Understanding How Health Insurance Deductibles Work

For years, employers have been covering the cost of health insurance as a benefit of working for that company. As an employer, you are in competition to retain great talent and are willing to pay for that. However, with the rising cost of health insurance, adjustments to health insurance deductibles are sometimes made to offset skyrocketing health insurance premiums. Understanding how your deductible works will save you money on your health care costs.

What is a Health Insurance Deductible?

Understanding how health insurance deductibles work

Your health insurance deductible is the amount that you will have to pay annually for your health care before the health insurance company starts paying. This will include surgical procedures, blood tests or hospitalizations.

A health insurance deductible is different from other types of deductibles, like auto, renters or homeowners insurance where you don’t get services until you pay your deductible. Many health insurance plans provide some benefits while you are meeting the deductible. Even if you haven’t completely paid your deductible, the insurance company will follow through on their portion of the medical bill as medical services continue to be provided.

Regardless of your deductible amount, having health insurance will lower your health care costs, even when you have to pay out-of-pocket to meet your calendar year deductible. Health plans with co-pays (usually a fixed dollar amount, such as $15, each time you visit the doctor or fill a prescription medication) will lower your first dollar coverage such as doctor visits. Be aware though, that co-pays typically don’t count towards the deductible. Any expenses that are applied toward your deductible will be reduced to the contracted negotiated rate from the insurance company.

Coinsurance is another form of cost-sharing in which you pay a percentage of the total bill, perhaps 20%, and the insurance company pays the rest, 80%. After the deductible is met your insurance may require you to pay coinsurance until your out-of-pocket maximum is met. After this cap is met, 100 percent of covered services will be paid by the insurer.

Claim Payout Example:

ER Visit: $2,300
Your Deductible: $1,000 (this comes off the bill first)
Coinsurance: 80% (insurance company) / 20% (your exposure) = $1040/$260
Your total out of pocket for the ER visit: $1,260

On a subsequent visit to the ER you would only owe 20% since your deductible has now been met for this calendar year.

Are Higher or Lower Health Insurance Deductibles Better?

Increasing your deductible is the easiest way to lower your premiums. You can calculate the risk you are willing to take based on the premium amount. This is a good way to save money for something that seldom happens.

Many high deductibles may qualify for a tax savings component called Health Savings Account (HSA). HSA’s are designed to create a financial incentive to self-insure for the little stuff by providing a tax savings. By making deposits during the tax year to a qualified HSA savings account, the IRS allows you to make an income adjustment on page 1 of the 1040 tax form. If this is offered through your employer on a pre-tax basis, your income will be adjusted on your W-2 for that tax year for your contributions to the account. Keep in mind, this account is subject to contribution limits by the IRS. Overall, this is a great way to reduce your taxable income while saving for future medical expenses. As an added bonus, funds in the HSA account roll over year to year, unlike a Flexible Savings Account (FSA).

Having a lower deductible will increase your health insurance premiums. While this is a higher monthly bill, it reduces the risk of a more substantial “surprise” cost in the event of an unexpected medical condition. For some people, this will be better fitting for their budget and overall lifestyle.

Choosing a Health Insurance Plan

Most plans cover preventive care at no cost to you. Screenings, immunizations, and other preventive services are covered without requiring you to pay your deductible or co-pay. Many health insurance plans also cover other benefits like doctor visits and prescription drugs even if you haven’t met your deductible. Some plans however, will require that you satisfy your medical deductible before these services are covered by the health insurance company. Doing your due diligence when selecting a plan will help with determining which option is best for you.

When choosing a health insurance plan, it’s important to understand what the insurance company covers without requiring you to pay your deductible. Then you can make an informed decision as to whether you want a plan with a lower or higher deductible. Knowing your deductible can save you money at claim time.

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