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What’s the Point of a Deductible?

Health insurance plans use a deductible to prevent fraud and provide lower monthly premiums.

December 6, 2017 - By Hal Levy - read

Your health insurance plan will want to store a new insurance card in your wallet – and might ask to keep that wallet open for a deductible. In health insurance lingo, a “deductible” refers to the overall amount you must pay, all on your own, before your plan helps you pay for care.

The thought of having to pay for healthcare in addition to the monthly premium costs you have to pay just to keep the health insurance policy is a stinker. The benefits may not be immediate, but insurance deductibles help to manage your overall spending on care.

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What Is a Deductible?

Most health plans have deductibles. A deductible means that you pay the amount of the deductible towards medical costs before your health insurance kicks in. The health insurance deductible amount is in addition to the premium amount you pay every month to enroll in the first place.

Example: Let’s say you choose a health insurance plan with a $350 premium and a $2000 deductible. In this case, you must pay your insurance company $350 each month to keep the coverage. $2000 is the total amount you have to spend, using your personal finances, before your health insurance plan will help you pay a portion of your bills.

When the total cost of all the care you’ve paid for on your own during the year reaches the amount of your deductible, it’s called “meeting your deductible”. The care you receive typically must be in-network, within your health insurance plan’s normal benefits, and sent to your insurance company via your insurance card.

Why Do Deductibles Exist?

Deductibles have stuck around for several reasons. Health insurance providers think that the benefits of deductibles outweigh the issue of paying more for care. These benefits include:

  • Negotiated Rates: Insurers negotiate with doctors to get a lower price for medical services. Even though you’re paying a deductible, as a member of an insurance plan you’ll likely be paying less than what a doctor charges to the public. Someone without insurance would have to pay full price.
  • Deductibles Share Risk: The idea is that if you have a reason to avoid unsafe or unhealthy behavior – because you will pay for it – then you will save money and your body by avoiding dangerous situations.
  • More Choice in Your Coverage: In theory, deductibles give you greater control of your healthcare spending. Government regulations have required all individual health plans to do certain things, decreasing the differences between individual health insurance plans. Higher deductibles are a response to these regulations. Instead of paying higher monthly bills to have everything covered at once, deductibles let you choose care as you need it without paying for frills.
  • Major Tax Advantages: Some companies offer “high-deductible health plans” that have taken the idea of choice even further. These plans lessen the burden of the deductible by encouraging you to use a health savings account (HSA) if you purchase insurance on your own, or a flexible savings account (FSA) if you get healthcare through an employer. HSAs and FSAs let you place your income into an account before that income is taxed. You can pay for almost any medical expense using an HSA or FSA debit card. If you were already planning to spend a significant amount of money out-of-pocket on healthcare needs, these accounts will help your money go further.
  • Deductibles Prevent Small Claims: Health insurance providers do expensive document review each time you seek medical care. Deductibles help make the cost of insurance lower when billing isn’t the insurer’s responsibility.
  • Deductibles Discourage Fraud: Deductibles make it prohibitively difficult for doctors to bill for fake treatments and keep the profits. Your insurance plan will trust that your medical needs are real, since there’s a cost for you to use seek care. Deductibles make you pause before getting care. This prevents an overloaded healthcare system from increasing insurance costs for everyone.
  • Insurance Isn’t Perfect: Historically, health insurance plans in America haven’t covered every cent of medical costs. Health insurance plans originated to protect you from really expensive, major catastrophes. A deductible lets health insurance plans continue to cover catastrophic accidents without having to pay attention to smaller healthcare costs.

How Can I Avoid the Deductible?

It’s not uncommon to find plans with low or non-existent deductibles. The more expensive metal levels – gold and platinum – have this option. These plans won’t necessarily save you money, because they have high monthly costs. A special type of bronze plan also comes without a deductible for certain services.

Affordable Care Act: Thanks to the Affordable Care Act, most health insurance plans in the U.S. require certain preventive services, such as vaccines and annual checkups, to be covered by your plan for free – even before you meet your deductible.

Are Deductibles Present Elsewhere? You’ll see deductibles listed for all types of insurance and warranties. You can also “deduct” from your taxes, which is a separate procedure that limits the amount you owe.

Deductible vs. Out-of-Pocket Maximum: What’s the Difference?

Once you meet your health insurance deductible, your health insurance will share the cost of your care. You’ll be asked to contribute a copayment (a fixed amount for services) or coinsurance (a percentage of your medical costs) until you’ve met your plan’s out-of-pocket maximum (the maximum amount is your capped out-of-pocket spending; this is aimed at protecting you from having to pay many thousands of dollars on care).

“Deductible” and “out-of-pocket maximum” are not two names for the same thing; they are two different things.

Deductible: The deductible is the amount you must spend out-of-pocket before your health insurance helps out with the costs. After you’ve reached your deductible, you’ll just need to pay copayments or coinsurance per your health insurance plan.

Out-of-Pocket Maximum: Your out-of-pocket maximum (or out-of-pocket limit) is the absolute max amount you are required to spend on your plan. This amount includes your deductible, as well as your copays and coinsurance payments.

Keep note, though, that your monthly premium does NOT count towards either the deductible or out-of-pocket maximum.

A Lower Deductible May Not Mean a Better Plan: Your health insurance plan may have a low deductible and a high out-of-pocket maximum. Or, your insurer could offer a high deductible but low monthly premiums. The level of your deductible has advantages and disadvantages.

A few plans set their deductible and out-of-pocket maximum at the same level, so that all of your care is covered after your deductible is met.

What Is the Maximum Deductible?

Deductibles for 2018 health plans are capped at $7,350 for an individual and $14,700 for a family of two or more people. This means all of the major medical plans that you find can’t have have a deductible that exceeds these amounts.

Deductibles for silver plans, the most popular type of “major medical” Obamacare health insurance, averaged $3,572 per year in 2017. The average deductible for employer-based health plans was $1,505.

Christian health sharing, temporary health insurance, and other unconventional healthcare arrangements are free to set their own deductibles.

Taking the Next Steps

It’s important to know how your insurance works, if you plan to manage your healthcare costs.

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