As you shop for insurance coverage, cost is an important factor. You pay a variety of costs for health care, and your deductible is one of the most important aspects to consider. The deductible affects your total cost for health care, and understanding how it works can help you decide which policy is the best fit for your needs.
What Is a Deductible?
A deductible is the amount you need to pay out of pocket before your health insurance provider pays for covered services.
With most health insurance programs, you pay a portion of the cost for care. After reaching a maximum out-of-pocket limit, the insurance company pays all costs, but you need to meet specific requirements first.
The deductible is one of those requirements. Until you reach it, you often pay 100% of your expenses. After that, you and your insurer might split the cost for covered expenses or your insurer might pay for everything.
For example, if your plan has a $1,400 deductible, you typically need to pay for at least $1,400 of care before the insurance company pays expenses for you. If you get a medical bill for $900 and pay that amount, $900 gets credited to your deductible, and you have $500 remaining. If your next bill is $700, you would only pay $500 to reach the deductible. After that, your insurance kicks in.
Preventative care and screening services are often available for free or for a modest fee — even before you reach your deductible. Those services typically include things like flu shots, cancer screenings, annual physical examinations and more. But if you require other types of services, such as care for an injury or illness, the deductible comes into play.
Deductible vs. Co-pay
A co-pay is another fee you might pay for health care, but it's different from a deductible. Co-pays are flat fees set by your insurer. Co-pays are typical for routine office visits and many prescription medications. But if you require advanced diagnostics or specialty drugs, you may need to pay additional costs.
When Do You Pay Your Deductible?
For most services except certain preventative ones, you pay for the full cost of care until you meet the deductible. For example, suppose you break an ankle, need surgery, get tests for certain medical conditions or have a chronic disease. In those cases, any billed costs could be your responsibility — depending on your health plan and how much you have already paid for care during the year. Prescription medication costs might count toward your deductible, so you might pay full price for medications until reaching it.
In some cases, a health plan has multiple deductibles. These can include:
Prescription medication deductibles. These apply only to prescription medication. You account for other costs, such as doctor's visits, separately.
Individual and family deductibles. When multiple family members are covered under one plan, each person might have their own deductible. But in some cases, you can combine payments within one family to meet a family deductible.
In-network deductibles. Payments you make might only go toward your deductible if you receive care from in-network providers.
Deductibles are typically annual, and they reset to zero at the beginning of each year.
When Can You Stop Paying?
Once you reach your deductible, your insurance company begins to pay for some or all of your covered health care.
If your deductible is the same as your annual out-of-pocket maximum, your insurer should cover any additional costs for the year. But in some cases, the out-of-pocket maximum is higher than the deductible, so you share costs with the insurance company until reaching that threshold.
After reaching a deductible, you often pay the coinsurance cost, or a portion of covered health care costs — up to the out-of-pocket maximum.
For example, you might pay 20% of costs while the insurer pays the remaining 80%. If you have surgery that costs $10,000 and you previously met the deductible, you'd be responsible for up to $2,000. But you only pay enough to reach the plan's annual out-of-pocket maximum. So, if the maximum is $3,000 and you already paid $1,400 toward the deductible, you would only be responsible for $1,600.
Low vs. High Deductible
You can often choose from a variety of health insurance plans. Some plans have relatively low deductibles, while others include high deductibles. So, what is a deductible amount that's best for you?
Plans with low annual deductibles typically have higher monthly premiums than plans with high deductibles. If you want to limit your risk by securing a low deductible, you pay a price in the form of higher premiums. Plans with high deductibles, on the other hand, allow you to lock in lower monthly premiums. But if you need a significant amount of care, you'll need to pay a substantial amount before your insurance kicks in.
Your best option depends on several factors unique to your finances and your health. For example, if you're in good health, you might prefer a plan with a high deductible. With that approach, you can minimize monthly premiums, and hopefully, you won't need expensive care during the year. But if the unexpected happens, you'll face steep costs as you work toward paying off the deductible.
If you need a significant amount of care, choosing a plan with a low deductible may be best. That way, you'll reach the deductible more quickly, and the insurance company will pay the majority of costs for the rest of the year. For example, if you have a chronic health condition or you expect to have major surgery in the coming year, you might benefit from a lower deductible. However, you'll pay relatively high monthly premiums for that security.
The Bottom Line
Deductibles are a way for insurance companies to share the cost of care with customers. You need to pay costs before the insurer pays a significant amount, and you might continue to pay a portion of costs after meeting the deductible. Because of that, it's critical to choose a plan that meets your needs and budget for health care expenses each year.
To choose the right plan, review the numbers with an estimate of your health care needs. Also, remember that with major events like surgeries, you might reach the out-of-pocket maximum relatively easily. As a result, it's wise to look at the big picture — your monthly premiums and out-of-pocket maximum can be equally as important as the deductible.