How Does a Health Insurance Deductible Work?

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Before your health insurance coverage kicks in, you need to meet the deductible, which is the amount you'll pay for health care out of pocket. Health insurance deductibles are calculated annually, with your expenses over the course of the year adding up until you've hit the limit. Once that happens, your insurance will begin covering some or all of the cost of medical treatment. The amount then resets every January 1.

However, some medical expenses, like your annual physical, are always covered, even before you've met your deductible.

How does a health insurance deductible work?

A deductible for health insurance is the dollar amount that you need to pay before the health insurance company will begin to cover many of your health care services — and, depending on your plan, before coinsurance and co-pay benefits can be utilized.

For example, if you have a plan with a $2,000 deductible, then you are completely responsible for covering the first $2,000 in medical care, after which your carrier will pay for all other covered health care services, minus any co-pays or coinsurance, for the remainder of the year.

Unlike deductibles in other forms of insurance, which work on a per-incident level, deductibles for health insurance are applied on an annual basis and generally across all services, with a few exceptions.

Exceptions to the deductible

While most cost-sharing benefits only kick in once your deductible has been met, health plans make a few exceptions where they will pay right off the bat. First, all plans are required by the federal government to cover preventive care at zero cost to the consumer. This includes your annual physical, screenings for things like high cholesterol and immunizations.

Other exceptions to deductibles offered by plans might include:

  • Co-pays on a set number of visits to your primary care physician (beyond your annual physical)
  • Some specialist visits
  • Mental or behavioral health outpatient visits
  • Generic drugs are also often excluded from the deductible requirement, with an established co-pay applying at all times

Health insurance deductibles vary greatly by policy, but in general, a plan with a lower annual deductible will have a higher monthly premium.

How to choose a deductible level

The two primary considerations when selecting a deductible are your ability to withstand risk and the amount you expect to spend annually on health care coverage.

For example, if you have a chronic health condition, such as kidney disease, that requires going to see your primary care doctor and specialists on a somewhat regular basis, then you may want to select a lower deductible plan so you will quickly reach your limit and your health company will start paying for your costs.

On the other hand, if you are relatively young, are in good health, and only go to see a doctor once or twice a year, selecting a plan with a higher deductible may make the most sense. High-deductible plans (HDHP) have lower monthly premiums, and because it would be unlikely that you would meet the deductible in any policy situation, you can save money by paying lower monthly premiums. But remember, until the deductible is met, you are effectively not receiving any of the cost-sharing benefits of having coverage.

If you're in your 40 or 50s but have low expected health care expenses, a more affordable health insurance plan with a higher deductible may make more sense. This lowers your guaranteed out-of-pocket costs by reducing the premiums you pay on a monthly basis.

One thing to consider when selecting an HDHP is whether you have the financial means to cover the deductible if an incident occurs where you have to pay it all in one shot.

The Affordable Care Act also established a minimum deductible amount, as well as a maximum out-of-pocket limit, which is revised each year by the Department of Health and Human Services. In 2024, the out-of-pocket maximum is set at $9,450 for an individual policy and $18,900 for a family, and the minimum deductible for all HDHPs was set at $1,600 for an individual plan and $3,200 for a family.

Understanding this trade-off is vital to choosing a plan and finding the best health insurance for your needs. The deductible structure of a health insurance plan is important when deciding which plan you choose, since it dictates when the carrier actually begins to pay.

What is the difference between an individual and a family deductible?

Each health insurance plan offers an individual and a family deductible, with the family deductible typically twice that for an individual. It is very important for households that have multiple family members covered under the same plan to understand how these two values dictate their cost-sharing benefits.

Health companies offer what they call “embedded” or “non-embedded” deductibles when plans are for family coverage.

Embedded deductibles means that each person in the family has an individual deductible in addition to the overall deductible for the entire family. In other words, your health insurance company will track the total amount paid toward the deductible for the entire family as well as the amount paid out by each member in that family.

With embedded deductibles, the company then begins to pay out benefits once one of two circumstances is met:

  1. As soon as any family member meets the amount set by the individual deductible, then the company will begin paying the healthcare expenses for that individual — and that individual only — for the rest of the year.
  2. If the family as a whole meets the amount set by the family deductible, then all after-deductible cost-sharing benefits will kick in for every family member for the rest of the year.

In a non-embedded plan, there is only one, overall family deductible. That means that as each person in the family incurs a medical expense, the out-of-pocket payment will go to the family deductible. Once that is met, the health plan will pay for all covered medical expenses for everyone in the family, minus any co-pays or coinsurance.

Medical vs. prescription deductible

Another aspect of deductibles is that some insurance plans separate prescriptions from medical services and instead offer what they call a “prescription” or “drug” deductible.

Some health insurance deductibles split prescription costs into their own deductible category.

In such cases, a prescription deductible is tallied separately from all other medical care. Policyholders for such plans are required to pay for medication up to the amount specified before the plan covers these costs.

People who have a high proportion of their medical expenses driven by medical prescriptions may actually benefit from having a separate prescription deductible, as these costs are typically much smaller than their medical counterparts. Plans with an Rx deductible make it easier for someone with high prescription costs to begin receiving the cost-sharing benefits offered by the policy.

Health insurance deductible examples

Example #1: Deductible with co-pay

Say you have a health insurance plan with a deductible of $1,000, plus a $100 co-pay for ER visits. In the beginning of the year, you go to the ER and end up with a bill of $4,500 that is covered by your health insurance plan. Your policy will pay for this bill, because it is covered, but you will first need to pay off the deductible. You'll:

  1. Pay $1,000 out of pocket to the provider of the health services, at which point you’ll have reached your annual deductible amount.
  2. You'll also need to pay the $100 co-pay.
  3. The remaining $3,500 ($4,500 total bill minus $1,000 paid by you) will be covered by your health insurance company.

Example #2: Deductible with coinsurance

Now let's say you have a health insurance plan with a deductible of $1,000 and coinsurance of 20% for ER visits after the deductible has been reached. In the beginning of the year, you go to the ER and receive a medical bill for $4,500 that is covered under your health insurance policy. You'll:

  1. Pay $1,000 out of pocket to the provider of the health services, at which point you'll have reached your annual deductible amount.
  2. Then, of the remaining $3,500 ($4,500 total bill minus the $1,000 deductible paid by you), you'll pay an additional 20% and your health insurer will pay the other 80%.
  3. Your total bill = $1,000 + $700 ($3,500 x 20%) = $1,700
  4. Insurer responsibility = $2,800 ($3,500 x 80%)

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