A health insurance deductible is the total amount you pay out of pocket for a health expense before insurance covers it. The average health insurance deductible depends on the type of insurance plan you signed up for. Deductibles involve cost-sharing between you and your insurer for medical expenses in the United States.
Your deductible depends on the monthly premium you pay. Health insurance premiums are how much money you pay monthly for an insurance policy. This payment ensures the insurance provider continues to cover you. The higher your monthly premium, the lower the deductible and vice versa.
The higher your monthly premium, the lower your deductible and vice versa.
Here’s a metaphor to break it down further. The monthly premium can be thought of as rent you pay a landlord for your apartment. If you pay high rent, your landlord will reduce the cost you have to pay out of pocket if, say, the oven stops working. The lower the rent, the more you’ll have to pay out of pocket should an equipment stop working.
What you’d have to pay to fix the “health” of your apartment would be the health insurance deductible.
In short:
- A health insurance deductible is the out-of-pocket expenditure on health care costs before insurance pays for the rest.
- Paying higher health insurance monthly premiums lowers the cost of deductibles.
- The average deductible depends on the type of plan you signed up for.
Understanding How Health Insurance Deductibles Work
Let’s use the following scenario to understand health insurance deductibles better.
You pay your health insurance premium of $400 monthly. This means you’re completely covered should an accident take place. Unfortunately, you get into an auto accident. You’re taken by ambulance to the hospital and treated for broken bones, bleeding, and whiplash, but you’re ultimately stable.
The cost of your hospital stay is $20,000. Your deductible is $3,000. So rather than paying the full $20,000 for hospital expenses, you pay $3,000. Your insurance provider covers the rest.
If you pay a higher health insurance premium of $500 a month, you have to pay $2,000 for the accident. If you paid $300 for the premium, you’d pay $4,000 out of pocket. (Please note that these are arbitrary numbers used for example purposes only.)
Average Health Insurance Deductible
The average American health insurance deductible in 2020 is $4,364 for an individual and $8,439 for a family.
Individuals who have a health insurance deductible of at least $1,400 and families who have a have a deductible of at least $2,800 are considered to have a high deductible health plan (HDHP).
If you opt for a higher deductible, you could save money in a health savings account (HSA), which would then reduce the cost of future health care expenses on a tax-benefit basis.
Having a higher HSA also gives you tax-deductible contributions, tax-free distributions for qualified medical expenses, and tax-deferred growth. Again, to get an HDHP, though, you must pay $1,3500 or more for individuals or $2,700 or more for family coverage.
Why Do Health Insurance Deductibles Exist?
Deductibles are a way for health insurance companies to mitigate risk and ensure that policyholders are sharing part of the costs. It’s also a way for companies to allow policyholders to opt for lower monthly premiums when they wish to.
What Do Health Insurance Deductibles Cover?
Health insurance deductibles cover whatever is stipulated in your health insurance coverage plan. Health insurance plans are required to cover “essential health benefits,” which include:
- Emergency services
- Hospitalization
- Laboratory tests
- Maternity and newborn care
- Mental health and substance abuse treatment
- Outpatient care (doctors and other services you receive outside of a hospital)
- Pediatric services, including dental and vision care
- Prescription drugs
- Preventive services (e.g., immunizations) and management of chronic diseases
- Rehabilitation services
Other Important Health Insurance Terms
You should know about copayments and coinsurance, as they are other types of out-of-pocket costs.
Copayments are a fixed amount that you pay for certain medical expenses that may not count toward your deductible. Such expenses apply to some doctor visits, prescriptions, or a trip to urgent care.
Coinsurance is a set percentage that you pay for covered medical expenses after you’ve paid your deductible.
In all, you pay for your deductible, copayments, and coinsurance for your annual out-of-pocket maximum, which is every cent paid toward a medical expense before insurance pays for the costs.
Medicaid, the Affordable Care Act, And Other Types of Insurance
The federal Patient Protection and Affordable Care Act (ACA) of 2014 required every United States citizen to have health insurance. Doing so ensures enrollees have some support for medical bills, medical services, and other health care costs.
The Henry J. Kaiser Family Foundation (KFF) reports the annual premium average for health care coverage from employers is $6,690 in 2017 for single coverage and $18,786 for family plans. The KFF also mentions that enrollees pay lower premiums in most cases, but the average health insurance deductible varies between plans.
The same principle behind deductibles, higher deductible plans, lower deductible plans, and health care services costs apply to those covered under Medicare and Medicaid.
A Medicare or Medicaid deductible involves medical expenses you must pay before Medicaid pays the rest of the medical bills. Medicare is more people above 65 or under 65 but have a disability. Medicaid is the state or federal health insurance that covers low-income individuals.
In Summary
When choosing the best health insurance policy for you, the total deductible will be a major factor to consider. The annual deductible you pay depends on your insurance plan and monthly premium costs. If you are generally healthy and anticipate having low medical costs, a high deductible insurance plan may be worth it. However, those anticipating higher medical costs might opt for a lower deductible and higher premium. Comparing affordability against your family’s medical needs can help with your decision.