Deductible & Out of Pocket Differences

When you have health insurance coverage, the insurer is unlikely to pay the total of your medical costs, and you should expect to shoulder some of the cost. Your insurance company will require you to pay deductibles and other applicable costs. Taken together, these payments are your out-of-pocket expenses. This amount will vary depending on your policy.

Deductibles

• A deductible is a specific amount of money that you must pay before your insurance benefits will kick in. For example, if you have a health plan with a $1,000 deductible and you need an operation that costs $15,000, your insurance won't begin paying for the operation until you front $1,000 yourself. Your insurance benefits will apply only to $14,000 of the cost. Deductibles often don't apply to routine services, such as check-ups, immunizations or prescription drugs. The lower your deductible, the higher your premium will be because a low deductible means insurance will begin paying sooner.

Other Out-of-Pocket Costs

• Deductibles are commonly referred to as an "out-of-pocket" cost, although they're not the only such cost. For routine services, insurers often require a co-payment or "co-pay," which is a set dollar amount that you must remit whenever you receive services. For some services and procedures, you may also have to pay "co-insurance," a percentage of your total bill, calculated after you've paid your deductible. For example, if your policy has a $1,000 deductible and 20 percent co-insurance, you'll pay the first $1,000, plus 20 percent of the remaining $14,000, or $2,800. Your total cost for the $15,000 surgery is $3,800.

Out-of-Pocket Maximum

• If you require a lot of expensive medical care, the deductibles and co-insurance alone might be enough to wipe you out financially, in which case insurance provides little benefit. Recognizing this, policies frequently include an out-of-pocket maximum. This is the most you can expect to pay from your own funds in deductibles, co-pays and coinsurance combined. Once you hit the maximum, the insurer pays all your medical bills.

Details

• Deductibles and out-of-pocket maximums are typically calculated on an annual basis. You could pay your entire $1,000 deductible one year, but when a new year begins, you go back to zero and have to pay another $1,000 before you're covered. Within a policy, deductibles and out-of-pocket maximums can be assessed per person or for a whole family. For example, in a family of four, you might have a $1,000 deductible for each individual member or a $4,000 deductible for everyone combined. On the surface, that may not seem like a huge difference. But with the whole-family deductible, if only one person were to need major medical care, the out-of-pocket deductible cost would be four times as high as it would be under a per-person deductible.