In 2023, the average annual deductible for employer-sponsored health insurance in the U.S. was $1,735.
Did you know that this cost traditionally increases from year to year?
If you know anything about deductibles and their role in a typical health insurance plan, you know that this isn’t great news. If you don’t know what a deductible is, you’ve come to the right place!
Successfully managing your healthcare costs starts with understanding the terms and concepts that make up your insurance plan. While there are many different terms to know, two that get confused with each other regularly are “deductibles” and “out-of-pocket expenses”. The terms are similar, but not interchangeable.
Let’s go over how these two frequently occurring concepts differ. While we are at it, in this blog we will also go over a few more helpful insurance term definitions.
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What are insurance deductibles?
Deductibles are the amount you pay for healthcare services before your insurance coverage starts to contribute.
After meeting that deductible amount, your insurance will chip in with their payment percentage. Then, you will only need to pay whatever the coinsurance or copayment is. This is also decided by your insurance plan and may not cover all services.
Here’s an example.
Let’s say your insurance deductible is $2,000. This means that first $2,000 in healthcare services, you pay in full. Don’t worry, you don’t need to keep track of that running total. Your insurance company will do that for you! Once you hit that $2,000 total, healthcare services after that will trigger the cost-sharing benefits with your insurance company. Remember that deductibles work on an annual basis. So after your new policy year begins, the total you have paid will reset to zero.
Many plans do pay for some services, even before meeting your deductible. Make sure to check your plan details for this information as it depends on your specific payer. For example, all marketplace plans pay full price for some preventative services, even before meeting your deductible.
Some plans also have different deductibles for different benefits. For instance, your overall deductible might be different from your prescription drug deductible. Also, note that family plans have their own set of rules when it comes to this topic. They often have both individual deductibles, for each family member covered, and an overall family deductible. The family deductible applies to the entire family at once.
Let’s end this section with a little fun fact. Did you know that generally, plans with lower monthly premiums have higher deductibles? So keep this in mind if you are shopping around for a plan!
What are out-of-pocket expenses?
Out-of-pocket expenses often get confused with deductibles.
They are the amount you pay for healthcare services that your insurance doesn’t cover. This amount accumulates before your insurance then pays 100% of your covered medical services. Out-of-pocket includes your deductible amount, copays, and coinsurance.
We already went over the ins and outs of deductibles. So let’s take a moment to further delve into copayments and coinsurance.
These terms are just as important to know, so let’s go over them quickly here:
Copayments: This is a fixed amount that you pay for covered medical services after meeting your deductible. These fixed amounts can vary between different services under a plan. This includes prescription drugs, office visits, labs, and more.
Coinsurance: Similar to copayment, but instead the percentage you pay for a healthcare service after you meet your deductible.
Another example of an out-of-pocket medical expense is non-covered services. These are medical services that are just not covered by your insurance provider at all. This means you are responsible for the cost, or it’s out-of-pocket. Prescription drugs often fall under this category, as well.
What's the difference?
Now that we know what both of these terms mean, let’s focus on the difference between them. To put it simply, the deductible is the set amount you pay on healthcare services in a year before your plan coverage even kicks in. Once you hit that deductible, you start paying based on the coinsurance part of your plan.
The out-of-pocket maximum is the most you can pay for in-network healthcare services in a year. This dollar amount comes from your copays, coinsurance, or deductible. After you meet that limit, your plan then pays for all covered expenses. This maximum exists to reduce the likelihood of financial ruin if a patient needs multiple hospitalizations and procedures in a year.
More helpful health insurance terms
There are a few other terms which you should familiarize yourself with. The first is “premium”. This is the amount of money you pay, usually from each paycheck, to have health insurance coverage. Remember, the lower the deductible the higher the premium cost and vice versa.
Next, let’s go over what “in-network” means. These are doctors, hospitals, or other medical providers/suppliers that are in contract with your insurance plan. Providers who do not work with your insurance company, or “out-of-network” providers, are going to be more expensive and lack coverage.
An “Explanation of Benefits” or EOB is next on the list of terms to know. So what is it? It is a piece of information that shows the price of a medical service. As well as the amount the health plan will reimburse a provider, how much your plan paid them, and your member savings. Utilizing an EOB allows you to see how much of your deductible you have paid. It also shows any copayments or coinsurance amounts you still owe and how much you might be able to save by using in-network providers.
“Preauthorization” is the last concept I am going to cover for today. These are decisions made by your insurance plan which cover the medical necessity of the following:
Healthcare service.
Treatment Plan.
Prescription Drug.
Durable Medical Equipment (DME).
This term can also go by prior authorization, prior approval, or precertification. Before a patient receives any of the above, their health insurance may require preauthorization. This is, however, not the case in an emergency.
Of course, there are many other terms to go over when it comes to health insurance, but it would get overwhelming if I listed all of them in this blog. So let’s stop here as the ones listed today are some of the most common ones you’ll see!
Conclusion
Understanding terms such as “deductibles” or “out-of-pocket expenses” is essential when it comes to navigating the world of healthcare insurance. These terms offer insight when it comes to your insurance plan coverage details and cost-sharing mechanisms.
Here are a few tips when it comes to managing your healthcare costs. First, familiarize yourself with your insurance policy’s plan. This includes things such as copays and coinsurance, deductibles, out-of-pocket expenses and so on. These differ between plans and are not always consistent year to year!
Having a baseline understanding of what to expect from your insurance while seeking medical services can save you from any future financial “surprises”. If you can, try to get into the habit of setting aside medical funds. Budget for your deductible and any possible out-of-pocket expenses.
Finally, try to stick with in-network care! Take advantage of those lower rates for services given within your insurance’s network of providers. This will ultimately save you from spending a lot on your out-of-pocket expenses!
