How health insurance works

Understanding how health insurance works can be confusing.

Why health insurance coverage is important

No one plans to get sick or hurt, but most people need care at some point. Health insurance helps you cover the costs of health care services and offers many other important health benefits. A high-quality health insurance plan:

Protects you from unexpected, high medical costs,
Ensures that you pay less for covered in-network health care services,
And, offers free preventive care, like vaccines, screenings and some checkups.

Here’s a simple way to think about it.

You pay a set amount each month, called a premium, for health coverage.

By making monthly payments, you become a member of a group, or plan, which shares the cost of medical services needed by the members of the plan.

Each member pays “just in case” they need care. This ensures that you won’t have to pay the true cost of care when you need it, which can be really expensive if you have to pay for it all yourself.

Understanding cost shares

Similar to how you share costs with the other members of your group, you also share costs with your health plan too. Most health plans share costs with you through deductibles, copayments and coinsurance. Thankfully, your annual cost share is limited to your maximum out-of-pocket amount.

Deductible

A deductible is the amount you pay out-of-pocket for covered health care services before your health insurance starts to pay. With a $3,000 deductible, for example, you pay the first $3,000 of covered services yourself. In most plans, once you pay your deductible, you’ll still need to pay copays and coinsurance until you reach your maximum out-of-pocket amount. After you reach the maximum out-of-pocket amount, your health plan will pay 100% of your health care costs.

TIP: Choosing a plan with lower monthly premiums will likely mean that you’ll have higher deductibles and end up paying more out-of-pocket if you need to see a doctor.

Copayments

Copayments, or copays, are fixed amounts that you pay for health care services and prescription drugs. For example, a visit to your primary care physician may have a $20 copay, while filling an order for prescription drugs may have a $15 copay. Your copay amounts stay the same no matter how much your doctor actually charges for a service. You will pay copayments until you hit your maximum out-of-pocket amount.

Coinsurance

Unlike copays, coinsurance isn’t a flat fee — it’s a portion of the cost of covered health care services after you pay off your deductible. Coinsurance shows up as a percentage in your summary of benefits and coverage. For example, let’s say your coinsurance is listed as 20%. After you pay off your deductible, your coinsurance kicks in so you pay 20% of the total cost of a health service and your health insurance carrier pays the remaining 80% of the bill.

Maximum out-of-pocket amount

Also called MOOP amount, out-of-pocket max, out-of-pocket limit

Your maximum out-of-pocket amount is the most that you can pay for covered health care in a calendar year , aside from your monthly premium payments. Your MOOP helps protect you financially in the event of large or unexpected health care bills. Most health insurance plans have a MOOP.

Your MOOP is made up of your

Deductible
Eligible copays
Eligible coinsurance payments

Your MOOP does not include your monthly premium payments.

During the calendar year

, most payments that you make when receiving care go toward your MOOP amount. When you have paid up to the level of your MOOP amount, your plan will start covering 100% of your covered benefits until the MOOP starts over in the next coverage year. Some supplemental benefits are not subject to the MOOP. For instance, in some plans, prescription drugs are not subject to the MOOP limit. Learn more about how to read your maximum out-of-pocket (MOOP) claim .

Your MOOP “resets” (starts over at zero) every calendar year

Here’s an example.

Let’s say you receive a $20,000 bill, and you are enrolled in a health insurance plan with the following benefits:

Deductible : $3,000
Coinsurance : 30%
Out-of-pocket maximum: $6,000

Steps to calculate your costs

How it works

You make payments totaling $3,000.

$20,000
– $3,000	(your deductible amount)
$17,000

The rest of the bill is $17,000.

This means you paid off your deductible for the year. Your health plan steps in at this point to help you pay for covered costs.

We apply your coinsurance rate (30%) to the rest of the bill to calculate your share of the costs.

$17,000
× 30%	(your deductible amount)
$5,100

Because you paid off your deductible, the rest of the bill gets split between you and your health plan. You are responsible for paying your coinsurance, and your health plan pays for the rest.

To calculate your total costs for this bill, we add your deductible and coinsurance.

$3,000	(deductible)
+ $5,100	(coinsurance rate × rest of the bill)
$8,100

But, you have an out-of-pocket maximum of $6,000. This means you cannot pay more than $6,000 for covered costs.

Thanks to your out-of-pocket maximum, your total cost for this bill is reduced.

$3,000	(deductible)
+ $5,100	(coinsurance rate × rest of the bill)
$8,100
– $2,100	*you cannot pay more than $6,000
$6,000

An out-of-pocket maximum is meant to help protect you and your finances. It’s also worth noting that, before receiving this $20,000 medical bill, you may have paid for other covered costs earlier in the year — that means your total cost for this bill would be even less than $6,000.

Keep track of your health care costs

One of the easiest ways to keep track of your covered health care costs is by regularly logging into your Sharp Health Plan online account. Here you can check deductibles, review your benefits and more.

Helpful definitions ›

Frequently asked questions ›

News center ›