Health insurance deductible and out-of-pocket costs made simple

How to understand the difference

Published: December 23, 2014 03:00 PM

One of the most common sources of confusion with health coverage is the difference between the health insurance deductible and the out-of-pocket limit. They're related but not the same, and it's important to understand the difference. The video above will give you the basics, and here are some other commonly asked questions.

What's a deductible?

It's the amount you have to pay out of your own pocket before your health plan's benefits kick in. If you buy a plan with a $2,500 deductible, you will pay for the first $2,500 of your medical expenses yourself. At that point, your plan will start paying some share of the expenses. If you go to the doctor, you might pay a flat $30 (this is called a co-pay) and the plan will pay the rest of the bill. If you have outpatient surgery, the plan might pay 80 percent and you'll pay the other 20 percent (this is called coinsurance).

Some plans provide some services "outside" the deductible. For instance, they might pick up part of the cost of a few primary care doctor visits a year even before you've spent to the limit of your deductible. The only way to figure out how a particular plan handles deductibles is to look at the coverage details. And of course all plans cover preventive services like pap smears, immunizations, and colonoscopies with no deductible or out-of-pocket costs at all.

If I hardly use any health care in a year and my deductible is thousands of dollars, why have insurance at all?

Two reasons. First, even before you've met your deductible, you'll be paying prices negotiated by your plan, not providers' list prices, which can be many times higher. Second, the real value of health insurance is the protection it gives you against catastrophic medical expenses. Care for an unexpected accident or serious illness can hit $100,000 before you know it. From that perspective, a deductible of a few thousand dollars looks like a bargain.

What's an out-of-pocket limit?

It is the most you will ever have to pay out of your pocket for health care during the year, not including premiums, but definitely including the deductible AND the co-pays and coinsurance you will continue to pay after you hit the deductible. If you hit your out-of-pocket (OOP) limit for the year, your insurance will pick up 100 percent of the costs thereafter.

In 2015 the maximum allowable OOP is $6,600 for an individual and $13,200 for a family. Very few people with ordinary medical expenses will ever pay that much, but it provides serious protection against catastrophic expenses. If you're injured in a horrendous accident that costs $200,000 to treat, your insurance will pay $193,400 of the bill.

How do deductibles and OOPs relate to a plan's "metal" level?

All plans sold to individuals must fit into a "metal level" that reflects the plan's overall generosity. A Bronze plan will pick up 60 percent of costs for the average member, Silver 70 percent, Gold 80 percent, and Platinum 90 percent. All plans, whatever their metal level, cover the same set of essential health benefits. The difference is how much of the cost of those services you're expected to pay when you receive them.

All the metal level plans likely have an OOP at or near the maximum allowed. The difference is that if you have a Silver or Gold plan with a lower deductible, you are much less likely to hit that OOP because your plan will start paying a major part of your health care expenses sooner.

Bronze plans tend to have lower premiums than Silver plans, which usually have lower premiums than Gold plans. You can think of it this way: Depending on the metal level you choose, you'll be paying your health expenses either upfront in the form of higher premiums, or at the point of service in the form of higher out-of-pocket costs.

The percentage you personally pay may not be the same as the overall average for your plan's metal level. If you never use up your $3,000 deductible, the plan is going to pay 0 percent of your costs, whereas if you have one of those $200,000 catastrophes, it's going to pay more than 95 percent. But overall, the plan will pick up its designated percentage of costs for all of its members combined.

Which deductible is right for me?

It depends on your medical needs and your financial resources. If you take very costly drugs, you may be better off paying a higher premium for a Silver or Gold plan that pays a greater share of your prescription costs.

If you are generally healthy and tend not to need much beyond an occasional doctor visit or medicine for a minor illness, plus appropriate annual preventive services, you may come out ahead with a higher deductible and lower premium. However, in that case you need to make sure that (a) you can lay your hands on enough cash to meet your health insurance deductible. and (b) you are confident that you won't put off going to the doctor just because you don't want to spend the money.

—Nancy Metcalf

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