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If you own any kind of insurance–car, home, health–you've probably heard the term "deductible." But what does it mean?
In health insurance, a deductible is the amount that you as a policyholder must pay each year toward your medical expenses before the insurance company begins to pay its share.
Let's say you have a health plan with a $1, 500 deductible. After a stay at the hospital, you might have a medical bill for $30, 000. You would be responsible for paying the first $1, 500 out of pocket. At that point, your health plan would begin to pay benefits for the remaining $28, 500 according to the terms of the policy.
The purpose of the deductible is to help keep premiums low through cost-sharing and by reducing the number of small claims and unnecessary doctor visits. As you can imagine, people whose health plans have deductibles are less likely to go to the doctor for every bump, bruise, cough, or runny nose.
Deductibles and preventive care
It's important to remember that many preventive care services are not subject to a deductible. That means you won't pay anything toward your deductible for common services such as annual physical exams, well-child visits, screenings, immunizations, and OB/GYN visits. The idea is to encourage people to be proactive about protecting their health, as prevention and early detection are the best ways to reduce health care costs in the long run.
Deductibles and copays are different
Many people confuse deductibles and copays (copayments). While both terms refer to out-of-pocket expenses, deductibles and copays are very different things.
A copay is the flat fee you pay for certain medical expenses—for example, $25 per office visit or $10 for a prescription drug. The health insurance company reimburses the doctor and the pharmacy for the difference between the copay and the cost of treatment. In general, if you pay a copay for a service or prescription drug, you do not also pay toward your deductible.
Be careful when comparing plans! Some health plans have copays that others don't, or their copays are significantly higher. And some don't have copays at all, but rather, charge you a percentage (called coinsurance) of the amount charged by your provider after your deductible is met.
These costs can drive up the cost of a plan quickly. You need to look beyond the monthly premium (the amount you pay each month for your health plan) and annual deductible to properly judge the value of a plan. Better plans may cost you more in premiums each month, but they could save you big bucks in the end because your out-of-pocket costs would be lower.
Raise your deductible to lower your premium
If you'd like to save money on your premium and you're in good health, it may make sense to consider a plan with a higher deductible. That's because plans with high deductibles generally have lower premiums. Conversely, plans with low deductibles have higher premiums.
High-deductible health plans with Health Savings Accounts
These days, more and more people are choosing high-deductible health plans (HDHPs) tied to a Health Savings Account (HSA). With an HSA-qualified health insurance plan, you enjoy the cost savings (lower premiums) of a high-deductible health plan with the added advantage of a Health Savings Account that you own and control. These plans allow you to take the money you save on premiums and invest it, tax-free, into the HSA, where it is ready and waiting to pay for qualified medical expenses. Money that is used for qualified medical expenses is not taxed as income.
Deductibles and family plans
When purchasing a family plan, it's important to pay attention to the type of deductible—traditional or aggregate. Health plans with traditional deductibles can often save money in out-of-pocket costs when a family has a lot of medical expenses. That's because these plans contain two separate deductibles: an individual deductible and a family deductible. The individual deductible allows each member of a family to receive benefits from the insurance company before the family deductible is met.
Consider a family of three on a health plan with a family deductible of $3, 000 and an individual deductible of $1, 000. If one family member reaches $1, 000 in medical expenses, that member's individual deductible is satisfied and the plan will start to pay benefits for that person for the rest of the year, even though the family deductible has not been met. Other members of the family are eligible to receive benefits once the entire family's combined expenses meet the family deductible. This is the kind of deductible typically seen in traditional health insurance plans.
If this same family had an aggregate deductible, the family would have to satisfy the entire amount of the family deductible ($3, 000) before any members of the family would receive benefits. The deductible may be satisfied by one family member or by a combination of family members, but the plan will only pay benefits once the entire family deductible is satisfied. This is the kind of deductible typically seen in a high-deductible health plan tied to a Health Savings Account.