Health Insurance Deductible: What It Is and How It Works

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Understanding your health insurance deductible is an important part of planning for you medical expenses.

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If your health insurance comes with one or more deductibles, you'll end up paying a few hundred dollars to several thousand dollars if and when you need medical care. Understanding what this deductible is, how it works, when you have to pay it, and when you don’t have to pay it is part of using your health insurance wisely.

What Is a Health Insurance Deductible?

Your deductible is a fixed amount you have to pay each year toward the cost of your healthcare bills before your health insurance coverage kicks in fully and begins to pay (if you're enrolled in Medicare, the Part A deductible is based on benefit periods rather than the calendar year).

How a Deductible Works—an Example

Let’s say your health insurance requires a $1,000 annual deductible, and all non-preventive services are counted towards the deductible (as opposed to being partially paid by the insurance company under a copay system).

1) In January, you get bronchitis.

  • Total bill after your insurer's network discount = $200. (Doctor, prescription.)
  • You pay $200.
  • Your health insurance pays $0.
  • $200 is credited toward your deductible.
  • $800 remaining before the deductible is met.

2) In April, you find a lump in your breast. The lump turns out to be benign; you’re healthy.

  • Total bill = $4,000. (Doctors, tests, biopsy.)
  • You pay $800. (Now you’ve met your $1000 deductible.)
  • You pay any copayments or coinsurance your health plan requires.
  • Your health insurance pays the rest of the bill.

3) In September, you break your arm.

  • Total bill = $2,500. (Emergency room, doctor, X-ray, cast.)
  • You pay copayments and/or coinsurance if you haven't yet met your plan's maximum out-of-pocket. But you do not have to pay anything towards the deductible since you already met it earlier in the year.
  • Health insurance pays the entire bill minus your copayment and coinsurance (if and when you meet the maximum out-of-pocket for the year, your copays and coinsurance charges will also cease; your insurer will cover all of your medically necessary in-network costs for the rest of the year).

4) Next January, you’ll start the process all over again (some plans don't follow the calendar year; in that case, your deductible would reset at the end of your plan year).

In most health plans, once you’ve paid the deductible for the year, you’re done with deductible payments until next year. Each year, the health plan sets a new deductible. Sometimes it’s the same amount as the year before; sometimes it goes up. But as described in the following section, it can sometimes be a bit more complicated.

Different Types of Deductible

Some health plans have more than one type of deductible.

  • Annual Deductible

This is the most common type of deductible and is what’s described in the example above.

  • Per-Episode Deductible

Unlike an annual deductible, a per-episode deductible happens each time you get a particular type of service. For example, your health insurance may require a $1,000 deductible each time you’re hospitalized (some plans will refer to this as a copay instead, but the magnitude of the charge means that from the consumer perspective, it's similar to a deductible).

Per-episode deductibles are less common than annual deductibles, although as noted above, Medicare Part A assesses deductibles based on benefit periods rather than calendar years, so it's possible to have to pay the deductible more than once in a given year. Conversely, the Medicare A system also ensures that if you're hospitalized in December and remain hospitalized into January, you'll only pay the deductible once, instead of having to pay two separate deductibles the way you would with most other types of health coverage.

  • Prescription deductible

Some health plans have a separate deductible that applies to prescription drugs, in addition to whatever deductible the plan has for other medical services. In a plan with a separate prescription deductible, the plan member will pay the full cost of all prescriptions (at the network negotiated price, assuming an in-network pharmacy is used) until they've spent enough to meet the plan's prescription deductible. After that, the coverage will usually switch to copays (flat dollar amounts) for lower-tier prescriptions, and coinsurance (a percentage of the cost) for higher-tier prescriptions.

  • Out-Of-Network Deductible

Some health plans, PPOs in particular, have one annual deductible for care you receive from in-network doctors and a higher annual deductible for care you get from out-of-network providers.

For example, if your health plan has a $1,000 in-network annual deductible and a $2,000 out-of-network deductible, your health plan would start paying for your in-network health care after you’ve paid $1,000 toward your in-network bills. If you then started seeing an out-of-network specialist, you’d have to pay $2,000 toward that out-of-network care before your health plan would start paying anything for your out-of-network care. The $1,000 you’ve already paid as an in-network deductible doesn’t count toward your out-of-network deductible.

In some health plans, any amount you pay toward your out-of-network deductible also counts toward your in-network deductible. In other health plans, the two deductibles are totally separate (note that some plans simply don't cover out-of-network care at all, which means that you'd be responsible for the entire bill—with no cap on out-of-pocket charges—unless it's an emergency situation).

  • Family Deductible

If your health insurance policy covers your entire family, it likely comes with a family deductible. Family deductibles work differently than individual deductibles, and can have embedded deductibles or function as an aggregate deductible. Learn more in "How Your Family Deductible Works." Note that the Affordable Care Act requires health plans to limit a single individual's total out-of-pocket spending (for in-network care) in a given year, even if that person is covered by a family plan that has a family deductible.

For 2020, the upper limit is $8,150 in out-of-pocket costs for a single individual, including deductible, copays, and coinsurance, and $16,300 for family plans. The in-network deductible that a single individual on a family plan can be required to pay can be as high as that amount, but no higher.

What Deductible Will Work Best for Me?

There's no one-size-fits-all when it comes to health insurance deductibles. It depends on your health, the amount of savings you have (that you'd be willing and able to spend on medical care), and the monthly premiums that you'd have to pay for the various health plans available to you.

If your employer offers health insurance, they may allow you to pick from among multiple plans with varying deductibles—or they may only offer one plan, in which case you don't have a say in the amount of the deductible. 

If you buy your own health insurance, you'll be able to pick from all of the plans that are offered in your area, and there will typically be numerous deductible levels from which to choose. Even in areas where just a single insurer offers plans in the individual market, there will be plans available from that insurer with varying deductibles. 

And even if you're switching to Medicare, you have options: In almost all areas of the country, Medicare Advantage plans are available with varying deductibles. And if you opt for Original Medicare instead, you can buy a Medigap supplement that will cover some or all of the deductible for Medicare Part A.

So assuming you do have options, what should you choose? The conventional wisdom is that higher deductibles work better for healthy people and people without kids, whereas lower deductibles work better for people with health conditions and/or children. But it's not always that simple, because you also have to consider things like how much you'll have to spend to purchase each plan (ie, the monthly premiums), and whether you have enough money saved to pay the deductible if and when you need medical care.

You'll need to consider how much you'd have to spend in total under each available plan, for a worst-case scenario as well as for a routine year. For the worst-case scenario, you'll tally up the total premiums and the maximum out-of-pocket costs for each plan. For a routine year, you'll still need to add up the total premiums (since you'll pay those regardless of how much health care you need), but you'll be considering the out-of-pocket costs for more routine things, as opposed to assuming that you'll meet the plan's out-of-pocket cap.

In some cases, you might find that a plan with a higher deductible and lower premiums actually ends up being the best solution (in terms of total spending for premiums and out-of-pocket costs) if you expect that you're going to have substantial medical bills during the year. This is why you have to actually run the numbers—don't just assume that a lower deductible is always the way to go if you're anticipating a lot of medical costs. Sometimes the premiums are so much higher on those plans that you'll end up spending more than you would have with a higher-deductible plan. This is especially true when we consider that plans often have very similar out-of-pocket maximums (including the deductible as well as copays and coinsurance), even if they have very different deductibles. If you anticipate very high medical costs during the year, the maximum out-of-pocket amount—in addition to the monthly premiums—is more important than the deductible.

If you're interested in saving money in a health savings account, keep in mind that you'll need to enroll in a high-deductible health plan (HDHP). These are narrowly defined by the IRS; you can't just pick any plan with a high deductible.

No matter which plan you pick, you need to ask yourself how you'd cover the deductible if necessary. Even if you're perfectly healthy and have never needed more than preventive care in the past, you never know when a serious injury or illness could strike. If you're opting for a plan with a $5,000 deductible because it's got the lowest premiums, do you have $5,000 that you would use to pay the deductible if necessary? If not, here are some ideas to keep in mind.

When Don’t You Pay the Deductible?

In the United States, thanks to the Affordable Care Act, you don’t have to pay a deductible when you get certain preventive care services from an in-network doctor, as long as your health plan isn't grandfathered. Things like your yearly screening mammogram, the colonoscopy you get when you turn 50 years old, and your yearly flu shot aren’t subject to the deductible. Your health plan will pay for those preventive services even if you haven’t met your deductible yet.

Some health plans, particularly some employer-sponsored HMOs, don't require a deductible at all. However, these plans usually charge copays for things like doctor visits, prescriptions, emergency room visits, and hospitalizations (according to an analysis by the Kaiser Family Foundation, 18% of workers with employer-sponsored coverage did not have deductibles in 2019).

What Doesn’t Count Toward the Deductible?

Healthcare expenses that aren’t a covered benefit of your health plan don’t count toward your health insurance deductible even though you’ve paid for them. For example, if your health insurance doesn’t cover orthotic shoe inserts, then the $400 you paid for a pair of orthotics prescribed by your podiatrist doesn’t count toward your deductible. Similarly, if your health plan doesn't cover out-of-network care, any amount that you pay for out-of-network care will not be counted towards your deductible (this is common among HMOs).

If your health insurance requires a per-episode deductible as well as an annual deductible, money you pay toward the per-episode deductible might not count toward your annual deductible.

If you have separate deductibles for in-network care and out-of-network care, the amount you’ve already paid toward your in-network deductible doesn’t count toward your out-of-network deductible. Depending on your health plan’s rules, the amount you’ve paid toward your out-of-network deductible likely won't count toward your in-network deductible, either. 

In most health plans, copayments don't count toward your annual deductible, although they do count towards your total out-of-pocket costs for the year. Learn more in "Do Copayments Count Toward Your Health Insurance Deductible?"

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