The two halves of what a plan costs
Every health plan charges you twice. The premium is certain, level and paid whether you see a doctor or not. The cost sharing is uncertain, back-loaded and paid only when you use care. Plans trade one against the other: a lower premium is bought with a higher deductible, and a lower deductible is paid for in premium. There is no plan that is cheaper on both, because carriers price them to be roughly equivalent in expectation.
Which means the ranking depends entirely on you. A plan that is $3,000 a year cheaper in premium and $4,000 worse in deductible wins for someone who visits a doctor twice and loses for someone with a chronic condition. Both are the same plan.
Cost sharing itself has three layers, and they apply in order:
- The deductible. You pay allowed charges in full until you reach it. On most plans preventive care is exempt and paid at 100% from day one.
- Coinsurance. Above the deductible you pay a percentage and the plan pays the rest. 20% is the common figure on a silver-tier plan.
- The out-of-pocket maximum. Once your cost sharing reaches this cap, the plan pays 100% of allowed in-network charges for the rest of the year. The Affordable Care Act limits this figure on non-grandfathered plans, and the limit is adjusted annually.
Premiums never count toward the out-of-pocket maximum. Neither do balance bills from out-of-network providers, which is a separate and much larger exposure that the balance billing calculator works through.
Why the cost curve bends twice
Plot total cost against spending and you get three straight segments joined at two corners.
Segment one runs at 45 degrees. Below the deductible every dollar of care is a dollar out of your pocket, so the line rises as fast as your spending does. This is the segment where a low-deductible plan earns its premium.
Segment two flattens to the coinsurance rate. Past the deductible you pay only your percentage, so at 20% coinsurance the line rises at one fifth the speed. Five dollars of care now costs you one.
Segment three is flat. Once cost sharing hits the out-of-pocket maximum the line stops rising entirely. Your total cost for the year is fixed at premium plus cap, whether the bills come to $60,000 or $600,000.
The corners are where comparisons flip. Two plans' curves can cross at most once in the region where both are still sloping, and the crossing is where their rankings swap. The calculator finds it by scanning for a sign change in the difference between the two curves and then bisecting, which handles the kinks correctly — an algebraic solution would have to case-split on which segment each plan is in.
The flat segment is the whole point of insurance. A plan is not primarily a way to reduce the cost of routine care; it is a way to convert an unbounded liability into a bounded one. That is why the worst-case figure — premium plus out-of-pocket maximum — deserves as much attention as the expected cost. It is the number that tells you what a bad year does to your finances.
Worked example: a PPO against a high-deductible plan
Plan A costs $450 a month with a $1,000 deductible, 20% coinsurance and a $3,000 out-of-pocket maximum. Plan B costs $200 a month with a $3,500 deductible, 20% coinsurance and a $7,000 out-of-pocket maximum. You expect about $6,000 of allowed charges.
- Plan A premium. $450 × 12 = $5,400.
- Plan A cost sharing. The first $1,000 in full, then 20% of the remaining $5,000 = $1,000. Total $1,000 + $1,000 = $2,000, which is below the $3,000 cap.
- Plan A total. $5,400 + $2,000 = $7,400.
- Plan B premium. $200 × 12 = $2,400.
- Plan B cost sharing. The first $3,500 in full, then 20% of the remaining $2,500 = $500. Total $4,000, below the $7,000 cap.
- Plan B total. $2,400 + $4,000 = $6,400.
Plan B wins at $6,000 of spending, by $1,000. Now find where that reverses.
Plan A's cost sharing reaches its $3,000 cap when $1,000 + 0.20 × (S − 1,000) = $3,000, so 0.20 × (S − 1,000) = $2,000 and S = $11,000. Past that point Plan A's total is fixed at $5,400 + $3,000 = $8,400.
For Plan B to also total $8,400 its cost sharing must be $8,400 − $2,400 = $6,000. Solve $3,500 + 0.20 × (S − 3,500) = $6,000: 0.20 × (S − 3,500) = $2,500, so S − 3,500 = $12,500 and S = $16,000.
So the plans tie at $16,000 of allowed charges. Below it Plan B is cheaper; above it Plan A is. And the gap keeps widening: at $30,000 Plan A is still $8,400 while Plan B has hit its cap at $2,400 + $7,000 = $9,400, a $1,000 difference that no further spending changes.
Note what that means in practice. The two plans differ by at most $5,400 anywhere on the curve — Plan B's advantage at zero spending — and by at most $1,000 in the disaster scenario. If your spending estimate is anywhere near $16,000, the arithmetic is not deciding this. The network and the drug formulary are.
How to read the result
Read the crossover before the winner. If your expected spend is far from the crossover point, the ranking is robust and you can trust it. If it is close, the plans are near-identical in cost and you are choosing between them for other reasons — which is a better position to be in than it sounds, because it frees you to optimise for network access.
Read the worst case second. Premium plus out-of-pocket maximum is the most a plan can cost you in a year. Ask yourself what you would do if you had to pay it. If one plan's worst case is manageable and another's is not, that difference matters more than a few hundred dollars of expected cost, because insurance exists to bound the tail.
Your spend estimate is the weakest input, and the table is the answer to that. Nobody knows next year's medical spending. Rather than agonising over one number, read down the reference table and see whether one plan wins across the range you consider plausible. A plan that wins from $0 to $12,000 is a safer choice than one that wins only at exactly your point estimate.
Watch what the calculator does not model. Copays are not deductible or coinsurance, and plans built on them behave differently — a $30 office visit copay is a fixed charge regardless of the allowed amount. Prescription drugs often sit on a separate tier structure with their own deductible. And the whole calculation assumes in-network care; step outside the network and a different deductible, a different coinsurance rate and an uncapped balance bill all apply at once.
Two structural factors sit outside the arithmetic entirely. A high-deductible plan that qualifies as an HDHP lets you fund a health savings account, whose triple tax advantage the HSA calculator quantifies and which frequently changes the ranking. And employer premiums for employer plans are paid with pre-tax dollars, so the real cost of a premium difference is smaller than it looks by your marginal rate.
Total annual cost for the two plans in the worked example
| Allowed charges | Plan A total | Plan B total | Cheaper |
|---|---|---|---|
| $0 | $5,400 | $2,400 | B by $3,000 |
| $1,000 | $6,400 | $3,400 | B by $3,000 |
| $2,500 | $6,700 | $4,900 | B by $1,800 |
| $5,000 | $7,200 | $6,200 | B by $1,000 |
| $10,000 | $8,200 | $7,200 | B by $1,000 |
| $16,000 | $8,400 | $8,400 | tied |
| $20,000 | $8,400 | $9,200 | A by $800 |
| $30,000 | $8,400 | $9,400 | A by $1,000 |
Plan A stops rising at $11,000 of spend and Plan B at $21,000, which is where each hits its out-of-pocket maximum. Between $5,000 and $10,000 the gap is constant at $1,000 because both plans are in their coinsurance segment at the same rate.
Comparison errors that pick the wrong plan
- Choosing on premium alone. The cheapest premium wins only if you use no care at all, which is the one outcome nobody can plan on.
- Choosing on deductible alone. A $0 deductible plan can easily cost more in premium than the deductible it saves you. Compare the totals, not the components.
- Forgetting that premiums do not count toward the out-of-pocket maximum. A plan advertising a $7,000 cap can still cost you $9,400 in a bad year once premiums are added.
- Ignoring the network. A cheaper plan whose network excludes your specialist is not cheaper. Out-of-network care carries a separate deductible, worse coinsurance, and a balance bill with no cap at all.
- Estimating spend from what you paid, not what was billed. The calculator wants allowed charges — the negotiated amount before insurance pays. Your explanation-of-benefits statements show it; your credit card statement does not.
- Overlooking a family deductible structure. Embedded and aggregate family deductibles behave very differently once one member has a large claim, which is what the out-of-pocket maximum calculator is built to handle.
The pre-tax premium is worth more than it looks
Employer health premiums are normally paid through a section 125 cafeteria plan, which means they come out of pay before federal income tax, before state income tax in most states, and before Social Security and Medicare tax. A $250-a-month premium difference — $3,000 a year — therefore costs someone in a 22% federal bracket with 7.65% payroll tax roughly $3,000 × (1 − 0.2965) = $2,110 in take-home pay, not $3,000. Deductibles and coinsurance are paid with after-tax dollars unless you route them through an HSA or a health FSA, in which case the same treatment applies to them. This calculator works entirely in pre-tax dollars for both halves, which is the right comparison for marketplace coverage and slightly understates the premium advantage of the cheaper plan for employer coverage.
What to check once the arithmetic is done
Networks first. Look up every doctor and hospital you actually use in each plan's directory, and check the directory date. A narrow-network plan can be genuinely excellent value and genuinely unusable, depending entirely on whether your people are in it.
The drug formulary next. If you take a specific medication, find it on each plan's formulary and note its tier, any prior authorisation requirement, and whether the plan applies the deductible to drugs. A single specialty medication can dominate everything on this page.
Then the account options. A qualifying high-deductible plan opens a health savings account, which is the only vehicle in the tax code with a deduction going in, tax-free growth, and tax-free withdrawals for medical costs. Employers often contribute to it, and that contribution reduces the plan's effective cost directly. Work it through with the HSA long-term value calculator and the HDHP versus PPO comparison before deciding that a high-deductible plan is the expensive option.
Finally, the family structure. If you are covering more than yourself, the interaction between individual and family deductibles and out-of-pocket maximums changes the answer materially, and it is not captured by a single-person calculation. Embedded designs cap each member at the individual limit; aggregate designs do not pay anything until the whole family limit is met. The out-of-pocket maximum calculator models both.
If you are leaving a job, the same comparison applies to continuation coverage, where the premium jumps to the full group rate plus an administrative charge — the COBRA premium calculator works that figure, and a marketplace plan with a premium tax credit is often the cheaper answer.