Understanding your deductibles and any other out-of-pocket costs is a crucial part of managing your healthcare costs.
The confusing and expansive world of health insurance has a lot of terms that are always tossed around. Most of these terms can be quite confusing, especially for a first-time health insurance buyer or anyone trying to get a good grasp of how health insurance works. One such term is health insurance deductible.
A health insurance deductible is the set amount that you’re required to pay out of your pocket before your plan kicks in and begins paying for the covered costs. The deductible amount may vary by plan and only what you pay for covered medical costs count towards your deductible.
How exactly do health insurance deductibles work and how can you make them work better for you and your loved ones? In this brief guide, we’ll walk you through the world of health insurance deductibles, look at different types of deductibles, and help you choose the best type of deductible for your situation.
What exactly is Health Insurance Deductible?
Simply put, a health insurance deductible is the amount of money that you are responsible for paying for the medical costs before your insurer begins sharing with you some of the medical costs for your treatment.
How do you know your health insurance deductible? Well, you are required to specify your deductible amount when enrolling in your health insurance plan during the open enrollment period. The deductible becomes effective for the entire year and will start over when you’re enrolling again.
It’s also important to remember that not all health insurance plans have deductibles. Some may not have deductibles but this would mean that you pay among the highest premiums out there. Again, the deductible amount may vary from plan to plan.
How Do Health Insurance Deductibles Works?
The easiest way to describe how health insurance deductibles work is through the following examples.
Individual A has a health insurance deductible of $700 and the cost of treating a particular medical issue is $3,000. He’ll be required to pay $700 from his pocket then the insurer will pay the remaining $2,300.
Any further treatment during the term of the policy will be covered in full by the health insurance company. The idea here is that Individual A has met the deductible and is not required to pay any further amount.
Individual B has a deductible amount of $2,500. She requires treatment equaling $500. But later in the year, she requires another treatment worth $4,000. In such a scenario, she will cover the cost of the first treatment at $500 while the remaining $2,000 would be used to cover part of the second treatment.
The insurance company will then cover the remaining $2,000 for the second treatment plus any other subsequent cost of treatment during the year.
Different Types of Health Insurance Deductibles
There are different types of deductibles depending on the type of health insurance plan that you have. Keep in mind that a given insurance plan may have a higher deductible than another plan. This is essentially why you have to know different types of deductibles so that you can choose what works best for your situation.
Here’s a look at different types of deductibles.
Also known as annual deductibles, this is perhaps the easiest deductible to understand. It’s the most common deductible and is applied across all the coverage. It basically adds up until the deductible amount is fully met. You basically do not have to guess the different deductibles or how they apply.
Also known as the per-episode deductible, a non-comprehensive deductible is becoming a common type of deductible. This is the type of deductible that applies to particular medical expenses or coverage.
This means that some medical expenses may require you to pay deductible while others may not. This type of deductible is almost the same as copayment in the sense that you only have to pay it when you require certain medical services. The only difference is that it’s often much more than normal copayment and similar to a normal deductible.
If you have a health insurance plan, the term cumulative or family deductible might be of interest to you. One of the most important things to note is that family deductibles are very different from individual deductibles.
Individual deductibles generally focus on the amount of deductible that each individual has to pay. On the other hand, family deductibles are paid cumulatively by all members of the family and the amount will be considered to be met. In other words, the family deductible doesn’t require each member of the family to meet the deductible on their own.
Needless to say, the family deductible is essential in saving money since every member’s contribution to the deductible will count. You have to keep in mind that family insurance plans give you two options:
- An individual deductible – This applies to each person
- A family deductible – This applies to the whole family and is paid cumulatively
Some health insurance plans offer separate deductibles that deal specifically with prescription drugs. In such a plan, you will pay the full costs of prescription drugs until you exhaust the prescription deductible amount stipulated in your plan. After that, your insurer will pay for the costs of prescription drugs for the rest of the policy period.
Generally, most health insurance plans have deductibles that count towards both in-network and out-of-network. However, some plans, especially PPOs, have annual deductibles for the care you receive in-network and an even higher annual deductible for out-of-network care.
Under such scenarios, the deductibles are totally separate and don’t cover each other. You have to keep in mind that such deductibles might be very expensive and may not be ideal for you if you’re on a budget or low on income.
The Difference between High Deductibles and Low Deductibles
Depending on the type of health plan that you have, you can either have a high deductible health plan (HDHP) or a low deductible health plan (LDHP). Also known as the consumer-driven health plan, HDHP simply has a high deductible meaning that you’ll have to pay low monthly premiums and high deductibles.
On the other hand, LDHP is designed in such a way that you have to pay high monthly premiums but low deductibles. In essence, the amount of deductible that you pay will directly affect the monthly premium that you pay. In other words, high monthly premiums translate to low deductibles while low monthly premiums translate to high deductibles.
Benefits of HDHPs
HDHPs give you the chance of paying low monthly premiums since you’ve paid a high amount upfront. This can be ideal for individuals who do not anticipate regular medical issues. In essence, it can be ideal for you if you are young, healthy, and do not have major chronic conditions that require you to visit the doctor regularly.
Again, most HDHPs are perfect if you have Health Savings Accounts (HSA) where you can contribute your before-tax money into this account. These accounts are designed for qualified medical expenses and roll to subsequent years if the funds aren’t spent.
One potential drawback of HDHPs is that you may be overburdened financially in the event of an emergency medical situation. Again, some people may choose to risk their health by skipping doctors’ appointments or failing to go to the hospitals if the deductibles are so high.
Benefits of LDHPs
One of the main benefits of LDHPs is the chance to save on out-of-pocket costs. Such costs are predictable, which makes it quite easy to budget for and manage your health care expenses. This can be ideal if you have a large family or anticipate regular visits to the doctor. It can be ideal if you have a pre-existing or chronic condition that requires regular visits to the doctor.
What Deductible will Work Best for You?
The type of deductible that will work best for you depends on your health, the monthly premium that you pay, the type of plan that you choose, and of course, the amount of savings that you have. HDHPs may be ideal for you if you have enough in savings and willing to spend on medical care while LDHPs may be ideal for you if you’re low on income.
But even with that, let’s go a bit into details.
HDHPs may be appealing to you if:
- You’re young and healthy
- You do not have dependents
- You rarely visit the doctor or buy prescription drugs
- You aren’t planning to get pregnant
- Have enough savings to cover out-of-pocket costs arising due to medical emergencies
On the other hand, LDHPs can be appealing to you if:
- You’re old and prone to health issues
- You have a chronic condition and anticipate regular visits to the doctor
- You’re planning on getting pregnant
- You have dependents on your plan
- Low on savings
When it comes to health insurance deductibles, there’s no one-size-fits-all. The best thing to do is to understand which type of deductible each plan offers, know the numbers, do the math, and choose a plan that makes the most sense for you and your family based on your health situations and financial standing.