UPDATED: Sep 10, 2013
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Health insurance has grown into one of the most complicated forms of insurance which individuals and families must interact with on a regular basis. There are excessive forms to be filled out, lengthy contracts that must be signed, and coverage explanations that seem to be written in Greek. It is no wonder that so many people are confused about their bills when they get them in the mail.
One common feature of an insurance policy is the deductible. It can be found on car insurance policies, homeowner’s insurance policies, and just about any other type of consumer insurance. Health insurance is no different.
What is a Health Insurance Deductible?
In the simplest of terms, a health insurance deductible is the amount which the policyholder must pay out of their own pocket before the insurance company will cover any medical treatments. This amount is in addition to any premium payments which are paid on a monthly or annual basis.
There are exceptions to this rule, such as some plans cover the cost of regular checkups. For example, a health insurance plan may cover the cost of an annual physical, even if the patient has not met the deductible for the year.
Here is an illustration of how a deductible works:
Jim has an insurance plan that carries a $1,000 deductible and a $200 a month premium payment. Each month Jim must write a check to the insurance company for $200. This premium payment keeps his plan current.
Jim falls while out hiking and breaks his leg. He visits a hospital in his health insurance plan’s network to get his leg fixed. The total cost of treatment comes out to $6,000.
The hospital will first send a bill to the insurance company which will pay their portion. In this case, it is $5,000. Jim will then get a bill for $1,000, which is his deductible amount. For the remainder of the year his insurance company will pay the total cost of any covered incident because he has met his deductible.
The above example is a simplified version, and does not take into account things like coinsurance. However, the overall theme of the example shows how a deductible works and how it will impact a patient’s medical bill.
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How Does a Deductible Impact The Cost of an Insurance Plan?
Deductibles and premium costs have an inverse relationship, meaning the higher the deductible, the lower the premium cost (with everything else being equal). The reason for this is it puts more financial responsibility on the policyholder, and lowers the potential financial obligations of the insurance company.
A secondary reason it reduces the overall cost is because having a higher deductible causes the policyholder to play a more active role in their care. A person with a very low or no deductible has nothing to lose by having every little thing checked out by a healthcare professional. But if an individual may have to pay for care from their own pocket, they are more likely to do their own due diligence and find cheaper routes to a remedy.
When picking a health care plan, be sure you can cover deductible.
When comparing different health insurance plans, whether through work or on the open market, it can be tempting to focus on the monthly premium amount. It is important to pay close attention to both the deductible and the out-of-pocket maximum, as these could be amounts which need to be covered from personal assets.