Health Insurance

How Does a Health Insurance Deductible Work?

How Does a Health Insurance Deductible Work?

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The deductible on your health insurance plan is the amount you pay for health care out of pocket before your coverage kicks in. However, there are some expenses to which the deductible does not apply. For these, you are fully covered by your health insurance policy. Health insurance deductibles may vary greatly depending on your specific policy, but usually if you have a lower annual deductible, the plan requires you to pay more in premiums.

How does a health insurance deductible work?

A deductible for health insurance is the amount of money that you personally need to pay before copay and coinsurance benefits can be utilized. In other words, it is the dollar amount you need to spend on medical expenses before the health insurance company begins to pay for your health care services.

For example, if you have a plan with a $2,000 deductible, you are completely responsible for the first $2,000 in medical care, after which your carrier begins sharing the costs of health care services. Deductibles are the primary means by which insurance providers help maintain lower premiums.

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. The Affordable Care Act also established a maximum deductible amount, which is revised each year by the Department of Health and Human Services. In 2021, the maximum deductible for an individual policy was $7,200, and $14,400 for a family.

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 recurring medical expenses each month, such as prescription drugs, then you may want to select a lower deductible plan that allows you to quickly reach that deductible.

On the other hand, if you are relatively young and do not get sick often, selecting a plan with higher deductibles may make the most sense. As a result, higher-deductible plans generally have lower premiums. Until these deductibles are met, you are effectively not receiving any of the cost-sharing benefits of having coverage.

For those people with 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. The only thing to consider when selecting a plan is whether or not you have the financial means to cover the required deductible should an incident occur.

Understanding this tradeoff is vital in how you choose a plan and find the best health insurance for your needs. The deductible structure of a health insurance plan is important in 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 stipulates both an individual and a family deductible, with the family deductible typically twice that of the 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.

Beginning in 2016, deductibles for insurance plans became "embedded". For each household, the health insurance company began tracking the total amount paid in deductibles for the entire family, as well as the amount paid toward deductibles for the care of each individual in that family. The company then begins to pay out benefits once one of two circumstances are met.

There are typically two scenarios that play out for each individual in the family and the family as a whole:

  1. If any family member meets the amount set by the individual deductible, then the company will meet the cost-sharing benefits 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 the family will begin paying out toward expenses for every family member for the rest of the year.

Medical vs. prescription deductibles

Another aspect of deductibles is that many insurance plans treat prescriptions differently than other services.

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

In such cases, a prescription deductible exists and 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 amounts 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.

Other exceptions to deductibles

While most cost-sharing benefits only kick in once the deductibles have been met, health plans can and do make a few exceptions where copays come into effect beforehand. For instance, all plans are required to cover preventive care at zero cost to the consumer.

Other exceptions to deductibles offered by plans include:

  • Copays on a set number of visits to primary care physicians.
  • Many catastrophic and high-deductible plans allow patients to pay a low copay for PCP visits even before deductibles are met.
  • A number of plans offer up to three visits to the PCP for a copay.
  • Generic drugs are also often excluded from the deductible requirement with an established copay applying at all times.

Health insurance deductible example

Example #1

Say you have a health insurance plan with a deductible of $1,000. During the course of the year, a medical event arises with a bill of $4,500 that is covered by your health insurance plan. Your health insurance policy will pay for this bill since it is covered, but you would first need to pay off the deductible. Your best option would be:

  1. You would pay $1,000 out of pocket to the provider of the health services.
  2. You would then reach your annual deductible amount.
  3. The remaining $3,500 ($4,500 total bill minus $1,000 paid by you) would be paid for by your health insurance company.

Example #2

Now let's say you have a health insurance plan with a deductible of $1,000 and coinsurance of 20% after the deductible has been reached. During the course of the year, you receive a medical bill for $4,500 that is covered under your health insurance policy. Here, your best option would be:

  1. You would pay $1,000 out of pocket to the provider.
  2. You would then reach your annual deductible amount.
  3. The remaining $3,500 ($4,500 total bill minus $1,000 paid by you) would be paid 20% by you and 80% by your health insurer.
  4. Your total bill = $1,000 + $700 ($3,500 x 20%) = $1,700
  5. Insurer paid = $2,800 ($3,500 x 80%)

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