What is a Deductible? A Health Care Guide

Understanding the terms used in your health insurance plan and the out-of-pocket costs involved can help you plan and manage your health care expenses. One of the terms you will hear is deductibles. Please keep reading to learn more about how health insurance deductibles work and what they mean for your health coverage.

Definition of a Deductible and How It Works

A health insurance deductible is a set amount that you must pay towards your healthcare each year before the insurance company (also called third-party payer) starts paying for your healthcare. Therefore, a deductible is the cost-sharing between you and the insurance provider. Until you have paid the annual deductible, you are responsible for 100% of your healthcare costs. Once you have paid the deductible, you only pay the copayment or coinsurance towards covered services, and the insurance company pays the rest. The deductible and copayments vary depending on the insurance company and the specific plan.

Other types of insurance policies, such as homeowner’s insurance and auto insurance, also have deductibles.

Average Deductibles

For workplace health plans, the average in 2024 is $1,992 for an individual deductible and $3,811 for a family deductible. For Marketplace plans, the average deductible in 2024 is $2,825 for an individual policyholder.

How Deductibles Affect Health Care Costs

Health Insurance Premium, Copay, and Coinsurance

A health insurance premium is the upfront cost you pay to keep your health plan active. If you have purchased your plan from the Marketplace, you will pay a monthly premium to keep your health coverage. If your health insurance is through your employer, they will deduct the monthly or biweekly (every other week) premium from your paycheck, depending on how often you get paid.

Copay is a fixed amount that you pay for a specific service covered by your plan.

Coinsurance is a percentage of the cost of a service that you and the policyholder are responsible for paying.

Find out How to Get Health Insurance Without a Job.

Out-of-Pocket Costs After Reaching Your Deductible

After you reach your deductible, you are only responsible for paying the copay or coinsurance of covered costs. These payments will count toward your out-of-pocket maximum. When you reach the out-of-pocket maximum, your health plan will cover 100% of eligible expenses.

Services Exempt From Deductibles

The only exception is preventive care, which is 100% covered by most health insurance plans if you stay in-network. This means your health plan will pay for annual physicals and immunizations (such as vaccines for influenza, hepatitis, pneumococcal, and others). Preventive care also includes other routine tests and screenings, such as mammograms, prostate exams, and cholesterol tests. These services are considered preventive or routine care; therefore, they are covered 100% even if you haven’t met your health insurance deductibles.

Some plans also exempt additional health care services from deductibles, such as prescription drugs or doctor visits. In this case, you pay the required copayment or coinsurance for these services but not 100% of the cost, even if you have not yet met your deductible.

On the other hand, some health plans have a separate prescription or pharmacy deductible. You pay out-of-pocket for your prescription drugs until you reach the deductible amount. Then, the insurance plan starts paying for all or part of the cost of your drugs.

HMO vs PPO Deductibles

An HMO (Health Maintenance Organization) doesn’t offer coverage for out-of-network providers except in an emergency. A PPO (Preferred Provider Organization) offers the flexibility to see out-of-network providers for a higher fee and separate deductible. Many HMOs don’t have deductibles. When deductibles are present, they tend to be lower than PPOs.

High Deductible vs Low Deductible Plans

What Does a $500 Deductible Mean?

If your health insurance plan has a low deductible of $500, you will pay the first $500 towards covered services in an insurance year. After you have met this deductible, you will be responsible for the copay or coinsurance payments, and your health plan will pay the rest.

An insurance year, also known as a plan year or policy year, is 12 months during which you (the policyholder) receive benefits through an insurance plan. It is important to check your policy documents or reach out to your insurance company to find out when your plan year begins because your plan year may or may not be the same as the calendar year. This means your insurance year (policy year) may not start in January or end in December.

What Does It Mean When You Have a $1000 Deductible?

If your health insurance plan has a deductible of $,1000, you will pay the first $1,000 towards covered medical costs in the plan year. After you have paid $1,000, you will only be responsible for the copay or coinsurance payments, and your health plan will pay the rest.

What is a High Deductible Health Plan (HDHP)?

If your health insurance plan has a high deductible of say, $4,000, the first $4,000 towards covered services in a plan year will be out-of-pocket expenses. The health plan begins contributing towards health care costs only after you have met this high deductible.

What Are The Pros and Cons of a High Deductible Health Plan (HDHP)?

As a general rule, the higher the health insurance deductible, the lower the monthly premium. High-deductible health plans (HDHPs) have some of the lowest monthly premiums. There are pros and cons to getting a high-deductible plan.

Advantages of a High Deductible Health Plan

Lower monthly premium.
Tax-free Health Savings Account (HSA): Some high-deductible health plans are paired with an HSA, which allows you to deposit money tax-free and use it for eligible medical expenses.

Disadvantages of a High Deductible Health Plan

High deductible: You will have to pay out-of-pocket for all your non-preventive medical care until you meet the high deductible.

Is High Deductible Health Insurance Right For Me?

Choosing the right health insurance can be confusing, i.e., high deductible health plans versus traditional low deductible plans.

It’s a good idea to consider your anticipated healthcare costs. If you or a family member have chronic medical conditions and need to see a primary care provider and specialists several times a year, then plans with lower deductibles may be the better choice. In this case, your monthly premium expenses will be higher, but the lower deductible amount will mean the health plan kicks in sooner, and you will start paying for healthcare services. This will help keep overall health costs in check. Nonetheless, if you are considering a low premium plan and higher deductibles, compare costs and check whether the savings you will make from the lower premium will be more than what you would pay for out-of-pocket medical expenses before meeting the deductible.

On the other hand, if you are generally healthy and do not anticipate any health care besides preventive care, a high deductible health plan may be the more cost-effective option for health insurance coverage. However, keep in mind that should you need costly health care services such as emergency room care, the health insurance company will only pay after you have met the high annual deductible. This could result in significant unanticipated out-of-pocket healthcare expenses.

Is It Better To Have a Deductible or No Deductible?

Deductible or no deductible will depend on your general health status. It is better to have a deductible if you are in general good health and do not anticipate needing major medical care. On the other hand, it is better to have a no-deductible plan if you have chronic health conditions that require ongoing care. In this case, a no-deductible health plan will skip the deductible and start paying right away for covered costs, thereby reducing your out-of-pocket expenses.

Note: A no-deductible health plan may be available on the Affordable Care Act Marketplace or through your workplace. However, a high deductible plan with a lower premium is more common.

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Common Questions

Do Family Members On The Same Plan Have Separate Deductibles?

Different health insurances have different rules. A family coverage health plan can have an overall family deductible, individual deductibles for each family member, or both. In the former, if the deductibles for any combination of family members meet the family-deductible maximum, then the plan’s deductible is considered satisfied for the whole family. In the latter, each family member must meet the individual deductible with an out-of-pocket cost before the health insurance plan kicks in.

Does a Health Insurance Deductible Cover Everything?

A health insurance deductible covers all eligible medical expenses. Once you have paid the deductible, your health plan kicks in, and you only have to pay the coinsurance or copayment for covered health care services. The exception is certain preventive care services, which are 100% covered under most health plans if you stay in-network. In other words, your health insurance policy will most likely pay for preventive healthcare costs even if you have not yet met your deductible.

What Medical Expenses Count Towards Your Deductible?

All out-of-pocket spends on necessary covered medical expenses count toward your deductible. Remember that these medical costs and benefits should be covered under your health plan. Also, you should follow all the rules regarding referrals. Use in-network providers and obtain pre-authorization for the health care expenses to count towards individual and family deductibles.

Can Deductible Costs Be Reimbursed With An HRA?

Yes, annual deductible costs can be reimbursed with an HRA. Health Reimbursement Arrangements (HRAs) are employer-sponsored benefits that are offered to employees to help them with out-of-pocket costs towards healthcare services. These reimbursements are usually tax-free when they are utilized for qualified medical expenses.

Companies that don’t provide group insurance to their employees can offer an individual coverage HRA. If your employer gives you this type of HRA, you can use the pre-tax dollars to purchase health insurance on or off the ACA Marketplace as well as reimburse for deductibles, copays, etc.

Companies that offer traditional group health insurance to their employees can also offer an excepted benefit HRA. As of 2023, these pre-tax funds can be used by employees for reimbursements up to $1,950 in qualified medical expenses.

Find out about Health Coverage Concerns of Working Americans.

Out-of-Pocket Maximum

The out-of-pocket maximum is the maximum medical costs you pay out-of-pocket in a plan year. Once you have spent the out-of-pocket maximum on the deductible, copayments, and coinsurance, the health plan pays for 100% of the covered benefits.

The out-of-pocket maximum typically includes your deductible, coinsurance, and copays. However, it does not include the following health care costs:

Monthly premiums.
Medical services that are not covered by your health plan.
Out-of-network health care costs.
Any covered medical costs that are above the eligible amount a provider charges.

Average Out-of-Pocket Maximums

For employer-sponsored health insurance plans under the Affordable Care Act, the out-of-pocket maximums for 2024 are $9,450 for individuals and $18,900 for family coverage. The average out-of-pocket maximum for workplace plans in 2023 was $4,346.

For marketplace plans, the maximum out-of-pocket limit for 2024 is $9,450 for individuals and $18,900 for family coverage.

For high-deductible health plans, the maximum out-of-pocket limit in 2024 is $8,050 for individual coverage and $16,100 for family coverage.