Do Premiums Count Toward Your Deductible?

142026616-Ivary-GettyImages.jpg
Image © Ivary/GettyImages.com

I recently heard a rant from a frustrated health insurance newbie. He said he had already paid more than the annual health insurance deductible amount in monthly premiums this year, but his health insurance still wasn’t paying for his doctor’s office visits. When he called his health plan to find out why they weren’t paying, he was told that he hadn’t reached his deductible yet.

He thought the premium payments he was making each month should be credited toward his annual deductible.

Unfortunately, health insurance doesn’t work that way; premiums don’t count toward your deductible.

If Premiums Don’t Count Toward Your Deductible, Then What Are They For?

Health insurance premiums are the cost of the health insurance policy. It’s what you pay the health insurance company in exchange for the insurer’s agreement to shoulder part of the financial risk of your health care costs that month.

But, even when you pay your health insurance premiums, your health insurance doesn’t pay 100% of the cost of your health care. You share the cost of your health care expenses with your insurer when you pay deductibles, copayments, and coinsurance, together known as cost-sharing expenses. Your health insurance company pays the rest of your health care costs, as long as you’ve followed the health plan’s managed care rules to get the health care.

Cost-sharing allows health insurance companies to sell health insurance policies with more affordable premiums because:

  • If you have some skin in the game, you’ll avoid getting care you don’t really need. For example, you won’t go to the doctor for every little thing if you have to pay a $50 copayment each time you see the doctor. Instead, you’ll only go when you really need to.
  • The financial risk the insurer faces is lowered by the amount of the cost-sharing you have to pay. Every dollar you pay towards your deductible, copayments, and coinsurance when you receive health care is one less dollar your health insurance company has to pay.

    Without cost-sharing like deductibles, health insurance premiums would be even higher than they are now.

    What’s Your Financial Risk? What Will You Owe?

    When you’re insured, the description of cost-sharing in your health insurance policy or Summary of Benefits & Coverage tells how much of your medical costs you pay and how much your health insurance company pays. It should spell out clearly how much your deductible is, how much your copays are, and how much your coinsurance is.

    In addition, your health plan’s out-of-pocket limit should be clearly stated in your policy or Summary of Benefits & Coverage. In 2017, the out-of-pocket limit can't exceed $7,150 for a single person or $14,300 for a family, unless you have a grandmothered or grandfathered health plan. These upper limits on out-of-pocket costs will increase in 2018 to $7,350 for an individual and $14,700 for a family.

    The out-of-pocket limit protects you from unlimited financial losses in case of really high health care expenses. After you’ve paid enough in deductibles, copays, and coinsurance to have reached your out-of-pocket maximum each year, your health plan begins to cover 100% of the cost of your care for the rest of the year.

    You don’t have to pay any more cost-sharing that year. However, you still have to pay your monthly premiums or your health insurance policy will be canceled.

    So, what’s the least you could owe, and what’s the most you could owe? You’d owe the least if you didn’t need any health care all year long. In this case, you wouldn’t have any cost-sharing expenses. All you would owe is your monthly premiums. Take your monthly premium cost and multiply it by 12 months to find your total annual spending for health insurance.

    You would owe the most if you have really high health care expenses because you either needed care frequently or you had one really expensive episode of care, like needing surgery.

    In this case, the most you’ll owe in cost-sharing is your policy’s out-of-pocket maximum. Add your out-of-pocket maximum to the cost of your premiums for the year, and that should define the upper limit to what you might owe for covered health care expenses that year.

    Beware, though. Not all healthcare expenses are covered. For example, some types of health insurance won’t pay for care unless you get it from an in-network provider. Most health insurers won’t pay for services that aren’t medically necessary. Some health plans won’t pay for certain types of care unless you’ve gotten prior authorization for it.

    Who Pays the Premium for Your Health Insurance Policy?

    The premium is the cost of purchasing insurance, regardless of whether you use the plan or not. But in most cases, the people insured by the policy don't have to pay the full premiums themselves. About half of Americans get their health insurance via a job-sponsored plan, either as an employee, or as a spouse or dependent of an employee.

    According to a 2016 Kaiser Family Foundation employer benefits survey, employers pay an average of 71 percent of total family premiums for employees who have job-sponsored health insurance. Of course, it can be argued that the employer premium contributions are simply part of the employee's compensation, which is true. But economists doubt that employees would simply receive all of that money in additional wages if employer-sponsored health insurance were to be eliminated, because health insurance is a tax-advantaged part of an employer's compensation package. 

    Among people who purchase their own health insurance in the individual market, plans are available through the ACA exchanges and off-exchange. Of the people who buy coverage through the exchanges, 84 percent are receiving premium tax credits (subsidies) in 2017 to offset a portion of their premiums (this data is for states that use HealthCare.gov, which includes all but 12 states in 2017; the majority of enrollees in the remaining 12 states are also receiving premium tax credits). Among people in states that rely fully on HealthCare.gov, the average pre-subsidy premium is $476/month in 2017, while the average after-subsidy premium is just $153/month. Clearly, the premium subsidies are covering the majority of premiums for the majority of enrollees.

    But people who buy their own coverage outside the exchanges are paying the full premiums themselves, as do people who buy coverage through the exchanges but whose income is above 400 percent of the poverty level (for reference, that cut-off point will be $98,400 for a family of four for 2018 coverage).

    Learn More

    Sources:

    Centers for Medicare and Medicaid Services, 2017 Marketplace Open Enrollment Period Public Use Files

    Department of Health and Human Services, Patient Protection and Affordable Care Act, Notice of Benefit and Payment Parameters for 2017.

    Federal Register, Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2018; Amendments to Special Enrollment Periods and the Consumer Operated and Oriented Plan Program. December 22, 2016.

    Kaiser Family Foundation, Health Insurance Coverage of the Total Population. 2015.

    Kaiser Family Foundation, 2016 Employer Health Benefits Survey.

    Continue Reading