Do Premiums Count Toward Your Deductible?

I recently heard a rant from a frustrated health insurance newbie. He said he had already paid more than his annual health insurance deductible amount in monthly premiums this year, but his health insurance still wasn’t paying for his doctor’s office visits. When he called his health plan to find out why they weren’t paying, he was told that he hadn’t reached his deductible yet.

He thought the premium payments he was making each month should be credited toward his annual deductible. Unfortunately, health insurance doesn’t work that way; premiums don’t count toward your deductible.

This article will explain what premiums are, how they differ from cost-sharing (deductible, coinsurance, copays), and what you should expect in terms of paying for your health coverage.

If Premiums Don’t Count Toward Your Deductible, Then What Are They For?

Health insurance premiums are the cost of the health insurance policy. It’s what you pay the health insurance company (or employer, if your employer provides a self-insured health plan) each month, in exchange for the insurer’s agreement to shoulder part of the financial risk of your health care costs—both expected and unexpected.

But even when you pay your health insurance premiums, your health insurance doesn’t pay 100% of the cost of your health care. You share the cost of your healthcare expenses with your insurer when you pay deductibles, copayments, and coinsurance, together known as cost-sharing expenses.

Your health insurance company pays the rest of your healthcare costs, as long as you’ve followed the health plan’s managed care rules (ie, prior authorization, getting referrals from your primary care doctor, using in-network medical providers, following step-therapy requirements, etc.).

Cost-sharing allows health insurance companies to sell health insurance policies with more affordable premiums because:

• If you have some "skin in the game", you’ll avoid getting medical care you don’t really need. For example, you won’t go to the doctor for every little thing if you have to pay a $50 copayment each time you see the doctor. Instead, you’ll only go when you really need to (on the flip side, the problem with cost-sharing is that people may also avoid necessary care due to the cost, and there is an ongoing debate about whether it might be better to eliminate cost-sharing and fully cover costs with premiums and/or taxes instead).
• The financial risk the insurer faces is lowered by the amount of cost-sharing you have to pay. Every dollar you pay towards your deductible, copayments, and coinsurance when you receive health care is one less dollar your health insurance company has to pay. 

Without cost-sharing like deductibles, health insurance premiums would be even higher than they are now.

What’s Your Financial Risk? What Will You Owe?

When you’re insured, the description of cost-sharing in your health insurance policy's Summary of Benefits & Coverage tells how much of your medical costs you pay and how much your health insurance company pays.

It should spell out clearly how much your deductible is, how much your copays are, and how much your coinsurance is (coinsurance will be stated as a percentage of the claims, so the dollar amount will vary depending on how large the claim is).

In addition, your health plan’s out-of-pocket limit should be clearly stated in your policy or Summary of Benefits & Coverage. In 2024, the out-of-pocket limit can't exceed $9,450 for a single individual or $18,900 for a family, unless you have a grandmothered or grandfathered health plan (note that the federal limit only applies to in-network treatment for essential health benefits).

These upper limits on out-of-pocket costs generally increase from one year to the next, although they'll decline for the first time in 2025, when they'll be $9,200 and $18,400, respectively.

Many plans are available with out-of-pocket limits below the allowable upper maximums, but they cannot exceed the federal limits.

(Note that Medicare is different: Original Medicare does not have a cap on out-of-pocket costs, although most beneficiaries have supplemental coverage that covers some or all of the out-of-pocket costs; Medicare Advantage plans cannot have out-of-pocket limits over $8,850 in 2024, although that does not include costs for medications.)

The out-of-pocket limit protects you from unlimited financial losses in case of really high healthcare expenses. After you’ve paid enough in deductibles, copays, and coinsurance to have reached your out-of-pocket maximum for the year, your health plan begins to cover 100% of the cost of your in-network, medically necessary care for the rest of the year. You don’t have to pay any more cost-sharing that year. However, you still have to pay your monthly premiums or your health insurance policy will be canceled.

So, what’s the least you could owe, and what’s the most you could owe? You’d owe the least if you didn’t need any health care all year long. In this case, you wouldn’t have any cost-sharing expenses. All you would owe is your monthly premiums. Take your monthly premium cost and multiply it by 12 months to find your total annual spending for health insurance.

You would owe the most if you have really high healthcare expenses because you either needed care frequently or you had one really expensive episode of care, like needing surgery. In this case, the most you’ll owe in cost-sharing is your policy’s out-of-pocket maximum. Add your out-of-pocket maximum to the cost of your premiums for the year, and that should define the upper limit to what you might owe for covered healthcare expenses that year.

Beware, though. Not all healthcare expenses are covered. For example, some types of health insurance won’t pay for care unless you get it from an in-network medical provider (and if your health plan does cover out-of-network care, you'll have a higher deductible and out-of-pocket exposure for out-of-network services).

Most health insurers won’t pay for services that aren’t considered medically necessary, or that are experimental. Some health plans require a referral from a primary care doctor before they'll cover a specialist's services. And some health plans won’t pay for certain types of care unless you’ve gotten ​prior authorization for it.​​​​

Who Pays the Premium for Your Health Insurance Policy?

The premium is the cost of purchasing insurance, regardless of whether you use the plan or not. But in most cases, the people insured by the policy don't have to pay the full premiums themselves. About half of Americans get their health insurance via a job-sponsored plan, either as an employee, or as a spouse or dependent of an employee.

According to a 2023 Kaiser Family Foundation employer benefits survey, employers pay an average of nearly 73% of total family premiums for employees who have job-sponsored health insurance.

Of course, it can be argued that the employer premium contributions are simply part of the employee's compensation, which is true. But economists doubt that employees would simply receive all of that money in additional wages if employer-sponsored health insurance were to be ​eliminated. That's because health insurance is a tax-advantaged part of an employer's compensation package. 

Among people who purchase their own health insurance in the individual market, plans are available through the ACA exchange (Marketplace) and off-exchange.

There's no financial assistance available for off-exchange policies unless your employer offers a health reimbursement arrangement and reimburses you for some or all of the cost of your premiums.

But most people who buy their health insurance through the exchange qualify for federal subsidies (and in some states, additional state subsidies) that reduce the premiums. Of the people who bought 2023 coverage through the exchanges nationwide, 90% were receiving premium tax credits (subsidies) to offset a portion of their premiums.

Nationwide, the average pre-subsidy premium for plans purchased through the exchange was $605/month in 2023. But 90% of enrollees received premium subsidies that averaged $526/month. The result was that the average net premium across all enrollees was just $129/month.

That's an average, and it's important to keep in mind that there's a lot of variation from one plan to another and from one enrollee to another. Out of the nearly 16.4 million people who enrolled in plans through the exchange in 2023, about 5.6 million were paying less than $10/month for their coverage, after their subsidies were applied.

The subsidies are larger and more widely available than they used to be, thanks to the American Rescue Plan and Inflation Reduction Act. The "subsidy cliff" has been temporarily eliminated, which means subsidy eligibility no longer ends abruptly when a household's income exceeds 400% of the poverty level. And for households with lower incomes, subsidy amounts have increased in order to make coverage more affordable than it was before.

Summary

Health insurance premiums are the cost of purchasing health insurance. They have to be paid regardless of whether the policyholder needs any medical care; if premiums aren't paid, the policy will terminate. And premiums do not count toward the plan's out-of-pocket costs (deductible, copays, coinsurance), which only accumulate if and when the person needs medical care.

A Word From Verywell

Health insurance premiums are the cost to purchase your health insurance, whereas your copays, deductible, and coinsurance are the cost to use your health insurance when you need medical care. They are two different things, and premiums are never counted toward a health plan's out-of-pocket limit.

But the good news is that very few people pay full price premiums for their health coverage. Most people with private health insurance either qualify for employer subsidies (ie, their employer pays a portion of their premiums) or premium tax credits (subsidies) in the marketplace/exchange.