Health insurance is confusing enough without trying to remember all the terms used for your out-of pocket costs. But learning the terminology is crucial to understanding how to make the most of your coverage and choosing the plan that is best for you.
Most plans don’t cover 100% of your costs on day one. The insurance company expects you to pay for a portion of the services you receive. These payments are called deductibles, which count toward your out of-pocket maximum. The out-of-pocket maximum is the maximum amount you will pay for covered medical expenses during the plan year.
Let’s look at each of these cost-sharing methods more closely.
What is a deductible?
A deductible is the set dollar amount you must pay for health care services before the plan will pay its portion of coinsurance. Coinsurance is a set percentage the plan will pay for provider services once you have met (paid) your deductible.
- Deductibles reset every plan year. The amount you have paid toward a deductible does not carry over from year to year.
- Deductibles are often different for in-network and out-of-network care. In-network deductibles are usually lower than out-of-network deductibles.
Some plans, called high-deductible health plans (HDHPs), require you to meet the deductible before the insurance company will pay anything.
Embedded vs. non-embedded deductibles
If you and your family are enrolled in an HDHP, there are two types of deductibles:
- Embedded: With this type of deductible, an individual family member may meet the individual deductible and receive benefits before the family deductible is met. For example, let’s assume you, your spouse and two children are enrolled for family coverage in an HDHP with an embedded deductible. The plan has a $3,850 individual deductible and a $7,750 family deductible. Your daughter gets sick and meets the $3,850 individual deductible. The plan will now begin to pay for her care. However, the insurance company will not pay for care for the remaining members of the family until the $7,750 deductible is met.
- Non-embedded: With this type of deductible, the family deductible must be met before the plan pays anything for anyone. For example, let’s assume you and your family are enrolled in an HDHP with a $7,750 family deductible. You would need to meet the $7,750 deductible before the insurance company will pay anything for any family member enrolled in the plan.
It’s important to keep in mind that embedded deductible plans will have a higher premium because the plan pays benefits earlier than for a non-embedded plan.
What is an out-of-pocket maximum?
The out-of-pocket maximum is the most you could be required to pay in a plan year. Once you have met the out-of-pocket maximum, the plan pays 100% of charges for the remainder of the plan year. Deductibles, coinsurance and copays all apply to the out-of-pocket maximum.
- Out-of-pocket maximums reset every plan year. The amount you have paid toward an out-of pocket maximum does not carry over from year to year.
- Out-of-pocket maximums are often different for in-network and out-of-network care. In-network out-of-pocket maximums are usually lower than out-of-network maximums.
Out-of-pocket maximums should not be confused with annual limits. Some plans limit the number of visits you may have in a plan year for services such as physical therapy, occupational therapy and home nursing visits. Once you have met your annual limit, you will be responsible for paying the full cost of those services, even if you have met your out-of-pocket maximum.
Putting it all together
To meet your deductible, you will need to add the charges you have paid for services received from different providers during the plan year. For example, if you have a $1,000 deductible, you may meet that deductible after paying $115 for lab testing, $135 for X-rays and $750 for an MRI.
To meet your out-of-pocket maximum, you will need to combine your copays, deductible and coinsurance. For example, if you have a $3,000 out-of-pocket maximum, you may meet that maximum after paying your $1,000 deductible, $1,000 in copays and $1,000 in coinsurance.
Choosing the right plan for you
When selecting which health plan is right for you, be sure to consider the deductible and out-of-pocket maximum.
- Plans with lower deductibles and lower out-of-pocket maximums will have a higher premium. Your monthly payment will be higher, but you will hit your deductible sooner and your maximum expenses in a given year are capped at a lower amount.
- Plans with higher deductibles and higher out-of-pocket maximums will have a lower premium. Your monthly payment will be lower, but it will take you longer to hit your deductible, and the maximum amount you may be required to pay in a given year could be higher.
For more information
If you still have questions about deductibles and out-of-pocket maximums, talk to your human resources department or benefits adviser. They will be able to explain how both work in the plans offered to you.
