What Your Deductible Means for Your Health Plan
Health insurance can be confusing. There are lots of terms to know and a few different costs to consider. The total cost of health insurance includes monthly premiums and out-of-pocket costs. Out-of-pocket costs include your deductible, copayments and, sometimes, coinsurance. How these costs work together can play a role in how much you end up spending on your healthcare. Here is a look at the deductible for health insurance and how it affects your overall healthcare costs.
What is a deductible?
To get started, it helps to understand exactly what a deductible is. A health insurance deductible is the amount you need to pay for services before your insurance will begin paying. It is a form of cost sharing. You pay your deductible each year, so it is an annual expense. For example, if you have a $2,000 deductible, you will need to pay for $2,000 of eligible costs before your insurance covers any costs for the year. For people with job-based coverage, the health insurance deductible average for single-person coverage in 2019 was $1,655. This amount has increased by 36% over the last five years and 100% over the last 10 years.
Health insurance plans can have separate deductibles for different types of services. For example, a plan may have a deductible for medical services and one for prescription drugs. Family plans can also have individual deductibles that each family member must meet, as well as an overall family deductible. Costs applied to an individual deductible will also apply to the family deductible. Once a family member meets their individual deductible, their medical services will be covered. The plan will not cover services for other family members. However, once the family deductible is met, the plan will cover services for everyone in the family.
Many plans also have coinsurance that begins after you meet your deductible. This is usually a percentage of the cost of services you must pay. For example, a 20% coinsurance means you will be responsible for 20% of the cost for a healthcare service after you meet your deductible. It is another form of cost sharing.
What services count toward the deductible?
Most ordinary medical services, like doctor visits, are only subject to a copayment—or copay. Copays are set amounts you pay at the time of services. You can have different copays for different levels of service. For example, you may have a $10 copay to see your primary care doctor and a $20 copay to see a specialist. Copays do not count toward your deductible.
Preventive services, such as checkups and mammograms, are generally not subject to any copay, so you can access these services for free without worrying about your deductible.
Service costs that typically apply to your deductible can include:
Anesthesia and surgical fees
Doctors or other providers not covered by a copay
Imaging exams and other diagnostic tests
How do deductibles affect premiums?
In general, health insurance with low deductibles have higher monthly premiums—the amount you pay to have the insurance. And plans with high deductibles cost less each month.
If you are choosing between high and low deductibles, it helps to have an idea of how much you, and your family, will use healthcare. People who rarely use health services may save money with a low monthly premium and a high deductible. However, someone with a chronic medical condition that requires frequent services may benefit from paying a higher premium and meeting a lower deductible.
The balance between deductibles and premiums can also affect how financially secure you feel. Some people do not like the thought of owing a large deductible should something unforeseen occur. Paying a higher monthly premium may give them a sense of financial predictability.
What are high-deductible health plans?
High-deductible health plans (HDHPs) are plans with very low monthly premiums and very high deductibles. They can save a lot of money for people who rarely or never use services that apply to deductibles. So how high is high? Some HDHP deductibles are as high as the total out-of-pocket maximum for the year. For 2020, the out-of-pocket maximum for individual coverage is $6,900. For family coverage, it is $13,800.
Besides saving on monthly premiums, there is another advantage to HDHPs. You can combine an HDHP with an HSA (health savings account) using pre-tax money. An HSA is only available to use with an HDHP. It is basically a savings account to offset out-of-pocket costs, including the deductible. An HSA can earn interest and stays with you if you change jobs.
Both you and your employer can contribute to an HSA up to an annual maximum. For 2020, you can contribute up to $3,550 for individual coverage and $7,100 for family coverage. Withdrawals from the HSA for qualified expenses are tax free. And you can roll over the funds in an HSA to the next year. By using these pre-tax funds, you may be able to lower your overall healthcare costs for the year.
Are there savings options other than HSAs?
People who do not buy HDHPs can’t use an HSA. However, they have other options. If your employer offers an HRA (health reimbursement arrangement), consider taking advantage of it. HRAs let employers contribute pre-tax money for employees to use for healthcare expenses. The employer owns the account and decides which expenses are eligible for reimbursement. So, deductibles may or may not be eligible. If not, an HRA can still help offset other expenses.
An FSA (flexible spending account) is another option. They are like HSAs in many ways. They are savings accounts and you can use the funds to pay for deductibles and other qualified expenses. Both you and your employer can contribute pre-tax money and there are contribution limits, but they are not tied to an HDHP. You must use FSA funds within the calendar year. FSA accounts do not earn interest and you can’t take the fund with you if you change employers.
If you are deciding on what type of health insurance plan to elect (low, medium or high deductible), it might be worth looking at your expected healthcare costs for the year. You can write it out long-hand or find a healthcare expense worksheet template on the internet. Your computer program may have a worksheet template also.