A health insurance deductible is the amount you pay before your insurance kicks in. For example, if you have a $1000 deductible, and you need a $1000 MRI procedure and a $2000 surgery, you will pay $1000 out-of-pocket for the MRI, and then $0 for the surgery.
How do deductibles impact your costs?
A health plan with a lower deductible generally carries a higher monthly payment, and vice versa.
If you prefer to pay a higher amount monthly for the security and predictability of low out-of-pocket expenses for high-cost medical care, you may want a low deductible in your healthcare plan. This can be a good option if you have a chronic health condition or high risk of sports injuries.
If you prefer a high one-time expense in the event you need high-cost medical care rather than a smaller monthly payment, a high deductible health plan may be the right choice for you. This can be a good option if you are younger and generally healthy, or if you have a health savings account (HSA), which you can use to pay your deductible with money that is not taxed as income. You may also have a health reimbursement account (HRA) through your employer that can pay your deductible, which can also make a high deductible health plan an advantageous choice.
High deductible health plans
A high deductible health plan is a plan with a higher deductible – the amount you must pay out-of-pocket before your insurance kicks in than a traditional health insurance plan. This definition is set by the IRS and includes any health plan with a deductible of at least $1,350 for an individual or $2,700 for a family.
With a high deductible plan, you usually make a lower monthly payment. If you have an HSA or certain kinds of HRA, you can use the funds from either of these to pay your out-of-pocket health care expenses free from federal taxes.
You can only qualify to get an HSA if you are enrolled in a high deductible health plan. Money you contribute to an HSA will roll over forever, so if you save money in an HSA while you're working, and don't use it for several years, or until you change employers or retire, it will still be there for you. If your employer also contributes to an HSA, you can potentially get the best of both worlds with the low monthly payment of a high deductible plan and freedom from high out-of-pocket expenses as they are covered by your employer's contribution.
Want to determine whether combining your HSA with a high deductible plan is a good option for you? An HSA might be a good choice If any of these are true:
- You have predictable healthcare expenses -- You can set aside money that will not be taxed as income to pay these expenses
- Your employer contributes to your HSA, and their contribution leaves a smaller out-of-pocket payment than the amount you would pay with a lower deductible health plan that did not use your HSA
- You want to save money now for health expenses when you are older, tax-free
Understanding your health insurance costs can help you make the best choice of health plan for you and your family. You can find more information about available types of health plans here.
Key takeaways
The deductible is the amount of money you pay before the insurer starts covering the cost of medical expenses
Higher deductibles typically mean lower health insurance premiums and vice versa
Deductibles are a form of cost sharing; the insurers splits the cost of care with you
Your deductible resets every year, even if your expenses exceeded it the previous year
Your deductible is the amount you pay for health care out of pocket before your health insurance kicks in and starts covering the costs. Some expenses, like an annual check-up or doctor’s visit, might not be subject to the deductible, depending on your plan. The deductible might be anywhere from $500 to $1,500 if you’re an individual, or $1,000 to $3,000 if you’re a family. In general, plans with higher deductibles have lower premiums and vice versa.
As an example, if you have a $1,000 deductible and have a $5,000 surgery, you’ll have to pay $1,000 out of pocket, and the remaining $4,000 will be covered all or in part by your insurance company.
However, even after you've paid your deductible, covered services may still have a copay or coinsurance, depending on the details of your plan.
How a health insurance deductible works
The benefit of a health plan is that it helps pay the cost of your medical expenses, but health insurance doesn’t always pay for everything — oftentimes you’ll have to chip in, too. That’s why most health insurance plans constitute a cost-sharing plan between you and the insurer; you pay a portion of the costs and your insurer pays a portion of the cost. How those costs are determined depends on different aspects of your plan, including the deductible.
The deductible is the dollar amount that you must pay out of pocket before your health insurance begins paying for covered medical expenses.
When you purchase an individual plan on the health insurance marketplace, and sometimes even if you’re choosing a plan offered by your employer, you will need to choose a deductible amount for your plan. Deductible amounts typically range from $500 to $1,500 for an individual and $1,000 to $3,000 for families, but can be even higher. (We’ll talk about health plans with high deductibles later.)
When a family has coverage under one health plan, there is an individual deductible for each family member and family deductible that applies to everyone. For example, the family deductible might be $2,000 and each individual deductible might be $350.
As an example, you have a $500 deductible and have your first doctor’s visit of the year. The doctor’s visit costs only $300, so you have to pay it in full because you haven’t met the deductible (you still need to spend $200 more). You go to the doctor for a second visit, which also costs $300. This time, you only need to pay the provider $200, since you met the deductible. The remaining $100 will be covered by insurance according to the details of your plan. (More on that below.)
However, certain procedures or services — like preventive care or a visit to a primary care doctor, perhaps even the example we used above — might not be subject to a deductible. That means the insurer will pay the entire cost of the visit minus a small copay, which you pay out of pocket. (You can check the benefits page of your plan to find out if you have a copay and when it applies.)
Related article: our study of where Obamacare plans cost the most.
After meeting the deductible
The next time you have a medical expense, you will only be responsible for coinsurance, having already met the deductible in full. The deductible resets every year, so each year you’ll need to repeat the process and pay out of pocket again before your health insurance covers your medical expenses.
More health insurance deductible examples
Let’s say you have a health insurance plan with a $500 deductible. A major medical event results in a $5,500 bill for an expense that is covered in your plan. Your health insurance will help in paying for these costs, but only after you’ve met that deductible. This is what happens next:
You pay $500 out of pocket to the provider.
Because you met the deductible, your health insurance plan begins to cover the costs.
The remaining $5,000 is covered by insurance, but you may still be required to pay a percentage of the costs, depending on if your plan has copays or coinsurance.
Copay
A copay is a fixed amount you pay for a covered expense. Let’s say your plan requires you to pay a $250 copayment for any outpatient surgery. Using the above example, your health insurance would pay the remaining $5,000, but you would have to pay $250.
Coinsurance
If you have coinsurance, then you and the insurer will split the remaining costs by a percentage. A common coinsurance split is 20%/80%, meaning you pay 20%, and the insurer pays 80%.
For this example, you would pay $1,000 (20% of $5,000) and your insurer pays $4,000.
Out-of-pocket maximum
Another feature of a health plan is the out-of-pocket maximum, or the most you’ll have to spend for covered services in a given year. The maximum out-of-pocket limit for 2022 is $8,700 for individual plans and $17,400 for family plans. These are federal government set limits, but your plan may have a lower out-of-pocket maximum.
Learn more about the difference between deductibles and out-of-pocket maximums.
What expenses count towards the deductible?
When you’re trying to meet your deductible, certain health care costs will be excluded. Premiums and copays generally don’t count, but you should check the details of your plan.
As mentioned, usually the cost of certain preventive services and benefits (like an annual physical exam) do not count towards the deductible either, because they and are covered in full by health insurance. (They’re considered an essential health benefit, so you can get them for free before you even meet the deductible.)
Prescription drugs are also typically covered even if you haven’t met the deductible. However, certain plans may require a separate deductible for prescription drugs, before insurance helps to shoulder the costs.
High-deductible health plan (HDHP)
An HDHP is a health plan with a deductible of $1,400 or more for individuals or over $2,800 for families. Employer-sponsored health insurance might not offer an HDHP, but it can be purchased on the Obamacare health insurance marketplace. The trade-off for having high deductibles is lower monthly premiums, which means cheaper health insurance. Also, HDHPs let you qualify for a health savings account (HSA). However, because of the high deductible, this type of plan could end up more costly in the long run.
Read more about if a high-deductible health plan is right for you.
Choosing the right deductible amount
The best health insurance coverage for you depends on your budget and your health history. When buying an insurance policy, you’ll be able to choose your deductible amount. Many people only look at the insurance premiums when comparing health plans. But this monthly price only represents one of the expenses that contributes to how much you'll spend on health care in a given month. (If you have workplace coverage, the premium is probably taken out of paychecks directly — and it will cost considerably less than if you were to buy an individual health plan on your own.)
Other expenses, including your health insurance plan's deductible and the copay and coinsurance costs, directly contribute to how much you'll be spending overall on health insurance, as we’ve seen in the example above.
Generally, individually purchased plans with a lower monthly premium will have a higher deductible, copay, and coinsurance percentage, which increases the amount you'll spend out of pocket for medical expenses.
When choosing a health insurance company and plan, make sure to look closely at these costs. If you think you will utilize your health insurance plan frequently – because you're managing a chronic condition or otherwise – the plan with the lowest monthly premium may not actually be the cheapest in the long run because of the high deductible.