Health Insurance Deductibles: How Do They Work?
Health insurance can help your family avoid bankruptcy from high medical bills. Understanding how it works isn’t easy, though.
The insurance plans are full of confusing terms, such as deductible, that everyday people don’t understand.
The complexities continue by having several other factors that impact your costs. It makes comparing policies extremely frustrating.
You can alleviate some of that frustration by understanding what you’re looking at.
One of the most significant factors that impacts your costs in a health insurance plan is your deductible.
Here’s how they, along with other insurance terms, work.
What Are Health Insurance Deductibles?
A health insurance deductible is the amount you pay before most of your insurance coverage kicks in.
An individual insurance policy with a $1,000 deductible would require you to pay for your first $1,000 of eligible medical costs.
Only then will the health insurance start making some payments on your behalf.
Unfortunately, things get more confusing from here.
You may have multiple deductibles
First, you may have more than one deductible.
You may have a deductible for general medical care and another deductible for prescription drugs.
You may meet your general medical deductible and have insurance start paying into the normal medical costs.
However, you’ll also have to pay your prescription deductible before your plan starts paying for prescription costs.
Some services may be covered before reaching your deductible
In a bit of good news, health insurance may pay for certain covered services before you reach your deductible.
Marketplace plans have to cover some preventative benefits before you reach your deductible.
These services include things such as:
- Gestational diabetes screening
- Mammography services (for women over age 40)
- Depression screening
- Immunization vaccines
- Obesity screening and counseling
- Several others
Plans may also cover other services before reaching your deductible, such as a checkup or a disease management program.
Family plans have separate deductibles
Family health insurance deductibles are even more confusing.
You generally have two deductibles to watch out for.
The first is a per-person deductible. This must be met for each individual before health insurance starts kicking in on most services for the individual.
The second is a family deductible. This is higher than the per person deductible.
If you reach the family deductible amount, insurance automatically kicks in for all family members whether they’ve reached their individual deductible or not.
Reaching the deductible for Person A without fulfilling the family deductible means Person B needs to meet their deductible.
Alternatively, the family as a whole has to meet their family deductible.
Only then will insurance start paying for Person B’s costs.
Some costs won't count toward your deductibles
Some medical expenses you pay won’t go toward covering your deductible.
In particular, costs for services not covered under your plan won’t count.
Out-of-network medical costs may not count toward your deductible, depending on your plan and the particular expenses.
Other plans may put out-of-network costs toward a separate out-of-network deductible.
Check with your insurance plan to see which costs don’t count toward your plan’s deductible.
Deductibles and insurance pricing
Deductibles are one major factor in your health insurance plan’s price.
In general, plans with higher deductibles have lower monthly premiums.
Plans with lower deductibles usually cost more each month.
Sometimes it’s easier to understand deductibles with an example.
Here are two common scenarios to consider.
Scenario A: Individual
It’s January 1st so your health insurance plan just reset. You have an individual health insurance plan with a $1,000 deductible.
You break your arm and end up in the urgent care clinic. The bill comes out to $1,500.
You pay the first $1,000 as your deductible. After that, your insurance plan applies your plan’s terms to determine whether you owe any additional amounts for coinsurance, copays, or other factors.
Scenario B: Family
It’s March 31st and you have a family health insurance plan. It has individual deductibles of $1,500 per person or $4,500 per family.
Family members have spent the following amounts toward their deductibles year to date:
- Person A - $750
- Person B - $1,500
- Person C - $1,000
- Person D - $250
- Total family - $3,500
Person D feels extremely sick and visits the emergency room. The bill is $5,000.
Person D has not met their individual deductible and the family has not met their family deductible yet.
However, the family is closer to reaching the family deductible than Person D’s deductible.
For this reason, the family only has to reach the family deductible before the rest of their insurance kicks in.
The $1,000 will be applied to the family deductible and the rest will apply based on the insurance plan’s requirements.
Other Health Insurance Terms You Should Know
A deductible isn’t the only confusing part of a health insurance plan.
Deductibles may also interact with these other important health insurance terms you should know.
A copay is a fixed shared portion of medical expenses you must pay to receive service. It is generally a flat amount per visit.
Before you meet your deductible, you usually have to pay for the entire medical expense.
After you meet your deductible, you only have to pay the copayment listed for each service.
Certain services may be covered before you reach your deductible. You may have to pay your copays on those services.
Copays may vary by type of service. You may have several copays such as:
- $25 copay for a general doctor visit
- $100 copay for a specialist doctor visit
- $250 copay for an emergency room visit
Let’s say you met your deductible and visit a specialist doctor. You pay $100 for the copay, assuming you’ve already met your deductible.
If the total bill was $250 for the visit, the insurance plan pays the other $150.
Coinsurance is like a copay, but you pay a portion of the bill for the services instead of flat dollar amounts.
You may have several coinsurance amounts such as:
- 20% coinsurance for a general doctor visit
- 15% coinsurance for a specialist doctor visit
- 10% coinsurance for an emergency room visit
Here’s an example. You’ve met your deductible. You visit a general doctor for a sick visit. The total bill is $100.
You’d pay 20% of the $100, or $20. The insurance company would cover the other $80.
An out-of-pocket maximum protects you from paying exorbitant costs for medical care.
These limits are often high.
For example, an out-of-pocket maximum for a family plan could be $16,000.
Once you’ve paid $16,000 for covered medical services, the insurance plan will pay everything else for the year.
Of course, there are exceptions.
Your monthly premium payments don’t go toward this amount. Neither does money spent for out-of-network care of services your plan doesn’t cover.
What Are HDHPs?
Some health insurance plans are called high deductible health plans (HDHPs). These plans come with higher deductibles, as the name suggests.
You’ll have more costs to pay out of pocket up front versus a low deductible plan before coverage kicks in.
Even so, this comes with some benefits. First, your premiums are usually lower. This can save you money every month.
If you don’t use medical services often this could be financially beneficial. Having a significant accident could result in costing more over the year, though.
HDHPs may also qualify you to open a health savings account (HSA). These accounts are tax-advantaged which could help you save money on taxes.
Contributions to HSAs are made pre-tax or give you a tax deduction. Money in the account grows without paying taxes on it at the time.
Money used for qualifying medical expenses can be withdrawn tax-free.
You can still withdraw money for other purposes but must pay income taxes and a 20% penalty for doing so.
Once you reach age 65, you can withdraw money for any purpose without paying the 20% penalty. You do still have to pay taxes for non-medical expenses, though.
How to Choose the Right Deductible for Health Insurance
Choosing a health insurance plan is highly complex.
Focusing on just the deductible can help you eliminate some plans from your consideration.
Since deductible and monthly premiums often move in opposite directions, you need to focus on what makes sense for you or your family.
Do you have an existing condition or go to the doctor frequently?
Those who need frequent access to health care services without a significant upfront cost at the beginning of the year may be better served with a low deductible plan.
The downside is that plan will cost more.
Do have the budget for out-of-pocket medical expenses?
If you have cash reserves, it may be a better deal to look for a higher deductible plan. Still, you’d have to run the numbers.
Look to see if the lower premiums offset the higher deductible based on your usual medical expenses for a year.
What medical expenses do you expect in the next year?
It's tough picking a deductible and health insurance plan when you can’t predict the future.
You don’t know if you’ll barely use your health insurance at all in an upcoming year or whether you’ll break your arm and need a pricy emergency room visit.
You have to do your best to predict what level of care you’ll need based on your past and knowledge of future circumstances.
Then, find the plan that offers the best pricing options for you based on your needs.
Consult an Expert
Health insurance plans are complex. If you are traditionally employed, your human resources department should be able to help you understand the basics of the plan options you have to choose from.
Once you have a plan at work, call the health insurance company to ask questions about the plan’s specifics and its deductible.
Shopping for health insurance on the marketplace outside of a workplace is another story. You’re on your own unless you consult an expert for help.
Health insurance brokers usually have access to health insurance plans from several companies.
While these salespeople earn commissions from health insurance companies, they can help you understand how plans work and the options you have to choose from.
Carefully consider your options with the advice they give to choose the plan that makes the most sense for you.