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Why Do Health Insurance Policies Have Deductibles?

If you are in the market for insurance, you may wonder what a deductible is in health, auto, or homeowners’ insurance policies—and how it works.

Deductibles are popular with property, casualty, and health insurance products. They are out-of-pocket costs that you must pay before your insurance coverage starts paying.

Usually, the higher your policy’s deductible, the lower the yearly or monthly premium payments. That’s because you’re in charge of more costs before coverage begins.

Here is a quick look at why insurance policies have deductibles, what a deductible in health insurance is, and how health insurance deductibles work.

Why Insurance Policies Have Deductibles

Deductibles enable insurance companies to share costs with policyholders when they make claims. But there are two other reasons why companies utilize deductibles: moral hazards and financial stability.

Moral Hazards

Deductibles help in mitigating the behavioral risk of moral hazards. A moral hazard is a risk in which a policyholder may not act in good faith. Insurance policies protect policyholders from losses, so an intrinsic moral hazard occurs: The insured party may engage in risky behavior without having to suffer the financial implications.

For instance, if drivers have car insurance, they may have the incentive to drive recklessly or leave their vehicle unattended in a dangerous area since they’re insured against damage and theft. Without deductibles, they have no “skin in the game.”

A health insurance deductible mitigates that risk since the policyholder is responsible for a portion of the costs. As a result, deductibles serve to align the insurer and the insured’s interests so that both parties seek to mitigate the risk of catastrophic loss.

Financial Stability

Insurance policies also utilize deductibles to ensure a measure of financial stability on the part of the insurer. An appropriately structured insurance plan protects people against catastrophic loss. A deductible offers a cushion between any given minimal loss and a truly catastrophic loss.

For instance, suppose an insurance policy didn’t have a deductible. The cost of every minor claim, irrespective of the amount, would be the insurer’s responsibility. This would create a high number of claims and raise the financial costs of the policy. It could also make it hard for the insurer to respond appropriately to actual catastrophic losses from policyholders.

Health Insurance Deductibles: Only Part of Your Costs

With a health insurance plan, deductibles are only part of the expenses you face. In addition to your monthly premium, your payment part of the expenses through:

• Your deductible. This is the amount that you must spend every year on covered healthcare expenses before your insurance begins to pay some of the costs. Generally, the lower the health insurance deductible, the more costly the policy.
• Copays. These are set amounts that you pay for a particular covered healthcare expense. A health insurance deductible example is whereby you have a $10 primary care copay and a $40 copay for specialists. You don’t require to meet your deductible first.
• Coinsurance. As soon as you meet your deductible, you’ll be responsible for your healthcare costs, and your plan will pay the remaining costs. This is known as coinsurance. You continue to pay coinsurance till you meet your out-of-pocket maximum for the year.

An out-of-pocket maximum is the amount you will pay for covered healthcare costs in one year. As soon as you reach that out-of-pocket maximum, your plan pays 100% of covered healthcare costs.

Resources and References:

• Catastrophic Loss Index
• Moral Hazard Definition
• Out-of-pocket Maximum