How Does a Health Insurance Deductible Work?
When you sign up for health insurance, you will receive a benefits package that explains your coverage options and limitations. While it may seem difficult to wade through all that reading, it is important that you understand your options and the benefits and costs of each. What seems like a very good plan may be hampered by high deductibles or co-payments.
What Is A Health Insurance Deductible?
A deductible is simply the amount you must pay before the insurance company will begin to reimburse your costs. Standard health insurance policies typically have a deductible of $500 or even $1,000. This means that the policy holder must pay 100 percent of all medical costs up to $500, at which point the plan kicks in and begins to pay.
There are also variations on this pattern. Some HMOs or health maintenance organizations do not have any deductible but include co-pays with every doctor’s visit or prescription. Others have very low deductibles and count any spending, even for over-the-counter medications, toward the deductible.
Still other plans are moving to the “doughnut hole” concept. This may be confusing for new insurance purchasers, but it basically means that the plan pays 100 percent of a small amount of health insurance cost at the beginning of the plan. After that, the patient must pay 100 percent up to a certain amount of spending, and then the plan picks up again.
For example, if you have a “doughnut hole” plan, your insurance might pay 100 percent of the first $500 of your care for the year. After $500 has been spent, you are required to pay 100 percent of the next $1,500 until you have spent $2,000 total on health care. After that, your plan will pay 80 percent of further costs while you pay 20 percent. Doughnut hole plans are designed to encourage infrequent use of health care services, since patients who spend less than $500 in this example have no co-payment.
Deductibles are calculated yearly. Some plans have provisions to carry over 30 days of spending into the new year so that if you are faced with hospital bills December 30th you do not have to start your deductible over on January 1st. Other plans do not have these provisions.
How Can I Compare the True Cost of Health Insurance Policies?
If you are offered a choice of more than one plan at work, your prospectus will often feature a side-by-side comparison chart. You could also make one yourself by reviewing the terms of each of the plans. You may also want to include options other than your employer-sponsored health plans such as private insurance plans you purchase through an agent.
Choosing the best health plan for yourself and your family depends on several factors. A plan with a low deductible is better for those who have little access to ready cash, even if the premium is somewhat higher. On the other hand, if you visit the doctor very infrequently and only need coverage for emergency situations, a low deductible makes little sense. You are better off purchasing a low-cost, higher-deductible plan and paying for your infrequent visits out-of-pocket. If you take maintenance medications, a plan with low co-pays for prescriptions may be attractive to you.
In order to make an informed decision about your health care insurance options, calculate the total you pay in premiums for a year and the total you project you will spend on health care. Add these two figures for each plan to see which one would be the best option for you. For example:
- Plan A features a premium of only $385 per month, but has a deductible of $1,000 and pays only 50 percent of costs after the deductible is met. You project that you will spend $3,000 on health care in the coming year, so the cost for this plan is $4,620 for the premiums, $1,000 for the deductible, and $1,000 for your 50 percent of the remaining costs. This gives you a total cost of $6,620 for the year.
- Plan B has premiums of $415 per month, but has a $500 deductible and pays 80 percent of most costs. Under the same formula, you would pay $4,980 for premiums, $500 for the deductible and $500 for your share of the costs. This is a total cost for the plan of $5,980.
As you can see, despite the higher premiums, Plan B actually has a lower overall cost to you.
Doing your homework can save you and your family money and insure that you have the right healthcare coverage for your needs.