Health Insurance 101: Deductible & Out-of-pocket Maximum

Despite being one of the most expensive purchases we make, most consumers spend comparatively little time understanding their health insurance plan. As such, health insurance remains a source of frustration and mystery to most. Over the more than 500 enrollment meetings hosted, I’ve noticed that the general confusion and misunderstanding over even the most basic of health insurance concepts is prevalent among all ages, incomes, industries and education levels. And these misunderstandings can be dangerous! Not understanding some of your policy’s basic provisions can leave you uncovered, fined, and at risk for significant, unexpected out-of-pocket expenses. That being said, you don’t need to be an expert to successfully navigate your and your family’s health insurance coverage. Understanding a few basic and near universal concepts can go a long way towards helping you select and use your insurance benefits.

 

No more so is this understanding critical to your plan selection and financial exposure than it is with your deductible and out-of-pocket maximum. These limits are almost always the largest figures in your health insurance program, and represent the two most important thresholds that affect your healthcare spending. But year over year, these two concepts make up over half the questions we are asked so I thought it to be a good place to kick off our Health Insurance 101 series!

What is a deductible?

A deductible, in general, represents the amount that you have to pay for covered medical services before the insurance begins to contribute towards the cost of your care. Seems simple enough, right? The problem is that deductibles are not all treated alike. Some only apply towards specific types of care, such as prescriptions or hospital stays.  Others, namely HSA-qualified health plans, have general deductibles that apply to all non-preventive services including doctor’s visits, lab tests and prescriptions. While you are in the process of meeting your deductible, you will pay the full cost for the service, after any network discount is applied.

Do my copays count towards my deductible?

This is one of the most common questions I am asked on the topic, but one rooted in a simple misunderstanding. A copay, by definition, is a fixed amount that you pay for a service with the insurance picking up the balance. But, if the particular service you’re receiving is subject to a deductible, the insurance will not pick up any of the cost until after the deductible has been met. Put another way, there is no such thing as a copay until you have satisfied your deductible. Unfortunately, many doctor’s offices muddy the waters by asking for a “copay” at the time of the visit, even if you have not yet satisfied your deductible. In reality, when you pay that $30 what you’re really doing is making a down-payment on the final invoice, all of which is included in (and counting towards) your deductible.

I have family coverage. How does my deductible work?

This is one of the more confusing concepts, mainly because it’s not well-communicated on most benefit summaries. There are two ways that family deductibles can apply: embedded or non-embedded (aka Aggregate).  If you have an embedded deductible, then each person in the family is subject to the individual deductible amount. For example, let’s say your plan has a $2,000 individual and $4,000 family deductibles, and there are 4 covered members in your family. Let’s also assume you have a $10,000 hospital stay. Under an embedded arrangement, you will have satisfied your deductible at $2,000. If your spouse then has a similar hospital expense, their deductible would be another $2,000. But at that point, the full family deductible of $4,000 would be satisfied and your children would have no deductible to meet.  Under a non-embedded (aggregate) deductible, you personally would be responsible for meeting the full $4,000 family deductible, at which point no other members in your family would have a deductible to meet.

Once my deductible is met, do I still have to pay for care?

Yes. Most plans are made up of three phases: Deductible, traditional coverage, and out-of-pocket max. During the deductible phase, you’re responsible for 100% of the cost of care. Once the deductible is satisfied, you transition into what I refer to as the “traditional” phase, during which time you would be responsible for paying copays (fixed dollar amount) or coinsurance (percentage of the cost of care). Should you meet your out-of-pocket maximum for the year, the insurance would pick up 100% of the cost of covered medical services for the rest of the year.

What is an out-of-pocket maximum?

Put simply, the out-of-pocket maximum is the most you would ever have to pay for covered medical services in a given year. But while they are usually very high numbers, it’s unlikely that most people will actually spend that amount in a year unless they have significant medical needs, or have plans that are based on coinsurance.  However, you should be aware that your exposure may be higher if you are utilizing out-of-network services.

What expenses counts towards the out-of-pocket maximum?

While there are exceptions to this rule, the majority of plans are structured so that any and all expenses you pay for covered services count towards your out-of-pocket maximum. Such expenses would include your deductible, copayments, and coinsurance.

I have family coverage. How does my out-of-pocket maximum work?

The concept is the same as it is with the family deductible, as explained above. But with the limits increasing over the years, and the prevalence of Silver-level plans, we’re seeing a shift towards embedded out-of-pocket maxes.

When do my deductible and out-of-pocket maximum reset?

These limits accrue one of two ways: Plan Year or Calendar Year. Plan Year means that the 12-month period starts when your policies renew, whereas Calendar Year means that it runs January through December, regardless of when it renews. The majority of employer-sponsored plans use Plan Year, but individual plans are almost always calendar year. But it’s important to note that these time periods are driven by the the carrier or company policy, and not when you happen to enroll. If for example, you sign up for health insurance with your new employer starting June 1, but their plan renews September 1, then you would only have 3 months to accrue towards your deductible and out-of-pocket max before they would reset with the rest of the company.

A better understanding of these basic insurance concepts can help you and your family anticipate and prepare for your healthcare expenses. It can also help you evaluate and compare your options at open enrollment. And this Health Insurance 101 series is designed to do just that! If you have questions you’ve always wanted to have answered, please don’t hesitate to send me a message and I’ll try and make sure they’re covered in future posts.

Wishing you a happy, healthy and enriched year!
Brad Leddon, CEBS
Senior Vice President
Coffey & Company, Inc.