What's a deductible?
Deductible is a term you might have heard in connection with your health insurance costs. But what exactly is a deductible? Here’s what it actually means: Your annual deductible is typically the amount of money that you, as a member, pay out of pocket each year for allowed amounts for covered medical care before your health plan begins to pay. This excludes certain preventive services that may be automatically covered. Deductibles can be high or low, depending on your plan, and that may affect how you pay for health care costs.
How do deductibles work?
What’s the difference between high deductible and low deductible health plans?
A high deductible health plan is also referred to as HDHP. A low deductible health plan may be referred to as an LDHP. Depending on the type of plan you have, there could be separate deductibles for prescriptions and/or separate deductibles per family member. It could take as little as one visit or over the course of many months to meet your deductible. For some plans, you may not meet your deductible within your plan year.
Benefits of high deductible plans
True to its name, a high deductible health plan (also called a consumer-driven health plan), has a higher deductible than a low deductible health plan, or “traditional” health plan. There may be other benefits to these types of plans, including:
- Members may spend less per month on their premium, or amount deducted from each paycheck. Spending less up front tends to appeal to generally healthy members who don’t anticipate upcoming medical expenses. The trade-off for spending less on the monthly premium is that you’re responsible for 100% of out-of-pocket costs until the deductible is met.
- As a way to offset the out-of-pocket costs, certain qualified high deductible health plans can be paired with a savings tool called a health savings account, or HSA. Employees can contribute pretax money into a special account designed for qualified medical expenses. If the funds aren’t spent, they roll over year to year.
Drawbacks of high deductible plans
One drawback of a high deductible health plan? In a worst-case scenario or emergency situation, meeting the deductible or out-of- pocket maximum could pose a financial burden. Another drawback? Some people might skip making doctors’ appointments or filling prescriptions to avoid spending money — risking their health in the process.
Snapshot of a high deductible health plan:
- Lower upfront premium — limiting monthly expenses
- Higher deductible must be met before your health plan begins to pay
- Designed to provide coverage for unexpected costs from medical treatments
How do you reach your out-of-pocket maximum?
Your deductible is part of your out-of-pocket maximum (or limit). This is the most you’ll pay during a policy period for allowed amounts for covered health care services.
Other cost-sharing factors that count toward hitting your out-of-pocket maximum:
- Copayments: Fixed dollar amounts of covered health care—usually when you receive the service. (For example, you might pay a $25 copay when you see your primary care provider (PCP).) Your plan determines the price of your copay and whether it’s owed before or after you meet your deductible.
- Coinsurance: You likely won’t pay coinsurance, calculated as a percentage of shared costs between you and your health plan, until your deductible is met. Typical coinsurance ranges from 20 to 40% for the member, with your health plan paying the rest.
Your premium and any out-of-network costs don’t count toward your out-of-pocket maximum.
Once your deductible and coinsurance payments reach the amount of your out-of-pocket limit, your plan will pay 100% of allowed amounts for covered services the remainder of the plan year.
Benefits of low deductible plans
The potential to save on out-of-pocket costs is a major draw of a low deductible health plan. Another benefit may be predictability: being able to budget for and manage your health care expenses. If you have a large family and anticipate regular trips to the doctor or have a busy medical history due to a chronic or pre-existing condition, a low deductible health plan may work best for you.
Snapshot of a low deductible health plan:
- Higher upfront monthly premium
- May help you manage out-of-pocket expenses with a lower deductible (health insurance payments start earlier)
- Designed for those who need regular medical care
What deductible plan may be right for me?
If you don’t anticipate needing many medical expenses for the upcoming plan year, a high deductible health plan may be the most economical one for you. If you do anticipate upcoming medical expenses, a low deductible plan might help you get the most mileage out of your plan.
| High deductible health plans may appeal to those who: | Low deductible health plans may appeal to those who: |
|---|---|
| Are young and generally healthy | Are 65 or over |
| Are not planning on becoming pregnant | Are planning on becoming pregnant and seeing their doctor regularly in the coming year |
| Rarely visit the doctor or buy prescription drugs | Anticipate needing more prescriptions or care due to a pre-existing or chronic condition |
| Don’t have dependents | Have multiple dependents on their plan |
| Can cover out-of-pocket costs in an unexpected medical situation | Anticipate upcoming expenses (history of illness or an upcoming procedure or surgery) |
Finding the right fit
There’s no “right” plan — it depends on your situation. How much coverage do you think you or your family will need in the coming year? Can you cover the out-of-pocket maximum? Once you have an idea of numbers, sit down and do the math to determine what plan makes sense for you and your family.
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