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What’s the Point of a Deductible?

Healthcare Writer

Last updated March 17th, 2020

Reviewed by Louise Norris

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

On many plans, some services such as certain preventive care, are covered before you have to meet your deductible. Your plan might also pay for a portion of other services, like office visits and prescriptions, before you meet your deductible.

The thought of having to pay for healthcare, in addition to the monthly premium costs you have to pay just to keep your health insurance policy, can be depressing. But note that though the benefits may not be immediate, insurance deductibles may help to manage your overall spending on care.

What Is a Deductible?

Most health plans have deductibles. A deductible means that you must pay a specific amount towards most medical costs — remember, some services are covered pre-deductible — before your health insurance kicks in. This deductible amount is in addition to the premium amount you pay every month to keep your insurance.  

Example: Let’s say you choose a health insurance plan with a $350 premium and a $2,000 deductible. In this case, you must pay your insurance company $350 each month to keep the coverage. Then you must spend $2,000 out of your personal finances before your health insurance will pay a portion of most of your medical bills. 

When you’ve spent the total amount of your deductible on your medical care for the year, you’ve “met your deductible.” For this to occur, you must typically receive your care from in-network providers, within your insurance plan’s normal benefits. Your insurance company knows when you’ve met your deductible based on bills sent by your provider, using the information on your insurance card. 

Why Do Deductibles Exist?

Deductibles have stuck around — and increased over time — for several reasons. Health insurance providers think that the benefits of deductibles are significant. These benefits include:

Negotiated Rates

Insurers negotiate with doctors to get a lower price for medical services. A deductible is a part of having medical insurance and 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 having to pay for the consequences of unsafe or unhealthy behavior will help you save money and damage to your body by dissuading you from engaging in those behaviors. Having to pay to meet your deductible also typically helps avoid unnecessary medical procedures or overutilization of medical care. 

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 immediately, higher deductibles can reduce your overall spending if you have few medical costs. 

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 (Note that you can contribute to an FSA regardless of what type of health plan you have, although FSAs tend to be popular among people with higher deductible plans. But you can only contribute to an HSA if you have an HSA-qualified high-deductible health plan (HDHP), which has to follow various IRS rules.)

Deductibles Ensure Accuracy in Billing

Insurers do expensive document reviews each time you seek medical care.The price has to be adjusted to the negotiated rate, and the amount credited towards the deductible, getting you that much closer to having your insurer start to pay claims. 

Deductibles Discourage Fraud

Deductibles make it 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 get care. Deductibles might also make you pause before getting care, knowing a good portion, if not, all of the expense will be your responsibility if your deductible hasn’t been met.

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 and major health costs while requiring patients to contribute to their own medical care.

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 – sometimes have this option. These plans won’t necessarily save you money, because they have high monthly costs. Some bronze plans also come without a deductible for certain services, though they can be quite costly if medical services are needed – copays can reach $1,000 a day for inpatient care.

However, for people with income between 100% and 250% of the poverty level, the Affordable Care Act (ACA, also known as Obamacare) created cost-sharing reductions, which enhance the coverage provided by silver plans purchased in the exchange. Especially for people with income on the lower end of the spectrum, cost-sharing reductions can result in silver-level plans with low or no deductibles.

Also 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.

Deductibles Vs. Tax-Deductible: When you file your federal tax return, you can deduct medical expenses that exceed 7.5% of your adjusted gross income, if you itemize your deductions. Medical expenses can include your insurance premiums as well as medical costs such as hospital stays, prescription drugs, lab work, doctor office visits and other medical services outlined on the IRS website..

Deductible Applied to Maximum Out-of-Pocket 

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 (MOOP). The MOOP is the maximum amount you will have to pay in a year for your medical care, excluding your monthly premium. It is aimed at protecting you from paying exorbitant amounts of money for your healthcare.

Keep in mind, however, that this MOOP amount only applies to in-network care. For out-of-network care, the MOOP might be higher or, depending on your insurance plan, there may be no MOOP limit at all. 

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 for medically-necessary essential health benefits provided by in-network providers. This amount includes your deductible, as well as your copays and coinsurance payments. Remember, 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 (including catastrophic plans and many HSA-qualified HDHPs) 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?

Out-of-pocket costs (for in-network essential health benefits) for 2020 health plans are capped at $8,150 for an individual and $16,300 for a family of two or more people. This means all major medical plans can’t have a deductible that exceeds these amounts.

Deductibles for silver plans, the most popular type of “major medical” Affordable Care Act health insurance, average $4,604 in 2020.1 The average deductible for employer-based health plans is $1,655.2

Christian health sharing, temporary health insurance, and other unconventional healthcare arrangements are free to set their own deductibles, as they are not regulated by the Affordable Care Act.

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Article Sources
  1. Centers for Medicare and Medicaid Services. “Plan Year 2020 Qualified Health Plan Choice and Premiums in HealthCare.gov States.” cms.gov (accessed March 2020).

     

  2. Kaiser Family Foundation. “2019 Employer Health Benefits Survey.” kff.org, September 25, 2019 (accessed March 2020).