Deductibles for health insurance.

A health insurance deductible is the amount of money you pay on covered health services before your insurance provider begins to share in the costs. This could range from $0 for a no-deductible health plan to a minimum of $1,400 If you are on a high-deductible health plan(HDHP), or $2,800 for family coverage.

However, Affordable Care Act plans usually pay for preventive health services before you’ve met your deductible. Actually, most health plans do the same.

Deductibles usually vary inversely with your monthly insurance premiums such that the lower your premium, the higher your deductible, and the higher the premium, the lower the deductible.

Generally, Americans pay about 10% to 40% of their health care cost each year depending on if they are on a low, or high-deductible health insurance plan according to Investopedia.

In this article, we’ll take a look at the various types of deductibles for health insurance, how they work, and how to choose the right one for your health needs.

Types of deductibles.

The following are common types of deductibles available.

1. Individual deductible: It’s simply how much you have to spend out-of-pocket as an individual on insured services before coinsurance kicks in.

2. Aggregate deductible: This is a collective deductible whereby all individual medical expenses on each member of a family add up towards a deductible for the entire family. Coinsurance only comes into effect when the total sum of health expenses on every family member reaches the deductible amount.

3. Embedded deductible: This is like a hybrid deductible that combines the features of both individual and Aggregate deductibles. There is a deductible for each family member and a collective one for the whole family as well.

Irrespective of the collective total at any point in time, any family member that has paid up to his or her deductible earns the benefits and whenever the family has been able to hit their collective deductible, every covered family member’s claim is also paid.

4. Comprehensive deductible: This is when the deductible applies to all medical services in an insurance plan.

5. Non-comprehensive deductible: In this case, the deductible doesn’t apply to all the medical services in your insurance plan.

6. Prescription drug deductible: This is when your health insurance plan has a different deductible for some or all of your prescription drugs. You’ll have to meet the deductible for your insurers to start paying their part on the drugs.

7. In-network and out-of-network deductible: Here, the deductibles you incur for in-network healthcare providers differ from out-of-network providers. You pay a lower deductible when you go to health care providers within the network of the insurer but more deductible when you go out of network.

Sign up for our newsletter to keep in touch:

12 things to know on how deductibles work.

• At the start of each year, your deductible is reset such that you start all over again from $0.
• Monthly premiums paid don’t count toward your deductible.
• Your annual deductible has to be met for your insurance company to start paying for covered medical services as stated by the National Bureau of Economic Research (NBER) in a paper titled “Time Aggregation in Health Insurance Deductibles”.¹
• Health insurance plans usually exclude certain essential medical services from your deductible such that you start enjoying coverage benefits on them before reaching your deductible.
• Your expenses on the health services that are covered by your plan are the only ones that count towards your deductible.
• Under the Affordable Care Act, preventive care services are excluded from deductibles. That means you get the insurance benefits for these services without meeting your deductible.
• There is a “no-charge-after-deductible” plan in which your insurance company starts paying the full cost of your medical bills after you’ve reached your deductible for the year without coinsurance.
• Changing your health insurance plan within the year of coverage will automatically reset your deductible. Which means you’ll start all over again with the new plan.
• You may have more than one deductible in a health plan such as a deductible for covered medical services and another one for prescription drugs.
• Your deductible counts toward reaching your out-of-pocket maximum for the year after which your insurance starts footing all your medical bills for that year.
• Deductibles vary according to the metal tier you choose. Higher tiers have lower deductibles whereas lower tiers have higher deductibles.
• Deductibles also usually vary inversely with your monthly premiums. Higher premiums are tied to lower deductibles whereas lower premiums place you on higher deductibles.

What is the best deductible for health insurance?

Health plan deductibles are certainly one of the things you must find out and compare among different insurance plans to know which plan is most suitable for you.

The following points should act as a guide to help you select the most reasonable deductible that serves your interests and health needs cost-effectively.

1. Chronic illness. Chronic illnesses usually require continuing medical care and running costs. Having a plan with a lower deductible that can be easier to reach each year will ensure you start getting the benefits of the plan earlier.

This could save you money when the plan covers most or all of the services you are getting.

2. Age: There is a correlation between age and the need for expensive health services. Increasing age increases your chances of needing such care and that’s one of the reasons insurance companies charge higher premiums on older people but lower on younger ones.

If you are younger and in great health, it may make financial sense to go for high-deductible health plans and lower monthly premiums. Chances are that you’ll likely not pay for enough medical services that could reach an average deductible in a year. So lowering your monthly premiums could save you money.

Evaluating the kind of medical services you’ve needed in the last couple of years will help you in making this decision.

3. Type of work. Some types of work have higher risks to them than others. Being in a field that places you at a high risk of serious injury should be considered in choosing the right deductible you feel will be cost-effective.

Everyone has to be careful to avoid work-related injuries so making a judgment based on this point could be complex and may require the services of an expert.

4. Expected high medical expenses. If you know you’ll need to undergo an expensive medical procedure whose cost is more than the out-of-pocket maximum for available plans choosing a high-deductible health plan where you’ll have to pay a less monthly premium could be cost-saving.

5. Medical History. For someone, known for frequent specialist doctors’ visits or frequent need for expensive medical services, a low deductible plan may be beneficial. (source)

6. Sports. If you or a dependent is into sports you can expect the need for medical services resulting from injuries, especially from contact sports. Opting for a lower deductible in a plan that covers all or most of the services you may require could make sense.

8. Pregnancy. If you are an expectant mother going for a low-deductible plan should also be considered.

Deductibles are just part of the expenses used in calculating your out-of-pocket costs even though research has shown that zero deductibles are among the strongest factors for preference of certain plans according to the European Journal of Health Economics. Other expenses include premiums, copayments, and coinsurance.²

Since deductibles vary inversely with some other expenses like monthly premiums, it’s always a good idea to calculate the impact of the kind of deductible you are considering on your out-of-pocket costs. This should enable you to find out what choice of deductible will save you the most money.

The trick in all of these is to opt for a deductible you could most likely reach soon within the insurance year. Research published by the Cambridge University Press has shown high deductibles have hurt people who expected their plans to protect their income from the costs of injuries and illness.³

If you are not likely to have much need for medical services within the year that you may not reach even an average deductible, then opting for higher deductibles with lower monthly premiums could be better.

Deduction for health insurance for the self-
employed.

Since 2003, being self-employed has given you the privilege to deduct 100% of your health insurance premium from your adjusted gross income (AGI) as we discussed in a previous article to answer the question of whether health insurance deductible is for the self-employed. This reduces your tax liability which translates to tax savings.

To be eligible you must be seen to be self-employed in the eyes of the Internal Revenue Service (IRS), have a business profit for that given year, and have qualifying health insurance coverage in the following areas according to the US government:

1. Medical insurance,
2. Qualifying Long term care insurance,
3. Health plans bought with advanced premium tax credits (APTC) via the Affordable Care Act.

What qualifies for a self-employed health insurance deduction?

The Internal Revenue Service gave examples of types of health insurance premiums that are deductible if you are self-employed. These include medical insurance, dental, and Long-term care insurance. (source)

Your insurance policy has to fall into any of these for you to stand any chance of a pretax deduction.

Any premiums you pay out of pocket for health insurance bought through the Federal marketplace are also tax-deductible. They include those paid for insurance gotten via the Consolidated Omnibus Budget Reconciliation Act (COBRA).

You may also be interested in knowing how to get health insurance, or how much for long-term care insurance.

References.

1. Time Aggregation in Health Insurance Deductibles. National Bureau of Economic Research (NBER). February 2021. DOI 10.3386/w28430. https://www.nber.org/papers/w28430 ↩︎
2. Kerssens, J.J., Groenewegen, P.P. Consumer preferences in social health insurance. Eur J Health Econ 6, 8–15 (2005). https://doi.org/10.1007/s10198-004-0252-3 ↩︎
3. Hoffman B. Restraining the Health Care Consumer: The History of Deductibles and Co-payments in U.S. Health Insurance. Social Science History. 2006;30(4):501-528. doi:10.1017/S0145553200013560 ↩︎