other hand is prefixed the amount that the insured has to pay for a particular service during treatment. Co-insurance on the other hand is the percentage of the total medical bill that the health insurance provider will pay.

Illustration 3

Say Ram undergoes surgery in a hospital and the bill comes out to be $25,000. In this case, he will have to pay a deductible (if it has not already been paid during previous treatment), a co-pay amount (such as $200 co-pay for surgeon’s fees and $100 co-pay for ICU care). This means of the total bill of $25,000 he pays $100 + $200 + $100 = $400 as deductible and co-pay. For the remaining $24,600 ($25,000 – $400), the health insurance plan (with co-insurance say 90%) will pay 90% of the amount i.e. $22,140 and Ram has to pay the remaining 10% i.e. $2,460 ($ 24,600 – $ 22,140).

In total, Ram pays an amount of $2,460 (co-insurance obligation) + $400 (Deductible and co-pay obligation) = $2,860.

Generally, all health insurance plans in the US have all three cost sharing components (deductibles, co-pay and co-insurance) embedded in it.

Let’s Wrap Up!

Health insurance plans in the US follow the concept of cost-sharing wherein the insured person has to share a part of the medical expenditure with the health insurance provider. This cost –sharing comes as deductibles, co-pay and co-insurance. While deductibles are a onetime costs before the health insurance plan kicks in, co-pays are recurring in nature and vary depending on the service availed by the insured during treatment. Co-insurance on the other hand is the portion of the remaining cost after deductibles and co-pay that the health insurance provider pays.

Disclaimer: The blog is based on the data and research done by the blogger in his/her personal capacity. Readers are advised to exercise their own discretion while purchasing any insurance policy.