Navigating medical expenses can feel daunting, but when you have a health plan, you don’t have to cover all of the costs on your own. Your health coverage provider pays for a large portion of your medical expenses once you’ve reached your deductible. Understanding what your deductible is (and what happens once you’ve reached it) can help you make the most of your coverage and save on healthcare expenses.
What is a deductible? A plain-language definition
A deductible is the total amount you will pay for medical services before your coverage provider helps with costs.
For example, if your deductible is $1,500, you must pay the total cost of medical expenses you receive up to $1,500. Then, you only pay a portion of additional expenses, while your plan provider covers the remainder.
If you look at your health coverage information, you’ll see an in-network and out-of-network deductible. In-network physicians, hospitals and other facilities have a contract with your plan provider to offer care at a lower cost. Out-of-network physicians or facilities may bill at higher rates because they don’t have a cost agreement with your plan.
In-network and out-of-network deductibles are independent of one another. Even if you have reached your in-network deductible, you will still be responsible for 100% of out-of-network costs until you reach that deductible, and vice versa.
How do deductibles work?: A real-world example
When you receive medical care, the provider submits a claim to your health coverage. The coverage team reviews the claim and determines whether the charges are reasonable for the care you received. They may reduce the amount your provider is allowed to bill you for services. Then, your provider sends you a bill for the allowed amount. If you have not yet reached your deductible, your provider will bill you for the entire allowed amount.
But once you have reached your deductible, your copay or coinsurance kicks in. Your copay is a set fee for services. Coinsurance is similar, but a percentage of healthcare costs you pay after you’ve met your deductible. For example, you might pay 20% of your bill, while your health coverage provider pays the remaining 80%.
Keep in mind that your deductible resets annually. If you’ve met your deductible for the plan year, you may want to seek additional medical care if needed before your plan resets, since your plan will cover a large portion of the cost. Plan years don’t always follow a normal calendar year, so check with your provider to find out when your deductible resets.
Real-world examples of deductibles and coinsurance
Your out-of-pocket costs for the same medical service can vary significantly depending on how much you’ve already paid toward your deductible and where you are in your plan. Here’s what that looks like in practice.
Let’s say your deductible is $2,000, and your coinsurance is 20%, meaning you pay 20% of charges once you’ve reached your deductible for the plan period. After a hospital visit, your health coverage provider receives a claim for $1,500. Here are some scenarios you might encounter:
- If you have paid $0 toward your deductible, you are responsible for paying 100% of the expenses. Your total bill is $1,500.
- If you have paid $1,000 toward your deductible, you are responsible for the remaining $1,000 on your deductible, plus 20% of the remaining $500. Your total bill is $1,100.
- If you have met your $2,000 deductible, you are responsible for 20% of the medical costs. Your total bill is $400.
Deductible vs. out-of-pocket maximum: What’s the difference?
When you hit your deductible, you still have to pay coinsurance, or a percentage of the healthcare expenses billed to your plan. That is, until you hit your out-of-pocket maximum .
Your out-of-pocket maximum is the total amount you will pay for care covered by your plan provider in a year. Once you reach this limit, your plan pays for 100% of covered services until your plan resets. All of your out-of-pocket payments (including payments toward your deductible and copay or coinsurance payment after you’ve reached your deductible) count toward your out-of-pocket maximum.
Real-world examples of deductible vs. out-of-pocket maximum
Your deductible, coinsurance and out-of-pocket maximum all affect what you owe for medical care. These scenarios show how a bill can play out depending on what you’ve paid so far in your plan year.
If your deductible is $2,000, your coinsurance is 20%, and your out-of-pocket maximum is $4,000, and you receive a $5,000 bill for covered surgery, here are some scenarios you might encounter:
- If you have paid $0 toward your deductible, you are responsible for paying $2,000 to reach your deductible, then 20% of the medical costs after that. Your total bill is $2,600.
- If you have met your deductible for the year, you are responsible for 20% of the costs until you reach your out-of-pocket maximum. Your total bill is $1,000.
- If you have paid $3,500 toward covered medical expenses for the plan year, you are responsible for 20% of additional costs until you reach your out-of-pocket maximum. In this scenario, you’ll hit your out-of-pocket maximum and all additional covered medical expenses will be covered at 100% by your plan. Your total bill is $500.
- If you have met your deductible and your out-of-pocket maximum for the year, your plan covers 100% of the covered medical expenses. Your total bill is $0.
What counts toward your deductible (and what doesn’t)
It’s important to keep in mind that not every medical expense counts toward your deductible. For example, many health plans cover preventive care (such as annual checkups with your primary care provider and some tests) at no cost to you or for a copay . Even though your provider may submit a claim to your plan, the claim will not count toward your deductible, since you are not paying for the visit.
Typically, medically necessary healthcare expenses that are covered by your plan count toward your deductible, including:
- Hospital bills
- Doctor visits (except those covered by a copay)
- Lab tests
- Imaging scans
- Outpatient and inpatient surgery
- Prescription costs, unless your plan has a separate prescription deductible
Expenses that may not count toward your deductible include:
- Copays
- Your monthly health coverage premium
- Out-of-pocket costs for care and procedures that aren’t covered by your plan
You can find the details on which services apply to your deductible in your member portal account.
Individual vs. family deductibles explained
Many health plans for families have separate deductibles for each individual on the plan, plus a combined family deductible. This is called an embedded plan. When an individual makes a payment for covered health expenses, it counts toward the individual’s deductible and the family’s deductible.
Here’s an example of a family plan with four individuals: mom, dad and their son and daughter. The individual deductibles are $2,000, while the family deductible is $4,000, and coinsurance is 20%.
- Dad has a $500 medical bill. Dad still owes $1,500 toward his deductible and $3,500 toward the family deductible.
- Later, the son has medical care with a $1,000 bill. The son still owes $1,000 toward his individual deductible. But now, the family has paid a total of $1,500 toward the family deductible, so $2,500 remains.
- Mom has a $2,000 medical bill. She has reached her deductible, and the family has paid a total of $3,500 toward the family deductible, so $500 remains. Mom now pays 20% coinsurance for any further medical expenses, but the rest of the family continues paying the full cost of their healthcare expenses until they reach their individual or family deductible.
- The daughter has medical care with a $1,000 bill. The family deductible has been met, so everyone in the family now pays 20% coinsurance.
Once the family deductible is met, everyone in the family pays coinsurance for further covered medical expenses for the rest of the plan year, even if they haven’t met their individual deductible.
How do high-deductible health plans (HDHPs) and health savings accounts (HSAs) work?
When selecting your health coverage, you may be able to decide between a high- or low-deductible plan, depending on your needs. High-deductible health plans (HDHPs) typically have a lower premium (the monthly cost for the plan) while low-deductible plans have a higher premium.
If you expect a lot of medical expenses, it may make sense to opt for a low-deductible plan. You’ll pay more each month, but once you reach your deductible your costs will be significantly lower. This plan is popular among older people, those with ongoing medical conditions, people who expect to need a major procedure and couples who are planning to get pregnant.
In some cases, an HDHP might make more sense. Young, relatively healthy people and those who don’t often visit the doctor might choose an HDHP because the monthly premium is lower. They’re still covered in the event they do need medical care, but they’re not expecting to reach their deductible in a given plan year.
HDHPs can be combined with a health savings account (HSA). Because many people with an HDHP don’t reach their deductible, covering medical expenses can be costly. An HSA is a savings account that you can use to pay for some of these costs. The funds you contribute are pre-tax, which lowers your taxable income. Withdrawing funds from your HSA to pay for eligible medical expenses (including doctor’s visits, prescriptions and medical equipment) also comes without being taxed. And, whatever you don’t use in a given plan year can be rolled over to use the following year.