While the concept isn’t too complicated to understand, people frequently overlook how a health insurance deductible impacts annual out-of-pocket expenses. The annual deductible is one part of the total health insurance payment plan, and your employees should be aware of how your business’s health plans’ deductibles fit their budgets.
Aren’t Deductibles, Copays and Coinsurance All the Same Thing?
No. All insurance policies divide medical costs differently. First, employers and their employees pay health plan premiums, frequently a flat monthly payment. When patients visit the doctor for routine care such as an annual physical, the employee has a copay. A copay can be a flat rate or a fixed percentage of any covered health service.
Say a patient goes to the emergency room with a broken leg. The patient will have to pay all costs up to the deductible before your health coverage begins to pay. This can be as little as $500 or as much as $25,000 or more, depending on the insurance plan. Once the employee has spent the deductible amount, the patient and the insurance company split the remaining costs, called coinsurance. Finally, plans frequently have an out-of-pocket maximum, based on the deductible and the coinsurance, that limits the total amount the patient will pay for the year.
What Pays Down the Deductible?
As mentioned above, medical bills from unexpected accidents are frequently considered costs that come out of the patient’s pocket and count toward the deductible’s annual total. Costs associated with serious illnesses also fall into the category of expenses that will pay down the annual deductible. Blood tests, emergency room care, hospitalization and surgery are the kinds of procedures that would initially be covered by the patient’s deductible.
Does an Entire Family Share One Deductible?
If your employees are on a family plan, the plan probably has an individual deductible and a cumulative deductible. For example, each member of the family might have a deductible of $500, after which the insurance plan starts paying for medical costs for that one person. That individual amount of $500 would also apply to the cumulative total of, say, $2,500, ensuring, if someone else in the family got sick, deductible payments would then only total $2,000.
Are Low Deductibles Better?
It depends on what your anticipated health needs are. Anyone who suffers from frequent injury or illness will benefit from having a low deductible. For example, the out-of-pocket cost of an overnight hospital stay will reduce the deductible, so anyone likely to have a hospital visit within the next year could benefit from a health plan with a low deductible, as one night in the hospital might meet the deductible amount. However, health plans with low deductibles come with a higher premium, so while patients save money after a few major expenses, they will be paying a steep price in the form of a high monthly payment.
Generally, anyone with a low risk of major medical problems benefits from having a health insurance plan with a high deductible. If the majority of an employee’s medical expenses involves routine care or low-risk illnesses, then a high deductible will mean a lower monthly payment. However, if that employee suffers from an unexpected major illness, it will cause significant out-of-pocket costs until the medical deductible is paid.
Does My Deductible Start Over Every Year?
Not always. Some health plans offer a rollover benefit during the last quarter of the year. For example, if an employee is hospitalized during the last week of the year, that employee could easily incur the expense for the entire annual deductible. Without the rollover option, the employee would then be responsible for paying another full deductible after the first of the year. With the rollover benefit, however, any out-of-pocket expenses paid toward the deductible during the last three months of the year not only pay down the deductible for the current year but for the following year, as well.
This content is provided solely for informational purposes. It is not intended as and does not constitute legal advice. The information contained herein should not be relied upon or used as a substitute for consultation with legal, accounting, tax and/or other professional advisers.
Dylan Murray has an MBA from San Diego State University and a bachelor’s degree in communication from Boston University. He is a licensed insurance agent in California, but he works as a professional researcher and writer reporting on business trends in estate law, insurance and private security. Dylan has worked as a script analyst with the Sundance Institute and the Scriptwriters Network in Los Angeles.