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New grad just out of college and working at a job that is asking me how much I want to contribute to my HSA.

My medical plan deductible is $3,000 and I am a single filer (when it comes to tax) so I can contribute a max of $3,500 in 2019.

What does that $3k deductible mean for me?

  • 5
    This has nothing to do with taxes. Insurance deductible has no relationship with tax deductions, if that's what you were thinking. – Barmar Nov 16 '19 at 14:10
  • What is your Max Out of Pocket (MOOP)? It might be $3K which means you'd have 100% coverage after you hit your deductible, but usually MOOP is a little higher than your deductible. – TTT Nov 17 '19 at 5:17
  • It's the same as auto insurance: the insurance company deducts a certain amount before starting to cover you. – RonJohn Nov 21 '19 at 21:32
13

Broadly, it means that you'll be responsible for the first $3,000 of medical expenses that you incur over the course of the year before insurance kicks in. There may be a co-pay as well where you're responsible for some fraction of the bill once you've met your deductible up to an out-of-pocket maximum.

Realistically, your plan very likely covers certain things like an annual checkup with no deductible. But it may not cover every test the doctor orders as a result of that physical with no deductible-- at least some of those tests are likely things you'd have to pay for until you reach your deductible.

So, for example, lets say you have a $3,000 deductible, a 10% co-pay (technically this would be co-insurance not a co-pay but it is pretty common to use them interchangeably in most discussions), and a maximum out-of-pocket of $6,000

  • You go for an annual physical. Insurance pays the full cost.
  • At the physical, the doctor orders a couple of tests that come to $150. You're responsible for paying those costs. That $150 goes toward your deductible.
  • Later, you have an accident and have to go to the hospital. The total of all your medical bills related to this accident is $5,000. You pay $2,850 in order to meet your deductible (you've now paid $3,000 over the course of the year). Of the remaining $2,250 balance, you pay 10% (your co-pay) and insurance pays the rest. So you owe an additional $225 and insurance pays $2,025. Your total out-of-pocket at this point is $3,225.
  • One of the tests the doctor ordered comes back with a worrying result and you get diagnosed with cancer. That causes you to rack up $150,000 of medical bills. Your co-pay of 10% would come to $15,000. But your total out-of-pocket limit is $6,000. You've already paid $3,225 so you own another $2,775. Insurance covers the remaining $147,225.

Note that there are probably different co-pays for in-network vs. out-of-network providers and other bits of potential complexity. I'm ignoring those and assuming that all of your care happens at in-network hospitals and by in-network doctors.

Your deductible and out-of-pocket maximum reset every year.

  • 1
    In the second example, you omitted the part where the "haha let's screw those poor suckers with no insurance" price tag for the tests is $150, but the "negotiated price" (i.e. actual price) the insurance allows for it is $8, and the lab sends you a bill for $8. – R.. GitHub STOP HELPING ICE Nov 16 '19 at 15:23
  • Also the current max out of pocket is $7900. $10000 is unlawfully high. – R.. GitHub STOP HELPING ICE Nov 16 '19 at 15:25
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    In the introduction you said there was a $3000 deductible, but in the third bullet point you say that the insured person needs to pay another $3350 to meet the deductible. One of these should be corrected, probably the second one. – Mark Dominus Nov 16 '19 at 18:28
  • I was about to comment the same thing. – Vilx- Nov 16 '19 at 18:28
  • @R..+ pub 969 for 2018 and rp-2018-30 in irb2018-31 agree 2019 OOP limit is 6750 self-only, 13500 family. rp-2019-25 in irb2019-22 says 2020 will be 6900 and 13800. – dave_thompson_085 Nov 17 '19 at 6:03
3

There are a number of different arrangements, but at a high level the deductible is the amount you must pay before insurance will start paying for medical expenses.

Commonly there are some things that are covered to some extent before you hit your deductible, for example I can get a physical every year without paying, but otherwise I pay for everything until my deductible is met.

Even after your deductible is met many times things aren't covered at 100%. For example, if I have a surgery it might be covered 80% after my deductible of $3,000 is met. So if the surgery costs $10,000 and I haven't paid for anything yet this year, I pay $3,000 of the surgery out of pocket (or out of my HSA) to cover the deductible. The remaining $7,000 balance is covered at 80% which means I have to pay 20% of it ($1,400) and the insurance company pays the other 80%, so I pay $4,400 total for the surgery. However, if I had a 2nd surgery later that year I'd only pay 20% of the cost of that one since my deductible had already been met.

You'll want to review the policy options to see how the coverage works. They should have a breakdown of which things are covered at what levels and if there are co-pays/co-insurance, etc. Look for a 'max out of pocket expense' figure as well.

An HSA is highly tax-advantaged (contributions are pre-tax, earnings are tax-free, and distributions are tax-free if used for qualifying medical expenses), even if you don't imagine reaching your deductible in most years it is usually worth contributing the max to your HSA if you can afford it (it is 2nd priority only to maximizing your employer's 401k match if available).

Depending on your HSA provider, you may be able to invest the funds in your HSA account in a low-fee index fund or similar. If that is the case, due to the tax-free growth of an HSA you can benefit by paying your expenses out of pocket and waiting years to get reimbursed from your HSA, there are a number of questions about HSA's on this site that go into more detail about this feature, here's one.

0

Put as simply as possible: a deductible (whether for medical insurance, home insurance, auto insurance, etc.) is that portion of a claimed expense the insurer will not pay, and is therefore the portion you are expected to pay out of your own "pocket". If your doctor charges you $250 for a visit and you have a $100 deductible, you claim the $250 expense, of which $150 is covered by your insurer and the remaining $100 is paid by you. If your doctor charges you $200 and you have a $200 deductible, your insurer pays nothing, so there's no point to even filing a claim with your insurer.

  • Surely you’d need to tell the insurer so that they know you’ve paid the $200. If you didn’t file the claim at that point and then later had a claim for a larger amount, they would try to deduct $200 from the next claim you made. – Vicky Nov 17 '19 at 9:00
  • @Vicky I think you're getting into the insurer's fine print setting out how you should file a claim, and how the deductible applies. To my understanding, the deductible is applied once for each claimable occurrence/visit etc.. If your doctor charges you for a visit and then follows up with a supplemental billing in regard to the same matter, I would expect that the insurer would allow for that as an amended claim. – Anthony X Nov 17 '19 at 14:59
  • Casualty insurance deductible (mostly homeowner and auto) is per claim, but medical deductible is for all claims in a year. The answers by Justin Cave and Hart CO have this right. – dave_thompson_085 Nov 22 '19 at 9:31
  • @dave_thompson_085 OK, I stand corrected. My intent was to outline the general concept of a deductible without getting into policy specifics. As I read the OP's question, it seemed as though there was some confusion between "deductible" as it applies to insurance, and "deductible" as the term may be applied in the context of income tax filing. – Anthony X Nov 23 '19 at 0:43

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