Final answer:
A deductible is the amount the policyholder must pay out-of-pocket before the insurance company pays the rest of the bill. Copayments are flat fees that must be paid before receiving certain services. Coinsurance is a certain percentage of costs that the policyholder must pay after the deductible has been met.
Step-by-step explanation:
A deductible is the maximum amount that the policyholder must pay out-of-pocket before the insurance company pays the rest of the bill. To give an example, let's say you have a health insurance policy with a $1,000 deductible. You go to the doctor and the total cost of the visit is $500. Since this amount is less than your deductible, you would have to pay the full $500 out-of-pocket. But let's say you have a second doctor visit later in the year that costs $1,500. Since your deductible has already been met with the first visit, you would only have to pay a percentage of the $1,500, depending on your coinsurance.
Copayments are flat fees that policyholders must pay before receiving certain services. For example, you may have a $30 copayment for each doctor visit. So even if your deductible has been met, you would still have to pay $30 for each visit.
Coinsurance requires the policyholder to pay a certain percentage of costs once the deductible has been met. For instance, if your coinsurance rate is 20%, and you have met your deductible, then you would be responsible for paying 20% of the total cost of a service, such as a hospital stay or surgery, and the insurance company would cover the remaining 80%.
Deductibles, copayments, and coinsurance help reduce moral hazard in insurance by incentivizing the insured party to bear some of the costs before collecting insurance benefits. This discourages unnecessary or excessive use of medical services and helps manage the overall cost of insurance premiums.