How Does an Embedded Deductible Affect My Health Insurance?

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In health insurance, a deductible is a specified amount of money you must pay before your insurer will provide aid for medical expenses. Family policies under the Affordable Care Act (ACA) often have one of two deductibles: aggregate or embedded deductibles. An embedded deductible has both an individual deductible for each family member and a family deductible that is the overall deductible for the policy. The individual deductible in an embedded policy is set lower, allowing a single family member access to medical benefits sooner. This can save families money in the event that one family member incurs a large number of medical expenses.

How Does an Embedded Deductible Work?

In an embedded deductible health plan, the policy will have two deductibles: the individual deductible for each family member covered and a family deductible. Due to the two deductibles, the coverage provided by the insurer for embedded policies can be accessed sooner. When one family member accrues enough medical expenses to the point that they meet their individual deductible, after-deductible health insurance benefits, like copays, coinsurance and cost sharing, will be provided by the insurer. However, these will be provided solely for that family member. Other members of the family would not yet be eligible for the same benefits.

Once multiple family members' medical expenses add up and surpass the family deductible, the insurer would begin to pay covered medical expenses for all members of the family. This applies even if a member did not meet their individual deductible.

Typically, embedded deductibles are exactly half of the entire family deductible. For example, a marketplace family health insurance plan with embedded deductibles could have a family deductible of $10,000 and individual deductibles of $5,000 for every covered member of the family.

Embedded Deductible Example

Say your family has a health plan with an individual deductible of $3,500 and a family deductible of $7,000. If your spouse experiences an injury with medical expenses of $3,500, your spouse would have met his/her individual deductible and he or she would have their medical expenses covered for the rest of the year. But you and your child would still need to pay expenses out-of-pocket until the family deductible or your individual deductible requirement is met.

Suppose that, later on in the year, you and your child have collected $3,500 of medical expenses together. Therefore, combined with the $3,500 of health care costs your spouse incurred earlier, you would fulfill the family deductible limit of $7,000. From this point onward during the plan year, you would no longer need to pay any deductibles, and the insurer would begin to pay covered medical expenses for the entire family.

Embedded vs. Non-Embedded Deductibles

Family health insurance plans can have one of two types of deductibles:

  • Embedded deductible (includes an individual and family deductible)
  • Non-embedded deductible (includes only a family deductible)

Embedded and non-embedded deductibles differ in how the deductible level is reached. Non-embedded deductible plans, also known as aggregate deductibles, do not begin to pay for medical expenses until the entire family deductible has been met. Furthermore, there are no individual deductible amounts for each family member. The two types of deductibles are similar in that once the family deductible has been met, the insurer covers medical expenses for all members of the family.

For example, an aggregate health plan could have a family deductible of $14,000. During the course of the plan year, say your family has spent $9,000 on medical expenses in total, with $8,000 of that amount attributed to an injury you sustained. At this point, you would not receive after-deductible benefits from the plan because the family deductible of $14,000 has not been met.

Embedded Deductibles for High-Deductible Health Plans with HSAs

For 2019, to qualify to contribute to a health savings account (HSA), a high deductible health plan (HDHP) with embedded deductible must have a minimum individual deductible of $2,700. Furthermore, in order for an HDHP to remain a qualified HSA plan, it cannot provide plan benefits until the IRS minimum deductible has been met. Any HDHP plans with a lower deductible would violate IRS regulations, as the plan would pay benefits out before meeting the minimum, making the plan not eligible for HSA contributions.

For instance, say you bought an HDHP embedded family plan with $2,500 individual and $5,000 family deductibles. If you incurred $3,000 of medical expenses, with the individual deductible set at $2,500, then $500 of the expenses would be eligible for coinsurance from the insurer. But this policy would not pass the IRS regulations for a qualified HSA, as benefits would be paid before the minimum deductible of $2,700 was met.

On the other hand, say the policy you selected had a $3,000 individual and $6,000 family embedded deductible. If you incurred medical expenses of $3,500, then you would meet your individual deductible limit, and your insurer would begin to pay for your medical expenses. Furthermore, the IRS minimum deductible of $2,700 would be met and the plan would be HSA qualified.

These minimums by the IRS may change every year and therefore are important to recognize as you would not be able to open or contribute to an HSA if your health plan does not meet the requirements. Employers who supply health insurance coverage also need to be aware of these changes to confirm that the HSA policies they offer to employees are compliant with IRS regulations.

Which Deductible Is Best? Embedded or Aggregate?

Typically, health insurance family plans contain embedded deductibles, but this does not mean that you should disregard a plan with an aggregate deductible. Embedded deductible plans are best when you anticipate that a family member will have a large number of medical costs during the year.

Say you know that your spouse may be experiencing discomfort in his/her knee and is considering surgery to fix the issue. This operation could cost tens of thousands of dollars and you would benefit greatly if your health insurance would subsidize most of the bill. In this case, purchasing a plan with an embedded deductible would be better because the lower individual deductible would allow medical benefits to be paid sooner for your spouse. And, if you have relatively few medical expenses, your family's total deductible payments for the year may be less than the family deductible.

The added deductible benefit does come at the cost of an increased monthly or annual premium that you pay for the policy. Aggregate deductible health insurance policies are cheaper and can save you money if you think that a family member would not incur a large medical expense during the plan year. This can be risky, as it is hard to predict your anticipated medical expenses. We recommend evaluating your family's health situation and picking a plan with a deductible that fits your coverage needs.

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