Is It Better To Have A High Deductible Or High Out-Of-Pocket?
Deductibles and out-of-pocket maximums are important factors in determining how much your health insurance will cost and how much your health plan will contribute to your care.
It's more likely that you'll have to pay a deductible for your health insurance. The out-of-pocket maximum is only a concern if you have a year with a lot of health-care expenses.
What Is an Annual Health Insurance Deductible?
A health insurance deductible is the amount you have to pay for health care services before your insurance plan starts to pay for it. This is not the same as a health insurance premium. A premium is the amount of money you pay to have insurance. The deductible is the amount you pay for services such as doctor appointments and tests before your health insurance pays its portion of the costs.
How Much Do Most Deductibles Cost?
Analysis of marketplace data found that the average medical deductible for an ACA marketplace plan for a single person is $5,071. That is a lot more than the average deductible for health insurance plans through an employer, which is how most Americans get health insurance before they retire. The Medical Expenditure Panel Survey from the Agency for Healthcare Research and Quality says that the average deductible for an employee health plan is $2,004.
The Agency for Healthcare Research and Quality's Medical Expenditure Panel Survey says that the average deductible for a family health insurance plan through an employer is $3,868. Based on these averages, the average plan would be called a high-deductible health plan (HDHP). An HDHP is a health plan with a deductible of at least $1,500 per year for an individual or $3,000 per year for a family.
What Is an Out-of-Pocket Maximum?
An annual out-of-pocket maximum is the amount you must pay for in-network health care services in a calendar year before your health insurance plan will cover all of your medical expenses. This out-of-pocket maximum is in place to keep you from going bankrupt if you have a busy year of health care costs and hospitalizations.
How Much is the Average You Have to Pay Out of Pocket?
An analysis of marketplace data shows that the average out-of-pocket maximum for a single person on an ACA marketplace plan is $8,044. The Affordable Care Act (ACA) says that almost all health plans cannot have a maximum out-of-pocket cost of more than $9,100.
In the market for health insurance through an employer, the average out-of-pocket maximum is $4,272 a year.
Does your deductible affect the amount you have to pay out of pocket?
Yes, your in-network deductible counts toward your out-of-pocket maximum.
For example, let’s say, you have a $2,000 deductible and a $4,000 out-of-pocket maximum. Once you've met your deductible, you're halfway to your out-of-pocket maximum.
Coinsurance is a term used to describe when a health insurance plan pays a portion of your health care costs after you have met your deductible. This could mean that your health plan pays 80% of in-network costs and you pay the remaining 20% until you reach the plan's out-of-pocket maximum. In that coinsurance example, you would pay $80 toward a $400 medical bill, with the health plan covering the remaining $320.
Deductible vs. Out-of-Pocket Maximum
Deductibles, coinsurance, and out-of-pocket maximums all work together.
Let’s go step by step:
Before your Deductible is Met:
Annual deductibles are common in health insurance policies. You pay for all health care services, including doctor visits, hospitalizations, outpatient care, tests, and prescription drugs, until you reach the in-network deductible.
As an example, suppose you go to the doctor for treatment. You have several tests that will cost you $300. Your deductible is set at $1,000. That means you'd pay the full $300 and still have $700 left for the year before your health plan starts covering some of the costs.
Once You Have Paid Your Deductible:
Once you've met your deductible, you'll usually be able to begin using your health insurance's coinsurance. Coinsurance is a percentage of the cost of in-network services that you and your health insurance company share. This could be the insurance company covering 80% of in-network covered health care costs and you covering the remaining 20%.
Let's say you reach your $1,000 deductible. You're not feeling well and decide to visit an urgent care center. During that visit, you end up needing $200 in services. If your coinsurance is 20%, the insurance company will pay $160 and you will pay the remaining $40. This does not include the copay you must pay at the time of your visit.
Once Your Out-of-Pocket Maximum Has Been Reached:
You pay coinsurance until the out-of-pocket maximum for your plan is reached. Once you reach the limit, the insurance company pays for all of your covered health care costs within the network.
If you get care outside of your health plan's network after you have reached your out-of-network maximum, you may have to pay for all of it yourself, depending on your plan. Even after you reach your out-of-pocket maximum, you will likely still have to pay premiums and copays.
So, Is It Better To Have A High Deductible Or High Out-Of-Pocket?
It is an interesting question that we frequently get asked!
1. A health insurance deductible is more likely to impact your health-care expenses than an out-of-pocket maximum, unless you use a significant amount of health care services each year.
2. A maximum out-of-pocket expense is a safety net that prevents you from incurring limitless medical expenses. However, the deductible is considerably more likely to impact you than the out-of-pocket maximum.
There is, however, a commonplace in both high deductible and low deductible plans.
Max is for low deductible plans and has similar high deductibles. So, consider whether you'd rather pay more every month or every paycheck in premiums to have your health-care costs covered and thus have a lower deductible. Or would you prefer to pay a lower monthly premium but have a higher deductible? The latter is for high deductible high premium plans with HSAs.
In addition to the low deductibles associated with HMO plans, another perk is that many preventative and wellness services are provided free of charge. So, at the end of the day, I would advise you to consider your options and determine which is the best financial fit for you. We can certainly assist with this, and please do not hesitate to get in touch with us if you have any questions.
Example of deductibles and out-of-pocket costs:
How to Cut Costs on Health Care:
To save money on health insurance, you have to compare different plans and find the best price for the plan and coverage you want.
Here are some ways to save money on your health care and health insurance:
1) Pick an HMO or an EPO
The way a plan's benefits are set up affects your freedom and costs with health insurance. Unless it is an emergency, health plans like health maintenance organization (HMO) and exclusive provider organization (EPO) would not pay for care from a provider outside of your Plan's provider network.
With a plan like a preferred provider organization (PPO), you can go to a doctor outside of the network, but it will cost you more and you will have to pay more in premiums. You can save money on premiums by choosing a cheaper plan, such as an HMO or EPO.
2) Choose a Health Plan with a High Deductible
The premium for health insurance is usually based on the plan's deductible. In general, the higher the deductible, the lower the premium.
A high-deductible health plan (HDHP) is one with a deductible of at least $1,500 for single coverage or $3,000 for family coverage. If you choose an HDHP, it will cost you less for coverage, but if you need care, you will have to pay a higher deductible.
An HDHP can save you money each month, but if you need health care, you may have to pay more.
3) Stay in your Provider Network
Whether you have an HMO, EPO, or PPO, if you stay in the network, you might pay less than if you went outside of the network. Most of the time, an HMO or EPO only pays for care within its network. If you do not have this coverage, you will have to pay for all of that care yourself.
With a PPO, you can get care from a doctor who is not in your network, but this usually costs more than staying in the network. Also, most costs for care that is not covered by your plan do not count toward your annual deductible.
4) Use Emergency Care When Necessary
Unless you are experiencing an emergency that requires immediate medical attention, you should try to seek care from your primary care physician or an urgent care clinic. Your copayment will be lower if you visit a primary care or urgent care center rather than a hospital. Hospitals are also more expensive than primary care clinics, so you will pay more for care there.
Don't wait to go to the hospital if you need to, but only go to the emergency room if it's absolutely necessary.
Set Up a Savings Account for Health Care
Health insurance plans can have health savings accounts (HSAs), health reimbursement arrangements (HRAs), or flexible spending accounts (FSAs). Set up one of these accounts and save money for future health care costs without having to pay taxes on it.
Interested in setting one up? We can guide you here.
How it works:
- An HSA can only be used in conjunction with an HDHP. It allows you to save money tax-free for health care, and your employer may also contribute money each year. According to the Kaiser Family Foundation, employers contribute an average of $575 per year to HSAs for single coverage and $987 for family coverage.
- An HRA can be associated with any health plan, but the main difference is that an HRA is owned by the employer, and only the company can contribute to it. When you change jobs, you usually cannot take your HRA with you. Employers contribute an average of $1,410 to an HRA for single coverage and $2,344 for family coverage each year, but you cannot contribute to the account yourself.
- An FSA is also not tied to any specific type of health plan. You can save money each year, but you may not be able to carry it over into the following year. As a result, unlike an HSA, an FSA may not be a long-term health care savings account option. The maximum FSA contribution is $2,850, and depending on the FSA, you may only be able to carry over a maximum of $575.
How to Pick Health Insurance Based on How Much it Costs?
When picking a health plan, it is important to think about how much health care will cost.
Here are some things to look for:
1. Compare Insurance Premiums and Out-of-Pocket Costs
Look at the premiums for the health insurance plans to see how much you would have to pay for coverage. But that's just the beginning when you think about how much health insurance costs.
When you need care, out-of-pocket costs like copayments, deductibles, coinsurance, and out-of-pocket maximums matter. Think about the deductible to see how much you would have to pay for care before your health insurance company would start to help. Check the plan's out-of-pocket maximum and the coinsurance amount to see how much you would have to pay after meeting your deductible.
With that information, you can move on to the next step, which is to compare the costs.
2. Weigh the Premiums and Deductibles
Premiums for health insurance are what you pay to have coverage, whereas deductibles are what you pay when you need care.
- Lower premiums are usually associated with a higher deductible.
- Higher premiums usually imply a lower deductible.
A high-deductible health plan may be right for you if you prefer to pay less for health insurance and more when you need it. A high-deductible plan may benefit someone in good health who does not anticipate needing much health care in the coming year.
However, some people would rather pay higher premiums with the understanding that they will pay less when they require care. Alternatively, they may anticipate higher health-care costs in the coming year, such as having a child or undergoing surgery. A higher premium with a lower deductible would likely be a better fit in those cases.
Determine which you prefer, as this will help you narrow your options. If you need guidance in determining which plan is right for you, click here.
Don’t forget to check out:
Is Whole Life Insurance a Good Investment?
Is Renters’ Insurance Worth It?
Pet Insurance: What It Is, What It Covers, & Should You Get It?
With lower deductibles, cost-sharing savings are realized sooner, but at the expense of higher monthly premiums. Plans with larger deductibles may be advantageous for individuals who are typically healthy and do not anticipate incurring substantial medical expenses. With a large deductible and a low out-of-pocket limit, you can avoid catastrophic medical expenses.
I hope this information was helpful. If you have any questions, feel free to reach out. I’d be happy to chat with you.
About the Author
As a Partner and Financial Advisor here at Vincere Wealth, Tim helps clients navigate their financial challenges and decisions. Having someone guide you today in making sound financial decisions can have a substantial impact on your future financial well-being. Tim takes great pride in guiding clients through the complexities of insurance, estate planning, and cash flow optimization.
LinkedIn: Tim Uihlein
Work with Us
If you're interested in an investment advisory or financial planning relationship, please consider Vincere Wealth Management.