An Embedded Deductible and How It Works

Family standing in front of a home
Health insurance plans can have family deductibles, but each person will generally also have their own, smaller deductible.

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An embedded deductible is a system that combines individual and family deductibles in a family health insurance policy. High-deductible health plans often use aggregate deductibles instead, but embedded deductibles are common for all other plans when multiple family members are enrolled in a plan together.

When a health plan has embedded deductibles, it just means that a single member of a family doesn't have to meet the full family deductible for after-deductible benefits to kick in. Instead, the person's after-deductible benefits will go into effect as soon as he or she has met the individual deductible, even if the coverage is through a family plan.

Since 2016, there are new rules that apply to the total out-of-pocket costs that any one person on a plan can be required to pay in out-of-pocket costs during the year. Aggregate deductibles are still allowed, but all family plans must have embedded individual out-of-pocket maximums. That means that in 2020, no individual member of a family can be required to pay more than $8,150 in out-of-pocket costs during the year (in-network). The upper limit increases to $8,550 for 2021, although many plans will continue to have out-of-pocket limits that are lower than the maximum allowed by law.

How It Works

With an embedded deductible, your health plan will keep track of two different types of health insurance deductibles for each family member: the individual deductible and the family deductible. The family deductible is usually twice as high as the individual deductible. When a family member has a health care expense, the money he pays toward his individual deductible is also credited toward the family deductible.

There are two ways coverage will kick-in, and the health plan will begin paying for the health care expenses of any particular family member:

  1. The family member has had enough personal health care expenses that he or she has met the individual deductible. In this case, the health plan begins paying for this person’s expenses, but not the health care expenses of other family members (unless it's care that's covered before the deductible, like certain preventive care, or treatment that's covered with a copay rather than being counted towards the deductible).
  2. Several different family members have each paid enough in individual deductibles that, added together, the family deductible has been met. In this case, the health plan begins paying the health care expenses for the entire family, even though the family members that haven’t paid anything at all toward their individual deductible.

Pros and Cons

The problem with an embedded family deductible is that the only way you can meet the family deductible and get coverage for the entire family is by pooling the individual deductible expenses of several family members (or at least two family members, if they both meet their individual deductibles). This is not true for an aggregate deductible; one person can meet the deductible with an aggregate deductible, assuming it's low enough that the person doesn't exceed the maximum out-of-pocket costs allowed under the Affordable Care Act (ACA).

With an embedded deductible, even if a single family member has very high health care expenses, those expenses alone won’t be sufficient to meet the family deductible. Why? Because as soon as that individual meets his lower individual deductible, his post-deductible health insurance benefits kick in and begin paying. He may then be required to pay other types of cost-sharing like copays or coinsurance, but those other out-of-pocket expenses don’t get credited toward the family deductible (they do, however, get counted toward's the family's out-of-pocket maximum). Only the money he paid toward his individual deductible gets credited toward the family deductible.

Since the individual deductible is smaller than the family deductible, one individual in the family can’t possibly satisfy the entire family deductible himself.

That means that at least one other member of the family would have to also meet the individual deductible over the course of the year for the family deductible to be met and after-deductible benefits to kick in for all covered members of the family.

The benefit of an embedded family deductible is that after-deductible health insurance benefits kick in for the sickest members of the family sooner than for other family members. Because these sick family members have higher health care expenses, they reach their individual deductible sooner than they would if the plan had an aggregate deductible, and health insurance then starts paying for all or most of their health care expenses. It’s thanks to the embedded deductible system that their insurance benefits kick in and start paying before the family deductible has been met.

2016 Changes

All of the above still applies, but starting in 2016 a new requirement was added, stipulating that no single individual can be required to pay more in out-of-pocket costs (in-network) than the maximum allowable out-of-pocket for that year. As mentioned above, tt is $8,150 for 2020 and in 2021, it will be $8,550.

So for example, before 2016, it was possible to have a health plan that did not have embedded deductibles or embedded out-of-pocket maximums. Let's say the plan had a $10,000 family deductible, and then 100% coverage after that (this sort of plan design was only common on high deductible health plans). If only a single member of the family incurred medical expenses during the year, she would have had to pay $10,000 before the coverage kicked in. That sort of plan design is no longer allowed because her out-of-pocket costs would have to be capped at $8,150 in 2020. The plan could still have a family deductible of $10,000, but more than one person would have to incur medical expenses to reach that deductible.

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Article Sources
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  2. healthinsurance.org. Out-of-pocket costs. Glossary.

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