Health Insurance Deductible: Low or High Deductible Plan?

Choose a deductible by comparing the total yearly cost of each plan: the premiums you pay no matter what, plus the care costs you would pay up to the plan’s out-of-pocket maximum, against the cash you actually have on hand. A low deductible usually means higher premiums and less risk. A high deductible usually means lower premiums and more exposure if you need care. The right choice depends on how much care you expect and whether you could pay the deductible without borrowing.

This is a US topic, and plan rules vary by employer, state and insurer. This guide explains the terms, shows a worked comparison and lists what to check. It cannot tell you which plan fits you. Read your plan’s summary documents, and ask the insurer or your benefits office when something is unclear.

The terms that matter

• Premium: the fixed amount you pay each month for coverage, whether or not you use care.
• Deductible: what you pay for covered services before the plan begins to share costs. Some services, such as preventive care, may be covered before the deductible.
• Copay: a flat fee for a specific service, such as a doctor visit.
• Coinsurance: your percentage share of costs after you meet the deductible. With 20 percent coinsurance you pay 20 percent and the plan pays 80 percent.
• Out-of-pocket maximum: the most you pay in a plan year for covered, in-network care. After that the plan pays covered costs. Healthcare.gov notes that premiums and out-of-network care do not count toward it.
• Network: the providers with whom the plan has negotiated rates. Out-of-network care may cost much more or not be covered.

Compare plans on total cost, not just the deductible number.

The basic trade-off

Neither is better in the abstract. The question is which has the lower expected total cost for you, and whether you could survive the worst case.

Run a worked comparison

These plans are made up for illustration. Assume two plans offered by an employer.

• Plan A (lower deductible): premium $350 a month ($4,200 a year), deductible $1,000, coinsurance 20 percent, out-of-pocket maximum $5,000.
• Plan B (higher deductible): premium $180 a month ($2,160 a year), deductible $3,500, coinsurance 20 percent, out-of-pocket maximum $7,000.

A healthy year with only preventive care. Plan A costs $4,200 and Plan B costs $2,160. Plan B wins by $2,040.

A moderate year with $4,000 of covered costs. On Plan A you pay the $1,000 deductible plus 20 percent of the next $3,000 ($600), so $1,600 plus $4,200 in premiums is $5,800. On Plan B you pay $3,500 plus 20 percent of the remaining $500 ($100), so $3,600 plus $2,160 is $5,760. Nearly identical.

A major year with $40,000 of covered costs. Both plans hit their maximum. Plan A costs $5,000 plus $4,200, or $9,200. Plan B costs $7,000 plus $2,160, or $9,160. Roughly equal again.

Here the high-deductible plan wins in healthy years and ties in heavy ones, because the premium gap ($2,040) is close to the gap in out-of-pocket maximums ($2,000). Real plans are rarely this tidy. When the premium gap is small, say $400 a year, the lower-deductible plan often wins for anyone who uses a moderate amount of care. Run your own numbers for each plan on offer.

Questions to ask yourself

1. How much care did I use in the last two years? Count visits, prescriptions, tests and procedures.
2. Do I expect anything planned? Surgery, pregnancy, physical therapy, ongoing treatment or a new diagnosis changes the math.
3. Could I pay the full deductible, or ideally the out-of-pocket maximum, from savings? If not, a high-deductible plan can turn a medical event into debt.
4. Do my doctors and prescriptions fit the plan’s network and drug list? A cheaper plan loses value if you must go out of network.
5. What are the copays and drug tiers? Frequent prescriptions can matter more than the deductible.
6. How comfortable am I with uncertainty? Some people prefer predictable costs even if the expected total is higher.

The role of an HSA

Some high-deductible plans qualify for a health savings account (HSA). According to IRS Publication 969, to contribute you generally must be covered by a qualifying high deductible health plan, have no disqualifying other coverage, not be enrolled in Medicare, and not be claimed as a dependent on someone else’s return. Withdrawals are tax-free only when used for qualified medical expenses; other withdrawals are subject to income tax and may face an additional 20 percent tax. Annual contribution limits and the definition of a qualifying plan are set by the IRS each year, so check the current figures before counting on an HSA. Not every high-deductible plan qualifies.

An HSA can make a high-deductible plan more attractive, because the premium savings can be directed into the account. Some employers contribute too. A flexible spending account (FSA) is a different tool with its own rules, often including a use-it-or-lose-it feature, so do not confuse the two.

Tie the decision to your cash reserves

A deductible is a risk you carry yourself. Ask whether you could pay the deductible, or the maximum in a worst case, without going into high-interest debt. If not, a lower-deductible plan may offer more safety even if it costs more in a typical year.

If you choose a higher deductible, set the premium savings aside in a dedicated account. In the example, the $2,040 yearly saving builds a deductible cushion in under two years. The wider question of how much cash to hold is in how much to keep in an emergency fund, and a medical line fits well in a sinking fund system.

Downsides of each choice

Higher deductible: you might delay needed care because of cost, which can lead to worse health outcomes and higher bills later; a large claim early in the year means paying a lot up front; some people cannot realistically save enough for it. If you are unsure whether a symptom needs care, contact a doctor or your plan’s advice line rather than waiting to save money. In an emergency, call your local emergency number first and sort out the bill afterward.

Lower deductible: you pay higher premiums every month, even in years when you use little care, and those premiums reduce what you can save.

Both: out-of-network or surprise costs can exceed expectations, and plans change every year, so last year’s choice may not fit this year.

What to check at open enrollment

• Compare total yearly cost, not only the monthly premium.
• Confirm your doctors, hospital and key medications are covered.
• Check whether deductibles are separate for individuals and families, and whether prescriptions are included.
• See which services are covered before the deductible.
• Ask about HSA eligibility and any employer contribution.
• Note the out-of-pocket maximum and that it applies to in-network care.
• Look at what changed from last year in premiums, network or drug coverage.

Health coverage is only one kind of protection. Term life versus whole life insurance covers a different question.

Where this comes from

This article is based on Healthcare.gov’s glossary definitions of deductible, coinsurance and out-of-pocket maximum, and on IRS Publication 969 for health savings accounts. The plan comparison uses invented premiums and deductibles to show the arithmetic. Premiums, deductibles, HSA limits and plan rules change every year, so confirm them in your plan documents and with the IRS. This is general information, not insurance, tax or medical advice.