Insurance 101 – Understanding the Nuts and Bolts of Your Health Plan

Health insurance is a complex and confusing topic; one that most people are reluctant to approach. This is especially true for trustees and administrator who must understand their own plan design, how that design differs from other available options, and be prepared to answer questions from participants and beneficiaries. In this installment, we will discuss the ins-and-outs of deductibles.

Most participants understand that a deductible is the amount of money you must spend before insurance kicks in. However, a health insurance deductible is different from other types of deductibles. Unlike auto, renters, or homeowners’ insurance, many health insurance plans provide some benefits before you meet the deductible. One example of this is preventive care, which is generally covered at 100%.

Another difference, and often a source of confusion, is that health insurance plans can adopt one of two deductible models: an embedded deductible or an aggregate deductible. The main difference between an “embedded” and “aggregate” deductible is that one individual cannot meet the deductible for the family with an embedded deductible whereas they can achieve this under an aggregate structure. This difference only does not impact participants enrolled in single coverage. It does, however, have a major impact on anyone who is covering multiple family members under the same insurance plan. Take the following example:

Example: Family of three (Mother, Father, and Child) are enrolled in a plan that has a $1,250 single / $2,500 family deductible for 2021. The family uses in-network providers for all medical care. The child has a surgery that costs $1,100 and later racks up medical expenses of $400 and $600 (i.e., $2,100 total).

  • Embedded Deductible – $1,250 of the child’s medical expenses count towards both his/her own individual deductible (i.e., $1,250) and the family deductible ($2,500). However, any expenses the child incurs in excess of $1,250 are paid post-deductible and do not count towards the family deductible. The remaining gap (i.e., $1,250) needs to come from the other family members. However, the post-deductible costs for the child would count towards the family maximum out-of-pocket limit.
  • Aggregate Deductible – All $2,100 of the child’s medical expense count towards the family deductible. However, the deductible has not been met in this example.

There are pros and cons with each benefit structure. The main advantage of an embedded deductible is it allows the sickest individual to receive post-deductible payment of claims quickest. The downside is that the other family members do not benefit from this unless they also have several medical claims. On the other hand, while an aggregate deductible allows one individual to meet the family deductible for all members, it takes longer (and costs more) to reach the post-deductible treatment.

Ultimately, which one is better for a particular family group depends on personal circumstances. If you have one person that incurs a significant amount of medical expenses, an embedded deductible will probably be best. On the other hand, if you have two or more people incurring a moderate amount of medical expenses, an aggregate approach would probably be more beneficial.

Trustees and administrators should be aware of the type of deductible their plan uses so they can accurately and competently address participant questions.