What is a Deductible in Health Insurance: Full Guide

Understanding the concept of a deductible in health insurance is essential for making informed decisions about your healthcare coverage.

In short, deductibles in health insurance imply that your basic policy will also cover a part of your expenses and get activated only when the threshold limit is reached. See it in detail!

What is a Health Insurance Deductible?

A health insurance deductible is the amount of money that an insured person must pay out of pocket for eligible healthcare services each year before the insurance plan will begin to cover the costs.

The deductible amount varies depending on the health insurance plan. The lower the deductible, in general, the higher the monthly premium.

Other expenses related to health insurance include:

The cost of health insurance on a monthly basis. This is what you pay to keep your coverage.
Copayments. These are fixed amounts that the insured must pay toward the cost of specific services. They do not contribute to the deductible.
Payments for coinsurance. Above and beyond the deductible, these reflect the insured person’s responsibility for a set percentage of the cost of certain services.

The Affordable Care Act (ACA)-created a health insurance marketplace that limits the out-of-pocket costs that insured individuals or families must pay each year. Plans sold elsewhere may not have the same or any, limits.

Deductibles, copayments, and coinsurance costs all count toward the ACA’s out-of-pocket maximum.

Premiums, out-of-network charges, spending on non-covered services, and provider charges in excess of a pre-determined limit are all excluded.

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How Health Insurance Deductibles Work

When you purchase health insurance, you pay a fixed monthly premium for a year of coverage. You may continue your coverage at the end of the year, though the insurer may change the premium amount.

The annual deductible is distinct from the monthly premium and represents the payment you must make for covered services before your insurer begins to cover the costs.

For example, if a plan has a $1,000 annual deductible and a covered patient requires a $3,000 procedure, the patient must pay the $1,000 deductible while the insurance company pays the remaining $2,000, assuming the procedure is covered under that health plan.

The deductible may be excluded from the annual out-of-pocket maximum in some plans. Check to see if this is the case before signing up.

After you pay the deductible and continue to pay your premiums, your medical expenses are covered, minus any copayments and coinsurance charges.

If the policy is renewed, the deductible must be paid again the following year before the insurance plan begins to cover costs.

How Deductibles Differ

Your plan may have multiple deductibles. If you have individual coverage, you may pay one deductible for the majority of your healthcare expenses and another for prescription drug costs.

If you have family coverage, you can pay individual deductibles for each person covered by the plan in addition to the policy’s family deductible.

Many insurance policies cover certain preventive care services with no deductible or copay.

Routine mammograms, for example, are typically covered in full with no deductible or copay for women aged 40 and up. For new plans, this is a federal requirement. Deductibles are charged by insurance companies as a cost-cutting measure.

The upfront cost of care prior to meeting the deductible encourages the insured to avoid unnecessary provider visits and medical procedures and allows those who expect to remain healthy to select a high-deductible plan with a lower monthly premium.

Depending on the plan’s coverage and premiums, Americans who purchase health insurance through the ACA marketplace typically pay between 10% and 40% of their total annual healthcare costs.

Copayments and Coinsurance

With a few exceptions, once you pay your annual deductible, your health insurance plan will begin covering your covered medical costs.

One example is copayments. Your copay is a predetermined monetary amount that you must pay for a doctor’s or urgent care visit, a prescription, or a medical service. After you pay your deductible, you must still cover the copayments.

Copayments are not the same as coinsurance, which is a fixed percentage of a bill for a medical service that you may be required to cover after meeting your deductible under the terms of your policy.

Examples of Copayments and Coinsurance

Here are a couple of examples:

When you visit the doctor’s office, you may be required to pay a copayment of $30.
If you are treated in an emergency room, you may be required to pay a 10% coinsurance share.
The amounts you pay for your deductible, copayments, and coinsurance for ACA marketplace plans all count toward your annual out-of-pocket maximum, which is the most you can be required to pay in a year for covered services.
The out-of-pocket maximum for an ACA plan for 2023 was set at $9,100 for an individual and $18,200 for family coverage, up from $8,700 and $17,400 in 2022, respectively.

Average Deductibles and High-Deductible Health Plans

In the United States’ tax code for 2022, a high-deductible health plan is defined as any plan with an annual deductible of at least $1,400 for an individual or $2,800 for a family. These deductible amounts are $1,500 and $3,000 for 2023, respectively.

According to the Kaiser Family Foundation’s annual survey, such plans, along with a separate category of high-deductible health plans with health reimbursement arrangements, will cover 28% of U.S. workers in 2021.

According to Kaiser, the average deductible for high-deductible plans with a savings option was $2,424 and the average annual premium was $7,016 for single coverage.

Other than high-deductible plans, single coverage had an average annual deductible of $1,294 and an average annual premium of $8,023.

If you’re looking for health insurance, each plan you’re presented with will include a complete list of copayments and coinsurance. Most insurers will provide high-, medium-, and low-deductible plans, each with its own set of specifications.

Comparing Health Insurance Deductibles

As you can see, the monthly premiums for high-deductible versus low-deductible healthcare plans differ significantly.

The true out-of-pocket costs of any plan, however, include the premium, deductible, copayments, and coinsurance. Your out-of-pocket expenses under a health plan will be determined by your medical history.

Personal Considerations

If you’re in good health and don’t have any health problems, you might not even spend enough to meet your plan’s deductible for the year.

A young and healthy person who rarely visits the doctor could benefit from a high-deductible plan with high coinsurance costs.

In contrast, someone who is pregnant or has a chronic condition that requires regular treatment may benefit from a more comprehensive plan to reduce deductible and coinsurance costs.

If you are married, you should compare the deductible for your spouse’s health insurance coverage as well as the additional cost of being added to the spouse’s insurance plan.

Depending on how the plan is structured, switching from single to family coverage may be less expensive than obtaining single coverage separately.

If you purchase health insurance through the federal or state marketplaces, you can compare the coverage of four distinct tiers to determine which one is best for you.

Health Insurance Deductibles and Marketplace Plans

Plans offered directly by insurers are similar to those available in the health insurance marketplaces established by the federal government and many states under the Affordable Care Act.

The marketplaces provide four levels of insurance coverage:

The Bronze plan, which has the lowest monthly premium, covers 60% of health-care costs on average.
The Silver plan has a higher monthly premium and covers 70% of healthcare costs on average.
The Gold plan has a higher monthly premium than the Silver plan, but it covers 80% of all medical expenses.
The Platinum plan has the highest monthly premium and, at 90%, the most coverage.

Notably, there is also a low-cost catastrophic plan with a deductible set at the ACA out-of-pocket maximum—$9,100 in 2023—for people under the age of 30, as well as those who qualify for a hardship or affordability exemption.

While the deductible is high, it does not apply to the three annual primary care visits.

Comparing Costs

When comparing health insurance plans, the amount of the deductible, the coverage provided in the plan, and how frequently you require medical care are all important considerations.

The cost of all ACA plans is determined by your age, smoking status, and location. The companies that offer you insurance and the price you’ll pay are determined by the state in which you live.

At the Bronze level, you would have the lowest monthly premium but the highest deductible.

A Platinum plan, on the other hand, would provide the most healthcare coverage plus the lowest deductible at a significantly higher cost.

If you have high costs for routine care, specialists, or prescription drugs, the Platinum plan may be a good option. The plan will have an expensive monthly premium as a trade-off.

Those who purchase insurance through the federal marketplace are automatically assessed for eligibility for subsidies based on their income.

You must enroll at the Silver level or higher, but if a cost-sharing reduction is available, you will pay less for coverage.

Does Medicare Coverage Come With Deductibles?

Yes. In 2023, the Medicare Part A deductible for inpatient hospital stays will be $1,600, up from $1,556 in 2022. Beneficiaries who stay in a hospital for more than 60 days per year are subject to additional charges.

The Medicare Part B outpatient deductible is $226 in 2023, down from $233 in 2022.

Deductibles for Medicare Part D prescription drug plans vary, but cannot exceed $505 in 2023, up from $480 in 2022.

Do You Pay a Deductible With a Medicare Advantage Plan?

Yes. The Medicare Advantage Plan is one of two options for Medicare recipients who want to supplement their coverage. Both are offered by private insurers.

Medicare Advantage Plan

A Medicare Advantage Plan replaces your Medicare card with a Medicare Advantage Plan card issued by a private insurer. Your Part A, Part B, and (optional) Part D services and costs are managed by that insurer.

Its coverage comes with its own supplemental premiums (which are expected to average $18 per month in 2023), copayments, and coinsurance costs.

Medicare Advantage plans provide additional coverage and services for an additional fee. The costs and coverage options vary greatly.

Medigap Plan

Medigap, or Medicare Supplement Insurance, pays some of the deductibles, coinsurance, and copayments for Medicare services.

For example, you could select a Medigap plan with a low monthly premium but a deductible that you must pay each year. However, if you are hospitalized for more than 60 days, it will cover your share of the expenses.

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The Bottom Line

If you want to compare healthcare costs, you must do the following math: monthly premium plus annual deductible plus copays and coinsurance equals total annual out-of-pocket costs under a given plan.

Of course, you can’t predict how many doctor’s appointments you’ll need in the coming year, and you don’t know if you’ll be dealing with a serious illness or injury.

So stick to what you know. If you’re young and in good health, you might consider a high-deductible plan. Be prepared to foot a large portion of the bill if you become ill.

Consider the low deductible plan if you have a recurring health problem that necessitates routine treatment by a specialist. You’ll pay a higher premium, but you should save money on the deductible, copayments, and coinsurance.

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