What is a deductible?

Have you ever heard the term deductible when it comes to health insurance but aren’t quite sure what it means? Understanding the concept of a deductible is crucial for effectively managing your medical finances and making informed decisions.

In this article, we will dive into the details and explain what a deductible is and how it works.

Takeaways rom this blog post:

• Deductibles define the amount a consumer must pay before their health insurance plan begins to share costs for covered medical expenses.
• Deductibles can impact out-of-pocket expenses, monthly payments, and the level of premiums and potential cost sharing.
• The relationship between deductibles and premiums is an important factor to consider when choosing a health insurance plan.

Learn more about common healthcare and employee benefits terminology with our glossary.

Definition of a deductible

In health insurance, a deductible is the amount of money an insured person must pay out-of-pocket before their insurance company begins to cover the costs of medical care. This means insured individuals are responsible for paying for a certain amount of their medical expenses before their insurance kicks in.

The insurance policy determines the deductible amount, which can vary depending on the plan type and the level of coverage you select. Once you meet your deductible, the insurance company will begin to cover a portion of medical costs for the rest of the plan year, with the insured individual being responsible for copayments or coinsurance.

Importance of understanding deductibles

Understanding deductibles is crucial for making informed decisions about health insurance coverage. By grasping the importance of deductibles, individuals can make a more informed decision on coverage for their specific needs, find the right balance between premiums and deductibles, and have a clearer understanding of how their insurance policy works.

Deductibles define the amount a consumer must pay before their health insurance plan will start to share costs for covered medical expenses. Typically, the higher the deductible, the lower the monthly premium, and vice versa. You’ll need to keep these two factors in mind when shopping for health insurance on the Health Insurance Marketplace.

Deductibles play a significant role in impacting out-of-pocket expenses for individuals with health insurance. When individuals meet their deductible, it contributes to the out-of-pocket maximum, which is the maximum amount a beneficiary has to pay for covered services within a plan year.

Potential out-of-pocket costs can include office visits, preventive services, prescriptions, and other medical services.

Once individuals meet their deductibles, coinsurance kicks in, where the individual and the insurance company share the cost of covered healthcare services. This can further impact out-of-pocket expenses as the individual is responsible for a percentage of the costs until they reach the out-of-pocket maximum.

Other factors that can impact health insurance costs include the number of people on the plan (individual vs. family coverage), the type of plan (such as an EPO, PPO, or HMO), and the network size.

Deductibles also reset annually, meaning the consumer must start over and meet the deductible again at the beginning of each new plan year. This can affect how much the individual must pay out of pocket for medical expenses each year.

Types of deductibles

There are various types of deductibles that can impact the cost and coverage of an insurance policy. Understanding the different types of deductibles is essential for making informed decisions about insurance coverage.

Annual deductible vs. separate deductible

An annual deductible is the amount an individual or family must pay for healthcare services before their insurance plan starts covering the costs. This means that once the annual deductible is met, the insurance company begins to pay for a portion of the healthcare expenses for the rest of the plan year. The annual deductible applies to all covered services within the plan.

On the other hand, an insurance company may implement a separate deductible for specific services such as prescription drugs. This means individuals must pay a separate amount before the insurance plan covers the costs of prescription medications.

According to KFF¹, 90% of workers with single coverage have a plan with an annual deductible.

Individual deductible vs. family deductible

Individual deductibles apply to an individual's medical expenses, while family deductibles apply to the entire family's medical expenses. For example, a health insurance plan with an individual deductible of $1,000 will require an individual to pay the first $1,000 of their medical expenses before the insurance company starts to cover costs.

On the other hand, a family deductible of $2,000 means that the entire family must collectively pay $2,000 in medical expenses before the insurance coverage kicks in for everyone. Aggregate and embedded deductibles can further complicate family deductibles. With an aggregate family deductible, the plan will cover all members' expenses once the family reaches the specified amount. On the other hand, embedded deductibles require each family member to meet their individual deductible before the plan begins to cover their medical expenses.

Average deductible for different health insurance plans

According to KFF’s 2023 Employer Health Benefits Survey, the average deductible for covered workers was $1,735 for single coverage. This number has increased by 10% in the last five years. The survey also found that 31% of workers with single coverage had an annual deductible of $2,000 or more. While the share of employees with deductibles of $2,000 or more decreased slightly between 2022 and 2023, it has grown since 2009, when only 7% of workers faced deductibles that high.

KFF also found that the likelihood of having a deductible depends on the type of plan you have. According to the survey, 33% of workers with an HMO didn’t have a deductible for single coverage, while 14% of workers with POS plans and 10% of workers with PPOs didn’t have one.

Here’s a breakdown of the average deductibles by plan type.

KFF also tracks² the average deductible for plans in the Affordable Care Act (ACA) Health Insurance Marketplaces. Depending on the metal tier, health insurance company, and type of plan you enroll in, you may face different deductibles.

What’s the difference between a low and high deductible plan?

A high deductible health plan (HDHP) typically has a higher health insurance deductible, meaning enrollees must pay more out of pocket before their insurance coverage kicks in. One of the benefits of an HDHP is that higher deductibles result in lower monthly premiums.

For individuals with lower healthcare needs and who rarely seek medical care, a high deductible health plan may be more cost-effective. However, those with more significant medical needs will get better coverage and lower out-of-pocket costs with a low deductible plan, even though premiums will be higher.

Certain HDHPs can also make you eligible for a health savings account (HSA), which allows you to save money for future medical expenses.

You can learn more about HDHPs and low deductible health plans in our article.

Can I get my deductible costs reimbursed with an HRA?

Yes, your employer can reimburse your qualifying out-of-pocket medical expenses with a health reimbursement arrangement (HRA). This depends on how your employer designed the benefit. For example, employers can restrict eligible expenses under an HRA, such as reimbursing employees for health insurance premiums only. You’ll want to check with your employer or HRA administrator to determine if they can reimburse you for out-of-pocket costs.

What costs are exempt from deductibles?

The ACA requires all health plans on the Health Insurance Marketplace to cover the cost of preventative health items and services, even if you haven’t met your deductible. This includes HIV screenings, blood pressure screenings, lung cancer screenings, and more.

Conclusion

Knowing insurance terminology like deductibles is essential for choosing the right health insurance plan. Understanding the terms health insurers use in the plan can help individuals determine how much they’ll need to pay in deductibles and how much coverage they’ll receive for different medical services.

1. https://www.kff.org/health-costs/report/2023-employer-health-benefits-survey/#:~:text=The%20average%20deductible%20among%20covered,than%20workers%20at%20smaller%20firms.

2. https://www.kff.org/private-insurance/issue-brief/deductibles-in-aca-marketplace-plans/