How Health Insurance Deductibles Really Work

A health insurance deductible is what you pay out-of-pocket before your insurance begins to cover your costs. This amount resets each year and varies by plan. Understanding your deductible can help you to effectively manage your healthcare expenses.

How Do Deductibles Affect Your Health Costs?

Understanding deductibles, how they work, and when you need to pay them is part of using health insurance wisely.

Here’s an example showing expenses with a $1,000 annual deductible:

In January, you get bronchitis. You see the healthcare provider and get a prescription.

• Total bill after your insurer’s network discount: $200
• You pay: $200
• Your health insurance pays: $0
• Amount credited toward your deductible: $200
• Remaining before deductible is met: $800

In April, you find a lump in your breast. It's not cancer and you’re healthy.

• Total bill for doctors, tests, and biopsy: $4,000
• You pay: $800 (Now you’ve met your $1,000 deductible.)
• Additional payments: Pay any copayments (flat fee per visit) such as $30 each time you see a healthcare provider) or coinsurance a percentage of the cost) required by your plan
  
• Health insurance pays: The rest of the bill

In September, you break your arm.

• Total bill for emergency room visit, doctors, X-ray, and cast = $2,500.
• You pay copayments and/or coinsurance if you haven’t yet met your plan’s out-of-pocket maximum. But you do not have to pay anything more toward the deductible since you have already met it.
• Insurance pays the entire bill minus your copayment and coinsurance.

The out-of-pocket maximum is the most you’ll pay annually, including all deductibles, copayments, and coinsurance.

After you meet the out-of-pocket maximum for the year, all charges, including your copays and coinsurance, will also cease; your insurer will cover all of your medically necessary in-network costs for the rest of the year.1

Next January, you’ll start the process all over again. (Note that some plans don’t follow the calendar year; in that case, your deductible and out-of-pocket maximum would reset at the end of your plan year or plan period.)

Each year, the health plan sets a new deductible and out-of-pocket maximum. Sometimes it’s the same amount as the year before; sometimes it changes.

There are some exceptions to annual deductibles. For example, Medicare Part A’s deductible for hospital care is based on benefit periods rather than the calendar year, so it’s possible to have to pay it more than once in a calendar year.

However, the Medicare Part A benefit period starts when you are hospitalized and provides continuous coverage for the duration of your stay. Even if you are hospitalized in December and remain in the hospital in January, you’ll only pay the deductible once.3

What to Know About Health Plan Deductibles

Annual deductibles are the most common type. However, some health plans feature multiple deductibles, which may include:

• Prescription deductible: Applies to prescription drugs, in addition to the plan's deductible for other services. Once met, coverage typically moves to copays for lower-tier prescriptions and coinsurance for higher-tier ones.
  

• Per-episode deductible: Charged each time you receive a specific type of service. For instance, a deductible might apply each time you're hospitalized.
  
• Out-of-network deductible: Some plans, like preferred provider organizations (PPOs), have one deductible for in-network care and a higher one for out-of-network services.
• Family deductible: A deductible for all family members covered by a family insurance policy. Family plans can have embedded deductibles, which include both individual and family deductibles, or they can function as an aggregate deductible, which means that insurance doesn’t pay until the entire family deductible is met.

If you have a family plan with an embedded deductible, your individual deductible might be $1,500, and the family deductible $3,000. Once $1,500 is paid for one member’s medical bills, insurance starts paying for their further expenses. When the entire family’s bills hit $3,000, insurance shares costs for everyone.

If you have a family plan with an aggregate deductible, the insurance wouldn’t pay until you reach $3,000 even if this is just for one family member.

In some health plans, any amount you pay toward your out-of-network deductible also counts toward your in-network deductible. In other health plans, the two deductibles are separate.

Some plans simply don’t cover out-of-network care at all, which means that you’d be responsible for the entire bill—with no cap on out-of-pocket charges—unless it’s an emergency situation.

Choosing the Right Deductible for You

If your employer offers health insurance, they may allow you to pick from multiple plans with varying deductibles, or they may only offer one type of plan with its set deductible.

If you buy your own health insurance, you’ll be able to pick from all of the plans that are offered in your area, and there will typically be numerous deductible levels from which to choose. Even in areas where just a single insurer offers plans in the individual market, there will be plans available from that insurer with varying deductibles.

If you have options, consider your health, the amount of savings you have (that you’d be willing and able to spend on medical care), and the monthly premiums that you’d have to pay for the various health plans available to you.

A monthly premium is the amount you pay each month to have health insurance. It’s separate from your deductible and any other expenses, such as copays and coinsurance.

The conventional wisdom is that higher deductibles work better for healthy people and people without kids, whereas lower deductibles work better for people with health conditions and/or children. But it’s not always that simple.

You also have to consider things like how much you’ll have to spend to purchase each plan and whether you have enough money saved to pay the deductible if and when you need medical care.

Run the numbers—don’t just assume that a lower deductible is always the way to go if you’re anticipating a lot of medical costs. In some cases, you might find that a plan with a higher deductible and lower premiums actually ends up being the best solution for your situation.

If you anticipate very high medical costs during the year, the out-of-pocket maximum—in addition to the monthly premiums—is more important than the deductible.

And even if you’re switching to Medicare, you have options: In almost all areas of the country, Medicare Advantage plans are available with varying deductibles.5 Medicare Advantage means you select a private insurance company for your Medicare benefits.

If you opt for Original Medicare, which includes Part A hospital insurance and Part B medical insurance, you can buy a Medigap supplement that will cover some or all of the deductible for Medicare Part A.

Coverage

Even if your insurance has a deductible, there are certain preventive care services that will be covered without you having to pay toward the deductible. It’s also important to check coverage and know what will not count toward your deductible.

When You Don’t Pay the Deductible

As part of the Affordable Care Act in the United States, you don’t have to pay a deductible for certain preventive care services from an in-network doctor, as long as your health plan isn’t grandfathered.

A grandfathered plan is one that was in effect prior to the Affordable Care Act that’s allowed to continue without follow all of the ACA’s regulations. If your employer has a grandfathered plan, you may have costs for some preventive care.

Some health plans, particularly some employer-sponsored health maintenance organizations (HMOs), don’t require a deductible at all. However, these plans usually charge copays for things like doctor visits, prescriptions, emergency room visits, and hospitalizations.

What Doesn’t Count Toward the Deductible

Healthcare expenses that aren’t a covered benefit of your health plan don’t count toward your deductible even though you’ve paid for them. For example, if your health insurance doesn’t cover orthotic shoe inserts, then the $400 you paid for a pair of orthotics prescribed by your podiatrist doesn’t count toward your deductible.

Similarly, if your health plan doesn’t cover out-of-network care, any amount that you pay for out-of-network care will not be counted towards your deductible.

If your health insurance requires a per-episode deductible, or a deductible each time you get a particular type of service, as well as an annual deductible, money you pay toward the per-episode deductible might not count toward your annual deductible.

If you have separate deductibles for in-network and out-of-network care, the amount you’ve already paid toward your in-network deductible doesn’t count toward your out-of-network deductible. Depending on your health plan’s rules, the amount you’ve paid toward your out-of-network deductible likely won’t count toward your in-network deductible, either.

In most health plans, copayments don’t count toward your annual deductible, although they do count toward your total out-of-pocket costs for the year.