Health Insurance Deductibles and Out-of-Pocket Expenses: How They Work

Sarah Warner, Receptionist

In America's complex healthcare landscape, health insurance is at the forefront of socially acceptable avenues for securing medical coverage for individuals and families. However, understanding the enigmatic branches of health coverage is challenging. There are a few crucial aspects that you, as a policyholder, need to understand in order to make choices that are right for you and your family.

In this piece, we will explore how deductibles and out-of-pocket expenses affect your health coverage, and how these unnecessary (but ultimately, unavoidable) evils of the healthcare world operate.

Health Insurance Deductibles

Deductibles in the health industry were initially designed to reduce excessive demand for health services in the 1940’s, and have since mutated into the monsters we know and tolerate today. In spite of being around for the better part of a century, most people do not understand the concept or purpose of a deductible.

A medical deductible refers to the predetermined amount individuals must pay for healthcare services before their insurance coverage commences. In other words, if one’s insurance is to pay for anything, you first pay X amount of dollars. The amount (X) varies greatly, from zero dollars to five or six digit amounts. What does this aim to do? “Share costs”.

● Cost-sharing: Deductibles are designed to share the burden of healthcare expenses between the insurance provider and the insured person.

● Financial Responsibility: Deductibles encourage individuals to take personal responsibility for managing their healthcare costs.

It sounds nice in theory. Whether or not it actually succeeds in cutting costs for the consumer 一 or makes them think twice before going to the hospital 一 the fact remains that every health insurance provider in the country utilizes deductibles. If one is choosing a healthcare plan through the government marketplace, the Affordable Care Act of 2010 has imposed maximums on deductible amounts to try to keep coverage affordable for individuals and families alike.

Which medical occurrences go towards meeting that magic number? Typically, deductibles apply to a wide range of medical services, including physician visits, hospital stays, and prescribed medications. That being said, every policy is different. Don’t assume a service or medicine is covered because you have health insurance. Always give them a call and ask to be sure.

What happens once a deductible is met? Insurance will start paying a portion of the costs of healthcare services. Only a portion, not the full amount (that doesn’t start until you’ve met your out-of-pocket, but we’ll get to that).

Out-of-Pocket Expenses

Moving on to the other arm of health insurance implements that are ambiguous at best; out-of-pocket expenses, or OOP expenses. OOP expenses are a concept in health insurance that sounds deceivingly clear: it's money directly from your pocket, right? Yes, but it is critical to remember that it does not go towards your deductible. What does go towards your out-of-pocket amount?

• Copays: fixed amounts that individuals pay for specific medical services or medications, regardless of whether or not the deductible has been met.

• Coinsurance: shares the costs between the insurance provider and the insured after the deductible has been met (this is typically a percentage).

• Non-Covered Services: services or treatments not covered by the insurance plan, such as elective cosmetic procedures.

This isn’t cause for total despair; policies have an annual maximum on the out-of-pocket expenses individuals have to pay, per the Affordable Care Act of 2010. This cap is intended to provide financial security by preventing policyholders from facing excessive medical expenses.

How Deductibles and Out-of-Pocket Expenses Work Together

How do these arms of the insurance machine work together? Deductibles need to be met before the insurance starts sharing medical costs, while out-of-pocket expenses include (but are not limited to) payments made after the deductible has been satisfied.

Think of the deductible and OOP as two separate buckets. The deductible bucket is typically smaller than the out-of-pocket one. When the new year begins, or one signs up for a new policy, the buckets are empty. Policyholders (you) pay for healthcare services, and that money will go into either the deductible bucket, or the out-of-pocket bucket.

Several hundred dollars later, the deductible bucket will (hopefully) be full. Insurance will now begin paying a portion of healthcare costs. The insured will still be paying the lion share, and that money will go into the out-of-pocket bucket. And once that bucket is filled, your insurance will cover all costs. Clear as mud, right? (It is worth noting that more often than not, folks do not hit their out-of-pocket cap).

Why is This Information Important?

Being in the know about deductibles and out-of-pocket expenses allows us, as the policyholders, to choose providers, procedures, and therapies that our chosen insurance is more likely to work with. It can help us weigh the potential financial burden of medical goods and services. Familiarizing ourselves with this system empowers us as consumers to make the right choices for ourselves and our families. It helps us to not be completely overwhelmed by the system in place, or to get lost in the complexities.

If the information that has been disclosed thus far seems confusing, you are not alone. Health insurance and the internal processes within have been tweaked, chipped at, and wholly amalgamated in order to make the system incredibly confusing. If the system is difficult to navigate or understand, consumers are far more likely to throw in the towel and cough up the money. If health insurance is a maze, we are the mice.

However, not all hope is lost. As the buyers, we still hold a great amount of power in the decisions we make when it comes to our health coverage. If you take away one thing from this article, let it be this; Ask permission, not forgiveness. When in doubt, call call call!

“Is this medication, at this dose, still covered?”

“Does my coverage include habilitative therapy, or rehabilitative therapy? What is the difference between them?”

It may sound like an obvious or arbitrary answer, but more often than not, it helps you avoid headaches in the future. It does take a fair amount of diligence in order to keep up, but in the end, it could be well worth it for your family.