Deductible vs. Out-of-Pocket Cost: Health Insurance 101

by Nick Versaw Updated December 7th, 2021

Deductible vs out of pocket: Woman smiles at camera

It can be intimidating to deal with providers and insurance companies if you don’t understand the health insurance jargon. It’s frustrating when you just want clear, straightforward answers.

If this is you, you’re not alone. According to a new survey by Bend Financial, while most Americans feel confident navigating the health care system, 56% feel “completely lost” when dealing with health insurance

Fortunately, health insurance doesn’t have to be puzzling once you’ve learned a few basic terms and concepts. In this article, we’ll shed light on the topic of high deductible vs. out-of-pocket maximums, explain the context, and offer real-life scenarios. 

Editor’s Note: In the health insurance industry, rules change often. The information in this article is accurate as of the time of writing, but be aware of changing policies.

Deductible vs. Out-of-Pocket Explained

Understanding these terms will help you learn how your health insurance works:

  • Deductible: A fixed amount you have to pay before insurance kicks in, say $1,000. Your deductible depends on the type of health insurance policy you have.
  • Out-of-pocket: Refers to all payments you make directly to the provider for covered services. Deductibles are out-of-pocket expenses.
  • Premium: The amount you pay for a health insurance plan. Generally, lower premiums mean higher deductibles and higher premiums have a lower deductible.
  • Copayments: A fixed amount that you will pay directly to your medical provider at the time covered services or procedures are performed. 
  • Coinsurance: A percentage of your healthcare costs that you must pay at the time of service.

Out-of-Pocket Maximum Explained

An out-of-pocket maximum is the most you will have to pay out of pocket for one calendar year. Out-of-pocket fees cannot exceed $7,000 for a single person to $14,000 for a family. Although you pay your health insurance premiums out of pocket, they don’t count toward meeting your deductible, unfortunately. Likewise, copayments and coinsurance don’t apply to the out-of-pocket maximum

What is Minimum Essential Coverage?

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Minimum Essential Coverage (MEC) was created to help regulate the health insurance industry. To be compliant with the Affordable Care Act (ACA), also called Obamacare,  health insurance plans were required to meet minimum essential coverage standards: 

  • Ambulatory patient (outpatient services) 
  • Emergency services 
  • Hospitalization services 
  • Maternity and newborn care 
  • Prescription drugs 
  • Rehabilitative and services and devices 
  • Laboratory services
  • Preventive and wellness services and chronic disease management 
  • Pediatric services, including oral and vision care 

Although the federal mandate has expired, several states like California still require all residents to have insurance that meets these standards. Other states like Washington D.C., Massachusetts, New Jersey, Rhode Island, Vermont, and Delaware have their own versions. 

Why Understanding Health Insurance Matters

The Bend Financial study found that more than half of the survey participants admitted that they were utterly confused over health insurance. 

The survey also found that three areas caused the most confusion among consumers:

  • What counts toward the deductible?
  • What procedures are covered?
  • What constitutes in- or out-of-network?

Survey authors believe that a lack of understanding around health insurance could be costly for consumers. When left to shop on the Health Insurance Marketplace on their own, they invariably opted for expensive and sweeping policies. Participants would rather pay more out-of-pocket than risk being insufficiently covered.

Are You Functionally Uninsured?

Not all consumers prioritize health insurance the same way. Tempted by low premiums, some shoppers choose plans with the lowest monthly premium and highest deductible

But is this always a good idea? If you’re like most middle-class families, you can’t afford to shell out the $4,000 to $5,000 needed to meet your deductible.

According to Healthcare.gov, a high deductible health plan (HDHP) is a preferred provider organization, or PPO plan, with a much higher deductible than other types of insurance. As of 2021, to be considered an HDHP, the plan must have a deductible of at least $1,400 for singles and $2,800 for a family plan

High deductible health plans are also known as catastrophic insurance policies because they only protect you from the worst-case scenario. These plans are popular among younger and healthier consumers because of their affordability. 

While it may work for some people, HDHPs aren’t for everyone. For example, the plan may not work if you have a chronic condition that requires multiple doctor’s visits a month and frequent trips to the ER. High deductible subscribers may procrastinate about their health and avoid health care altogether because they can’t afford to pay for it out of pocket.

Make the Most of Your High Deductible Plan 

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A PPO plan like an HDHP gives you access to a network of health care providers and medical facilities at a reduced cost. You can choose your provider as long as they are part of the network, you don’t need a referral to see a specialist.

Read about the different types of health insurance to learn more. 

While you can’t see what’s just around the corner, you can prepare for the inevitable. One way is to contribute to a health savings account (HSA) or flexible savings account (FSA). These are tax-advantaged savings accounts usually administered by your employer through direct deposit. Your contributions are kept in a special account to pay for medical expenses such as deductibles, copays, prescription drugs, and other medical items.

High Deductible Health Insurance Example

In this scenario, you purchase a health plan with a $600 a month premium. You have a $4,000 health insurance deductible and 30% coinsurance. During the year, you have two procedures, one that costs $2,000, and the other $2,500.

Of the $4,500 in medical expenses, you would pay $4,000 yourself. You’re left with a balance of $500. Your insurance covers 70% ($350) of the remaining medical costs. You would then pay coinsurance in the amount of 30% ($150). 

The good news is that since you’ve met your deductible, you’ll only pay 30% for any health care services for the rest of the year.

Before You Choose

With a careful understanding of health insurance, including out-of-pocket limits, deductible amounts, and health care expenses, you can make better decisions about your health. 

Before you decide on any insurance plan, consider all your options. Think about all the potential out-of-pocket expenses, including premiums, deductibles, copays, and more. If you opt for an HDHP, consider opening up a health savings account.

Whether you opt for a high deductible health plan with a low premium or a lower deductible with higher premiums, Compare.com makes it easy to save. 

You can check out helpful articles like this one about finding the best individual plans so you can get coverage for yourself if you don’t have access through work.

You can also compare prices and estimate the cost of medical services before going to the hospital. By comparing prices on any medical procedure, you’ll know you’re getting a fair price. Use the Compare.com tool to connect to health care providers in your area. 

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