hospital bills as a result of the deductible

What is a Deductible in Health Insurance?

The most important concept to understand if you are looking to buy health insurance is “what is the deductible in health insurance?” The reason that this question is so important because of the impact that the deductible has on your premium

So, what is the deductible in health insurance? The deductible in health insurance is the amount of medical bills you are responsible for before your health insurance will begin to pay any benefits. To better understand let me answer the question: “what is a deductible in health insurance” with an example.

Examples of a Health Insurance Deductible

Imagine that you have purchased a health insurance plan that has a $5000.00 deductible. During the year you develop an appendicitis. You go to the emergency room and are then rushed into surgery. After three days in the hospital, you are released. Your total medical bill comes to $44,900.00.

Since you have a $5000.00 deductible, you will pay the first $5000.00. Afterwards insurance will pay all or a percentage or the remaining $39,900, depending on your policy provisions.

On the other hand, imagine that you injure your left leg playing soccer. You head off to the Urgent Care facility where the doctor orders an x-ray. Luckily, you did not break any bones, so the doctor applies a wrap and sends you home. The total cost for this Urgent Care visit comes to $3250.00. Since this lower than your deductible you are responsible for the entire medical bill.,

The Two Types of Health Insurance Deductibles

There two different types of deductibles in health insurance. The most common type of health insurance deductible is the annual deductible. Under the annual deductible, all medical costs incurred during the plan year are added together until the deductible is reached.

Here is an example of an annual deductible in action.

In January you wake up with a terrible sore throat and a fever. Worried that it may be strep you head to your local Urgent Care Center where you are seen and they run some lab tests. The bill for that visit is $150, which you pay.  Later that year you injure your leg playing soccer and incur $3250.00 in medical bills. You have now met $3400.00 of your $5000 deductible. Sadly, one month later you need an appendectomy which costs $44,900.00. Since you have met $3400 of your $5000 deductible, you only pay $1600, after which the insurance begins to pay benefits.

You will not find the second type of deductible in many health insurance policies. This is the per cause deductible. Although medical cost sharing plans do not technically have a deductible, they utilize this approach in their health plans. In medical cost sharing plans the equivalent of a deductible is called an Initial Unshareable Amount.

With this approach, you must meet a new deductible for each new medical event. In the example above, your share for the appendectomy would have been $5000. That is because the earlier medical expenses do not accumulate towards the deductible. But the benefit of this approach is a lower monthly premium.

It is also important to know that plans with a per cause deductible still have a maximum out-of-pocket.

Is it Better to Have a High or Low Deductible for Health Insurance?

If you have a chronic illness and need to see the doctor regularly or take multiple expensive medications a lower deductible will be your best choice. But if you are generally healthy, the higher the deductible the better off you will be financially.

The size of your deductible is directly related to your monthly health insurance premium. Higher deductibles mean a lower monthly premium. Of course, other factors such as copays and coinsurance also impact your monthly cost. None-the-less, the size of your deductible will have the biggest impact on your cost. To illustrate I ran quotes on a 40-year-old, nonsmoker male using one of my short-term health insurance plans.

 

Plan 1

Plan 2

Plan 3

Deductible

$5000

$5000

$10,000

Coinsurance

100%

80%

100%

Maximum Out of Pocket

$5000

$10,000

$10,000

Monthly Premium

$185.55

$143.99

$126.16

As you can see from the illustration above, there are two plans with a maximum out of pocket cost of $10,000.  But the plan with the $10,000 deductible is $17.83 a month ($213.96 annually) less expensive. That is because under Plan 2, the insurance company must begin paying benefits after you reach the $5000 deductible. While Plan 3 requires that you pay the first $10,000 before any benefits are paid by the health insurance company.

According to STATISTICAL BRIEF #507Out-of-Pocket Health Care Expenses for Non-Elderly Families by Income and Family Structure, 2015, the median out-of-pocket medical expenses for all American families was $451. That is a long way from even a $5000 deductible

median out of pocket medical expenses

In the example above, choosing the $10,000 deductible over the $5000 deductible with 100% coverage plan saves $712.68 a year in premium. That is more than the all American families will spend in medical expenses.

What is Zero Deductible Health Insurance?

If you are like most people, you would love to find a zero deductible (no deductible) health insurance policy. And if you do a search of “zero deductible health insurance” you will find websites that offer it. However, it is very important that you understand that are not offering major medical health insurance.

There are no zero deductible health insurance policies that provide major medical insurance coverage.

Major medical health insurance policies are relatively straight forward. You pay a deductible, perhaps some coinsurance and copays and then health insurance pays everything else.

Take a moment and look back the examples above to see major medical in action.

Fixed Benefit Health Insurance is also known as indemnity benefit health insurance. Unlike major medical insurance, these policies list specific medical procedures and services that are covered. If the procedure or service is not listed it is not covered.

In addition, these policies also list exactly what they will pay for each listed service or procedure. If your service or procedure costs more than the listed benefit, you pay the balance. And unlike major medical health insurance there is no maximum out-of-pocket limit.

There are a lot of health insurance agents selling “zero deductible health insurance” policies. Most of these policies are generally a stand-alone fixed benefit policy. I would not recommend a stand-alone fixed benefit policy. You can be left holding the bag for large medical bills since there is no maximum out-of-pocket limit! 

Some agents may also sell a combination of fixed benefits with a high deductible major medical policy. The combination of a fixed benefit health insurance policy with a high deductible health insurance policy does a better job of protecting you financially. 

no deductible health insurance good or bad



No Deductible Health Insurance Good or Bad?

I never recommend no deductible health insurance. There are two reasons why you do not want to buy any no deductible health insurance.

The first reason is the cost. You should never buy a stand-alone fixed benefit policy since there is limit to your personal liability. So, to achieve a zero deductible health insurance policy you must buy two policies to eliminate the deductible.

Here is an example of combining a fixed benefit health insurance policy with a major medical health plan.

Male age 40, nonsmoker and in good health buys a $10,000 deductible major medical plan. Then combines that with a fixed benefit health insurance policy.

The major medical plan pays 100% of all medical expenses after the $10,000 deductible. The monthly premium is $126.16

He then buys a fixed benefit health insurance plan with a $10,000 annual benefit for $145 a month.

The total monthly premium is $271.16 a month. But he receives for first dollar benefits for all covered medical expenses. And there is no guarantee that the first dollar benefits will cover 100% of his out-of-pocket costs.

His friend is also a 40-year-old nonsmoker in good health but he chooses a $5000 deductible with 100% coverage for $185.55 a month. That is a savings of $85.61 monthly or $1027.32 annually. Over five years this individual will save $5136.60.

This next chart really brings the point home. As you can see, 86% of all families incurred less than $2500 in medical expenses.

What is the Best Health Insurance Deductible?

By avoiding first dollar, zero deductible health insurance you save far more in premium than you are likely to spend in medical care. None of this is to say that you will not have a medical event that will cost in the tens of thousands of dollars. You can see that 14% of families incurred a larger expense.

But insurance is supposed to protect you from a large financial loss. Health insurance is not supposed to pay for small dollar amounts that you can absorb. So, what is the best health insurance deductible?

First, choose a deductible that you can afford. While a $10,000 deductible might seem daunting, it is still a manageable amount to pay off over time. But if that deductible is all that you can afford, it is better than tens of thousands of dollars in medical bills.

Second, consider your current health. If you are relatively healthy it is unlikely that you will incur a large medical expense in the next twelve months.

Third, create a “medical savings account.” This may not be tax deductible, but it can be used to future medical expenses. Over time you can accumulate a fairly large savings that can be tapped into for medical bills.

Work with an Independent Health Insurance Professional

I strongly recommend that you talk with a highly qualified, independent health insurance agent. An independent agent will be able to offer health insurance plans from numerous insurance companies. In addition, this agent may also be able to help you enroll in a strong Medical Cost Sharing Health Plan.

You will want to avoid any insurance agent who represents one company. This health insurance agent is known as a “captive agent”. Many of these agents will claim that they will only enroll in a plan that is right for your needs. Unfortunately, these agents cannot get paid if they do not sell a plan offered through the one company that they represent.  

The independent health insurance that you choose should also be certified to enroll you in a plan offered on the health insurance marketplace. I have many early retiree clients who were able to manipulate their income and qualify for a premium subsidy. Beware of the agent who claims that he can help you with healthcare.gov but isn’t legally certified to enroll you.

If you have any questions, feel free to schedule a time to talk by visiting https://mels.youcanbook.me

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