Deductibles are a cost sharing mechanism that allows you to pay lower monthly premiums each month. In the event that something happens, you’ll have to pay the full amount up front but then your insurance carrier will reimburse you once they receive their portion of the claim.
In this post, we review the aspects of What Is The Purpose Of Deductibles, types of deductibles in insurance, what is a good deductible for health insurance, and deductible vs copay.
What Is The Purpose Of Deductibles
The purpose of a deductible is to lower your monthly premium by requiring you to share in the cost of healthcare.
A deductible is not insurance. A deductible is a cost-sharing mechanism that requires you to pay for certain types of services before your health plan begins to cover them. This can also be thought of as your out-of-pocket maximum, or the most you will have to pay for healthcare in any given year.
Although you must meet your deductible before receiving benefits from your health plan, there are often ways to get these covered at reduced or no cost through medical billing companies and other third parties. It’s important to understand the difference between coinsurance and copayments so that you can make informed decisions about which strategies work best for you.
Deductibles are only in effect after you have met your Annual Out of Pocket Limit.
Deductibles are only in effect after you have met your Annual Out of Pocket Limit. This means that if you have a $500 deductible and an annual out of pocket limit of $7,500, you will be responsible for the first $500 of any healthcare costs incurred during the year. After meeting that threshold, the insurance company starts paying 100% of claims up until they hit their maximum out-of-pocket limit (in this case another $7,000). Once they hit their maximum allowable amount paid towards medical bills that year ($14,500), none of those costs will be covered by them (and therefore come straight out of your pocket).
Deductibles are not in effect until you have met the Annual Out of Pocket Limit. If your insurance plan does not cover many things like prescription drugs or deductibles (or even mental health care!), then these expenses should be factored into total expected medical costs when calculating what percentage coinsurance rate makes sense for you based on how much money you can comfortably afford each month versus how much coverage is important to protect yourself from financial ruin if something catastrophic were to happen while uninsured
You are responsible for paying the deductible up front, but in most cases it will be reimbursed to you by your insurance carrier.
A deductible is the amount of money you pay before your insurance coverage kicks in. For example, if your health plan has a $500 deductible and you get into a car wreck that causes $1,000 worth of damage to your vehicle, then you would be responsible for paying $500 upfront before any money from your insurance company starts coming in.
If you have a high-deductible health plan (HDHP), then it’s important to keep track of how much money goes toward meeting the deductible each year. This can help ensure that you don’t end up paying more than necessary out-of-pocket for covered services because some plans require certain amounts paid out-of-pocket before they start paying 100 percent of covered expenses.
Deductibles exist as a cost sharing mechanism that allow you to pay lower monthly premiums each month.
Deductibles exist as a cost sharing mechanism that allow you to pay lower monthly premiums each month. For example, if you have a $3,000 deductible and make monthly payments of $100/month for insurance, you will only be responsible for paying the actual cost of medical care up to the annual out of pocket limit (typically $6,350).
After meeting your Annual Out of Pocket Limit ($6,350), your insurance carrier will begin covering 100% of your expenses until it reaches its Lifetime Maximum Coverage ($500K for an individual plan). Once you reach this point in terms of how much healthcare has been paid out from your insurer versus how much they’ve had to pay in total reimbursements on behalf of their customers’ claims during that year (or any other period), then neither party has any more responsibility towards paying out claims or performing more services. By setting up such limits within their plans with regards towards what amount should be covered by each party separately at different points during time periods like this one described above – insurers are able to lower premiums while still being able to keep some level control over costs since they know exactly where those limits lie ahead before making any decisions regarding them.”
types of deductibles in insurance
Embedded Deductibles
If you have a family plan (two or more members), there are two types of deductibles. The first deductible is what is called an embedded deductible, meaning that there are two deductible amounts within one plan; single and family.
The single deductible is embedded in the family deductible, so no one family member can contribute more than the single amount toward the family deductible. Once the member meets their single deductible, they will start paying copays and coinsurance toward the out-of-pocket maximum.
For example, if you have a $2,000/$4,000 (single/family) embedded deductible, this is how it would work:
Since the subscriber met his deductible, he was able to move on to his copays/coinsurance. The spouse will continue to pay toward the deductible until it is met.
True Family Deductible
The second type of deductible is a true family deductible. This means that a family can meet the deductible by pooling deductible expenses. Unlike embedded deductible plans, there is no limit to the amount one member can pay toward the family deductible.
Let’s say you have a $2,000/$4,000 (single/family) true family deductible. Here’s how your plan would work:
In this example, the subscriber met the entire family deductible, so the entire family moves on to copays/coinsurance. For both types of deductibles, once the deductible is met, you will pay copays or coinsurance when you receive covered services.
Deductible Vs Copay
What Are Co-pays?
A co-pay, short for co-payment, is a fixed amount that a healthcare beneficiary pays for covered medical services. The remaining balance is covered by the person’s insurance company.
Co-pays typically vary for different services within the same plans, particularly when they involve services that are considered essential or routine and others that are considered less routine or in the domain of a specialist.
Co-pays are typically lower for standard doctor visits than for seeing specialists. Co-pays for emergency room visits tend to be the highest.
What Are Deductibles?
A deductible is a fixed amount that a patient must pay each year before their health insurance benefits begin to cover the costs.
After meeting a deductible, beneficiaries typically pay co-insurance—a certain percentage of costs—for any services covered by the plan. They continue to pay the co-insurance until they meet their out-of-pocket maximum for the year.
Some plans have a separate deductible for prescription drugs or other services. With family plans, there are often two deductibles: for an individual, and for the whole family.
Preventive Services
In most cases, preventive services are covered at 100%—meaning that the patient doesn’t owe anything for the appointment. Plans offered through the Patient Protection and Affordable Care Act pay in full for routine checkups and other screenings considered preventive, such as mammograms and colonoscopies for people over a certain age.
Real-Life Example
Suppose a patient has a health insurance plan with a $30 co-pay to visit a primary care physician, a $50 co-pay to see a specialist, and a $10 co-pay for generic drugs.
The patient pays these fixed amounts for those services regardless of what the services actually cost. The insurance company pays the remaining balance (the “covered amount”). Therefore, if a visit to the patient’s endocrinologist (a specialist) costs $250, the patient pays $50 and the insurance company pays $200.
Now suppose the same patient has a $2,000 annual deductible before insurance starts to pay, and 20% co-insurance after that.
In March, he sprains his ankle playing basketball, and treatment costs $300. He pays the full cost because he has yet to meet his deductible. In May, he has back problems, which cost $500 to treat. Again, he pays the full cost.
In August, he breaks his arm playing touch football, and the bill for his hospital visit comes to $3,500. On this bill, the patient pays $1,200—the balance of his deductible. Once he meets the deductible, he also pays 20% (his co-insurance amount). In this case, that would be an additional $460 (20% of $2,300—the difference between the deductible and the hospital visit).
what is a good deductible for health insurance
When it comes to shopping for health insurance, experts say more Americans need to look beyond just the monthly cost of a plan.
Almost a quarter of Americans say the monthly premium is the most important factor when they’re considering the cost of health insurance, according to a survey of nearly 2,200 U.S. adults Morning Consult performed in conjunction with CNBC Make It.
Meanwhile, only 8% of respondents say the biggest concern is a health plan’s deductible, which is the amount of money you’re on the hook to pay before your insurance coverage kicks in.
That’s not surprising, Jonathan Wiik, principal of health-care strategy at TransUnion Healthcare, tells CNBC Make It. But it is short-sighted, he adds, saying that taking the time to factor in how the deductible will affect your medical bills is “absolutely” worth it.
While the monthly costs, or the premiums, associated with a health-care plan are typically clearly spelled out, information on the deductible can be harder to parse. “There’s a benefit literacy issue in our country,” Wiik says.
People look at the premium and say, ‘Oh, that’s what will come out of my check.’ But they don’t read the fine print that the plan has a $6,000 deductible, he adds.
It may also come down to cost for some consumers. “The lower the premium, typically the higher the deductible,” says Kim Buckey, vice president of of client services at DirectPath, an organization that guides employees to make better health care decisions. Some may take the chance that they’ll stay healthy and pay the lower monthly costs. But if something does go wrong, “that’s where you end up with a rude shock sometimes,” Buckey tells Make It.
The average deductible is $1,655 this year, according to the Kaiser Family Foundation. That means the typical American will need to pay up to that amount before their insurance starts to pay their bills. Of course if you don’t have any major medical needs, you may pay less. Obamacare plans can be even higher, with some options carrying average deductibles between $4,000 and $6,000, Wiik says.
Yet it’s hard to simply avoid buying a plan without a deductible. About 82% of those with health insurance have some kind of deductible as part of their plan, Kaiser finds. Sometimes it’s the only option: About a quarter of companies plan to offer a high-deductible health plan as the only insurance option for their employees in 2020, according to a survey of large employers by the National Business Group on Health
“[Deductibles are] a poor funding mechanism,” Wiik says. Yet they are there to keep premiums in check and to make health care more affordable and accessible, he says.
The problem is that even though deductibles may make health insurance premiums more manageable, nearly half of Americans can’t cover the cost of an unexpected illness or injury, according to a recent survey from health savings account platform provider Lively.
“Health care is ridiculously expensive right now,” Wiik says. “Being admitted to the hospital is like buying a house.” Plus, many people don’t understand what the cost of care may look like in advance because pricing is so opaque.
In most cases of serious illness or injury, your disposable income will get wiped out, Wiik says. Many people will not be eligible for hospitals’ charity programs because they make more than $50,000 a year. That means if you have a high deductible, you are likely stuck with a $5,000 bill that may wipe out any savings you’ve managed to build.
When shopping for health insurance plans, look at the “total cost of a plan when you’re trying to make a decision,” Buckey says. There are a number of calculators that can help run the numbers on some of the biggest costs when comparing plans, including the monthly premium, the deductible and coinsurance rates.
“It’s definitely worth sitting down for a half an hour and doing a rough calculation on the back of the envelope around what your expenses are and what your employer is offering you,” Buckley says.
If you can’t swing a more expensive monthly premium, or if your employer doesn’t offer a plan with a low deductible, consider setting up a health savings fund using a health savings account or flexible spending account that can be used to pay for out-of-pocket expenses.
HSAs, which are designed to be used with a high-deductible plan, allow you to contribute up to $3,550 per year for self coverage and up to $7,100 for family coverage in 2020. These may be offered through your employer, or you can sign up for one independently.
FSAs are offered through your employer and allow you to contribute up to $2,700 in tax-free funds in 2019, with limits expected to increase to $2,750 in 2020. You don’t need to have a high-deductible plan in order to be eligible for an FSA.
While some people may say ‘I can’t afford to do that,’ Buckey says it’s worth double checking and running the numbers. These savings accounts do reduce your taxable income, so that may net you enough to contribute. Additionally, your employer may even make contributions to an HSA, so that’s “free money,” Buckey says you should definitely be taking advantage of.
“Just take five, 10 minutes to eyeball those [benefits guides], they may have some surprises that change your mind,” she says.