Some of the most potentially confusing questions around health coverage involve health insurance deductibles: what they are, how they work, why they exist, and how patients can find the best possible plans from a deductible standpoint. And while these questions all have reasonably simple answers, working out what kind of healthcare plan and deductible structure is best for any given person is depends very much on their specific situation.
The basic definition of a deductible is this: It’s an out-of-pocket cost that the insured needs to pay before their insurance takes effect. Once a deductible is paid, further costs are handled through coinsurance and co-pays. Below, we take a closer look at the basics of health insurance deductibles and what they can mean for your coverage.
Deductibles: Why Policies Have Them
There are a couple of major reasons for health insurance plans to include deductibles.
Financial Stability for the Insurer
Insurance companies generally try to guard themselves against having to pay out for numerous small claims which might otherwise amount to a massive financial drain that leaves the company unable to fulfill responsibilities on all its policies. Setting aside a certain cushion of out-of-pocket costs for the insured in the form of a deductible ultimately reduces the possibility of major insurance payouts becoming catastrophic losses that destabilize the whole system.
This isn’t just an issue in health insurance. Home and auto insurance also commonly come with deductibles. In all these cases, the goal is to keep the insurer financially stable enough in the normal course of business that if a major catastrophe does come along — a large-scale natural disaster, for example, or a pandemic like COVID-19 — the insurer can operate and fulfill its role under the toughest conditions.
This has become a particularly important priority during the 21st century as expenses from natural disasters have grown radically. There have been two record-setting years for uninsured damage and insurer losses since 2010, a span of time that has included multiple severe wildfire seasons in California, severe storms in the American South and Midwest, and catastrophic Hurricanes like Harvey, Irma, and Maria. Overall, the 2017 record came to more than $330 billion, with more than $130 billion of that total paid out by insurers.
Protection From Moral Hazard
By its nature, insurance exists to safeguard the insured from risk. In structuring plans, this means that insurers also have to account for some uncomfortable possibilities, which together constitute a kind of contract risk known as a moral hazard. In brief, this term applies to situations where the insured:
When the insured is responsible for some portion of their plan’s costs, it mitigates, from the insurer’s viewpoint, the risk of a moral hazard.
Deductibles, Other Costs, and Healthcare Premiums
Deductibles are one part of the costs of healthcare plans incurred by the insured. The deductible is a basic threshold of expense beyond which the insurer must activate and pay its share (usually the majority) of covered services costs.
There are other costs involved in healthcare beyond the deductible:
- is paid during a period in which both the insurer and insured join together to cover healthcare costs.
- are a set fee for the insured for specific healthcare expenses. These apply regardless of whether the deductible has been paid first.
Overall, co-pays are paid on a per-incidence basis, while coinsurance and deductibles are covered in monthly premiums. Overall, these expenses are governed by an out-of-pocket maximum, which shelters policyholders from undue risk by capping the total amount they can be asked to pay for healthcare services. After the out-of-pocket maximum is reached, the insurer is fully responsible for covering the costs of care.
The Trade-Offs: High Premiums vs. Low Premiums
Some plans come with high monthly premiums, while others come with lower monthly costs. The best option will usually depend on the specifics of the insured’s situation and preferences.
- The premise of these kinds of plans is usually that the policyholder is motivated to pay off their deductible and reach their out-of-pocket maximum as quickly as possible in order to start saving significant amounts of money in the long term. For those with sufficient financial means (and for those who know they are likely to need to access care regularly), this can be an attractive option.
- These kinds of plans spread out higher deductibles over a longer period of time, making them easier to handle affordably on a month-to-month basis for clients without the financial means to pay considerable out-of-pocket costs in the short term. The bad news about low-premium plans is that they can ultimately wind up costing more in the long run. However, if the possibility of a long-term hit is worthwhile to achieve immediate coverage, or if you’re someone who reasonably expects to use their policy infrequently, this can be a worthwhile way to go.
Finding the Right Health Insurance
Health insurance deductibles raise just some of the many complicated questions that people can face in their quest for the best healthcare plan for their needs. It always pays to shop around, and especially to seek out the perspectives of experts in the field and powerful research resources through an insurance marketplace like TrueCoverage, which combines the choices of a marketplace with the functions of an insurance broker and personal advisor.
With excellent ratings from our clients and a solid track record of delivering results for people from all walks of life, TrueCoverage stands ready to help you in finding just the right plan for your budget and for your health.