Health insurance can be confusing, especially when you start to compare how much various plans cost. You can’t just compare premium to premium, because coverage often comes with many other expenses. Find out more about health insurance deductibles and how they impact the total cost of your coverage below.
How Much Is Health Insurance?
The cost of health insurance depends on a variety of factors, including employer contribution, premiums, deductibles, co-pays, and out-of-pocket maximums.
Employer, Government or Individual Plans
If you get health insurance through an employer-sponsored plan, your employer typically covers some of the costs for the premium. That, coupled with the fact that the employer is buying bulk coverage for all of the enrolled employees, often means you pay less for your part of the premium than you would for most individual options.
The same is true for government-sponsored programs such as Medicare and Medicaid. The costs of these programs are at least partially subsidized by public funds through taxes. The monthly premiums for these programs — when they exist at all — tend to be much less than those of individual plans that you buy in a marketplace.
Health Insurance Premiums
Premiums are what you pay (typically monthly) for your health insurance. For example, if the bill from your health insurance company is $200 a month, your premium is $200 a month — or $2,400 a year.
Deductibles, Co-Pays and Out-of-Pocket Maximums
Your cost doesn’t end with the premium, though. You may also pay for health care services throughout the year as you use them. The most common expenses are known as deductibles and co-pays.
Your deductible is how much you pay before your insurance kicks in to start covering things each year. For example, if you have a plan with a $5,000 deductible, the first $5,000 of medical expenses you incur are billed to you. It’s a bit more complicated than that (and explained in depth below), but deductibles are typically the biggest or second-biggest impact to overall health insurance cost.
Even after you meet your deductible, you may still find yourself billed for some of your healthcare expenses. Co-pays or coinsurance are usually calculated based on a flat-rate per type of service or a percent of overall charges, and how much you pay depends on your insurance policy. For example, you might pay a $20 co-pay each time you visit the doctor’s office or 10% up to $500 for emergency room services.
Your out-of-pocket (OOP) maximum is the maximum amount you would have to pay each calendar year under your plan. Once you meet the OOP max, you no longer pay co-pays or coinsurance within that calendar year.
How Does a Health Insurance Deductible Work?
A health insurance deductible spreads the cost of health care between you and the insurance company.
Basic Deductible Example
Here’s an example to help you understand how it works.
- Mary has an insurance plan with a $5,000 deductible and an $8,000 individual out-of-pocket maximum.
- Mary has a surgery, and the total billed to her insurance company by all parties (the hospital, surgeon, anesthesiologist, radiologist and lab) is $35,000.
- The insurance allows $22,000 of that amount. That means the insurance says that $13,000 of the amount is above the “usual and customary” charge it accepts for these services. The provider must write off that amount.
- That leaves a total balance of $22,000. Mary has a deductible of $5,000, so she’s billed for that much. The insurance company pays the remaining $17,000.
That’s a simple example without coinsurance, but it lets you understand how deductibles work.
Deductible Example with Co-Pays
Here’s an example with co-pays:
- Tyler has an insurance plan with a $2,000 deductible, a $7,000 OOP max, and $30 co-pays at the doctor’s office.
- Tyler goes to the ER for an injury. The total allowed charges for that visit are $3,000.
- Tyler pays $2,000 and the insurance pays $1,000.
- At this point, Tyler has met $2,000 of his $7,000 out-of-pocket maximum.
- If he goes to the doctor within the same calendar year, he will continue to pay the $30 co-pay until he reaches the OOP max or the next calendar year hits and all the numbers reset.
Understanding Your Total Potential Health Insurance Cost
So, when you’re comparing the cost of health insurance plans in the marketplace, it’s important to consider deductible and potential OOP maximums, because these can change the entire game for how much health care costs you within a given year.
For example, consider these two example plans:
- Plan A: A premium of $200 a month, a deductible of $10,000 a year, and an OOP maximum of $15,000.
- Plan B: A premium of $500 a month, a deductible of $5,000 a year and an OOP maximum of $8,000.
If you have a chronic illness or know you might end up in the hospital (say you’re planning on a hernia surgery or you’re pregnant), you know that you might max out your out-of-pocket. In that case, plan A would cost you $2,400 in premiums and $15,000 in deductibles and co-pays up to your OOP max. That’s a cost of $17,400 for the year.
Plan B would cost you $6,000 in premiums but only $8,000 in deductibles and co-pays. That’s a total of $14,000 for the year, making plan B potentially cheaper overall despite the higher premiums.
However, if you are reasonably healthy and don’t foresee yourself needing a lot of health care services in the coming year, Plan A might be less expensive overall. You might see the doctor three times for minor illnesses or a well-check, paying $900 or so total in health care costs. Coupled with your $2,400 premium, that’s only $3,300.
Shopping for health care coverage is very dependent on context and personal circumstances. You need to understand your own health, the way you use health care resources and how likely it is you might need major medical assistance during the year. Then, you can evaluate the total cost, including deductible, of each plan available to you.
Is Your Health Insurance Deductible on Your Taxes?
Sometimes, people get confused when they hear people talking about deductibles and think it’s a discussion on taxes. That’s actually a different topic, but you can deduct health insurance costs — and other qualified medical expenses, such as amounts paid to your doctor’s office for treatment — on your federal tax return in certain cases. In most cases, the total expense has to be 10% or more of your adjusted gross income. Some self-employed individuals may be able to deduct these costs without meeting that threshold, though.
Choosing a health care plan doesn’t have to be hard, but it definitely requires carefully weighing your options. Start looking for a plan — as well as coverage for other needs such as vision and dental — at TrueCoverage.