Your premium isn’t everything you pay for your health insurance. Extra costs such as deductible and out-of-pocket maximum also count.
Many think health insurance will cover their medical expenses as long as they pay for the premium. Unfortunately, this isn’t the case. Extra costs like deductible and out-of-pocket maximum are also included in policyholders’ bills.
People need to pay a certain amount of money – called a ‘deductible’ – before the insurer covers part of their medical bill. And the insurer will cover all of the medical expenses as policyholders reach their out-of-pocket maximum.
What is deductible in health insurance?
To put it simply, a deductible is the amount of money that you must cover on your own for health services such as checkups or prescriptions. As you reach your deductible maximum, insurance companies will start to pay a portion (not all) of your medical bill.
The maximum amount of deductible depends on your policy, and it will reset annually in January. It is estimated that in 2021, health insurance deductible will vary between $0 to $8,550 per individual and around $17,000 per household.
What contributes to your deductible?
Usually, fees that count towards a deductible include:
- Lab tests
- Some medical device usages
It’s worth noticing that preventive care services such as annual or monthly checkups don’t make up your deductible. In addition, prescriptions may often count toward a separate deductible.
The relationship between deductible and premium
If you pay more for deductibles, you pay less for premiums and vice versa. This is because the more you pay for deductibles, insurers will have more money to cover your medical bills later. Conversely, if you pay less for deductibles, insurers will have to cover these costs and thus, require you more money (premium) to cover your medical expenses.
So, the question is, “Should I pay more for deductibles and register for less premiums or the other way round?”
The answer is: it depends. If you have bad health and may have to visit the doctor many times a year, you will soon reach your deductible. Thus, choose a low deductible plan in this case so that you can have the insurer pay for your health insurance sooner. On the other hand, if you’re in good health, consider a high deductible to save the budget on your premium.
What happens after you have reached your deductible?
After you meet your deductible, your insurer will share the medical bill with you through copayment or coinsurance. These are the fees that you must pay by yourself, independent of your premium. After deducting these fees, your insurance company will be responsible for the rest of your medical fees.
Copayment (also known as copay) is the fixed amount of money you must pay for a medical service. For example, your copayment for each visit to an emergency room is $25. If you’ve met your deductible, you will only need to pay $25, and your insurer will take care of the rest. Or else, you must bear all the cost out-of-pocket.
Coinsurance, meanwhile, is not fixed but is decided according to a percentage. Depending on the type of medical service that you need covering, the proportion may vary. For example, a 30% coinsurance means that you must pay for 30% of the final bill, while your insurance company will deal with the remaining 70%.
What is an out-of-pocket maximum?
As the name suggests, an out-of-pocket maximum is the maximum amount of medical fees you have to cover yourself. With the copay and coinsurance, and other fees, your deductible will count towards your out-of-pocket maximum. Once you’ve reached the out-of-pocket maximum, your insurer will have to cover the rest of your medical fees.
What contributes to your out-of-pocket maximum?
As we’ve defined, the out-of-pocket maximum will result from:
- Your deductible
- Copay and coinsurance
The relationship between out-of-pocket maximum and premium
Similar to deductibles, the less you pay for your out-of-pocket maximum, the more you have to pay for your premium and vice versa.
What happens after you have met your out-of-pocket maximum?
As you reach this stage, you will no longer have to care about coinsurance or copayment. Your insurer will bear the cost of any covered medical services in your plan. You only need to pay your monthly premium, some out-of-network services, and non-covered healthcare bills (if any).
Illustration for deductible and out-of-pocket maximum
Let’s look at the cases of Alex and Peter – two policyholders:
Alex and Peter bought a health insurance plan with a $3,000 deductible and a 30% coinsurance. While Alex’s out-of-pocket maximum is $5,000, Peter’s is $4000. They had a car accident that cost them a $12,000 medical bill. Minus the deductible, the rest of the bill for each is $9,000. 30% coinsurance means $2,700. So far, they both have to pay $5,700 out of their bills.
How much Alex and Peter will end up paying depends a lot on their out-of-pocket maximums:
|Deductible + Coinsurance||$5,700||$5,700|
|What policyholder pays||$5,000||$5,700|
|What insurer will cover||$7,000||$6,300|
In Alex’s case, he would have to pay $5,700 for his deductible and coinsurance. Since his out-of-pocket maximum is $5,000, the left $700 will be in charge by his insurer. Meanwhile, since Peter hasn’t reached his out-of-pocket maximum, he still needs to cover the whole $5,700, and the company will take care of the rest.
In short, deductible and out-of-pocket maximum are medical fees that you must cover by yourself. First, you need to pay for your deductible, and then the deductible will contribute to the out-of-pocket maximum. Then, once you’ve reached your plan limit, your insurer will be in charge of the rest covered fees.
Remember that both deductible and out-of-pocket maximum exclude your premium. Thus, even when you hit the limit, you continue to pay for your premium.
Frequently Asked Questions
What if I don’t meet my yearly deductible?
You may have good health and thus don’t have to spend much on your medical bills. Thus, you may not meet their yearly deductibles. Unfortunately, this also means that you must cover the medical bills by yourself.
The good news is even if you have yet to meet your deductible, you can still save money on medical services subjected to it. This is because many insurers help you negotiate lower prices. For example, the cost of your medical service is $500, and you haven’t reached your deductible. If your insurer can negotiate to reduce the cost to $300, you only must pay $300.
What are embedded and aggregate deductibles?
Embedded and aggregate deductible are two standard plans for family health insurance.
An aggregate deductible is the amount of money that needs to be paid out of pocket for any/all of the family members covered by the plan before the insurers start to pay for your medical bills.
For example, the overall deductible for your family plan is $9,000. If the total medical bills of your family reach $9000, your family is considered meeting the deductible.
On the contrary, an embedded deductible is the deductible for each individual.
For example, your family has two members. The overall deductible is $9,000, and the deductible for each individual is $4,500.
If one member has paid up to $4,500 in care, any further care for that person will be covered by the insurer. That one family member has reached the deductible doesn’t mean that the other member will also be covered. The other person still must spend at least $4,500 to get paid by the insurer.
One thing to note is that plans with aggregate deductibles are less expensive than those with embedded deductibles.
Does cost sharing for dental services count towards my out-of-pocket maximum?
The out-of-pocket maximum for dental plans only applies to those under 19 years old. For children, some plans do include pediatric dental coverage. If the plan covers your child’s pediatric dental services, the cost-sharing will count towards the out-of-pocket maximum.