Should I get a high-deductible or low-deductible plan?

Health Insurance

January 5, 2016

When you’re shopping for health insurance, understanding the terms can make it difficult to choose the right policy for your needs. This is especially true when it comes to deductibles. Aside from the dollar amount, what’s the difference between a high-deductible and low-deductible insurance plan? How do you decide which type of plan meets your needs? Answers to these questions depend largely on your medical situation. Under the Affordable Care Act, a lot of treatments and services are now included under major medical plans without any added cost to consumers. Below, we’ll discuss some of the pros and cons of different deductibles so that you can make a more informed decision when you sign up for health insurance.

How Deductibles Work

What’s a deductible? The deductible represents the threshold you have to meet in order for your insurer to pay out benefits. Even after you meet the deductible, you may still owe a portion of the bill, and this is known as co-insurance. Along with deductibles and co-insurance, you may also have to pay co-payments at the time of service. Co-payments and co-insurance will cost more under high-deductible plans.

Let’s say that you break your leg on a skiing trip. You’re rushed to the nearest emergency room, which happens to accept your insurance, and treated for the break. With your co-pay, you’ll pay $100 for the initial visit. Months later, you get a bill for $2,500 from the hospital. How did a straightforward trip to the ER result in a bill of $2,500?

As it turns out, your deductible for the year is $2,000, which is high for an individual. The hospital charged $4,500 to treat your leg. Once you met the $2,000 deductible, this left a balance of $2,500, which was covered by your plan at 80 percent. Co-insurance requires you to pay the remaining 20 percent. In this case, that added another $500 to your bill. In essence, you paid $2,600 total while your insurance carrier paid $2,000.

When High Deductibles Make Sense

If you don’t see your doctor often because you’re in good health, then you can probably get away with a high-deductible plan. These policies typically have deductibles of $1,000 or more. In fact, some deductibles are astronomically high. The tradeoff is that premiums are much lower with high-deductible plans than they would be with low-deductible policies. Labeled “consumer-directed health plans,” high-deductible policies require people to think critically about the type of healthcare that they pursue and receive.

Because you’ll pay more out of pocket for medical services under a high-deductible plan, you’ll need to become a savvy shopper when it comes to seeking out care. Several websites exist for assisting consumers in finding low-cost treatment options, and you can always run the numbers at home before getting that suspicious cough checked out. High-deductible plans make sense for young or healthy people who require few medical services throughout the year.

Another bonus to high-deductible plans is that they usually allow participation in health savings accounts or HSAs. HSAs give you the option to set aside pre-tax money into an account specifically reserved to cover out-of-pocket expenses, and the amounts roll over each year. These accounts earn interest without being subject to taxes. Plus, your employer may contribute a certain percentage to your HSA, and the amount that you save can be transferred if you change jobs or policies.

When to Choose the Low-Deductible Option

On the other end of the spectrum, low-deductible health plans typically charge more up front but require less of a financial commitment throughout the year. These plans make sense for people with ongoing medical conditions or chronic illnesses. If you’re going to see the doctor every month because you have cancer or diabetes, then you’ll want to sign up for a low-deductible plan. Premiums will be higher, but your insurer will pay for a greater percentage of your medical care.

With a low-deductible policy, you might pay less than $1,000 for that broken leg in the earlier scenario.

More important, you’ll be able to afford your long-term medical bills more easily. Low-deductible plans also make fiscal sense for people with limited savings options. If that unexpected $2,500 bill from before would financially devastate your savings, then you should consider a low-deductible option.