Is health insurance just a medical discount plan until you reach your deductible?
Reddit user PearlLo writes:
Basically until you meet your [health insurance] deductible it's a medical discount plan.
Is that true? Basically, yes. Until you have paid out of pocket up to your annual deductible amount, health insurance is simply a way to get discounts from list prices – but not necessarily impressive discounts. If you don't plan to reach your deductible for the year, there is a much better way to pay for healthcare.
What is a health insurance deductible?
Most health insurance policies have an annual deductible. This is the amount you must pay out of pocket before your insurer starts helping with your medical bills. For example, a common deductible is $5,000. Let's say you got healthcare for a sinus infection in January, and a cut that needed stitches in July. Let's say the total cost came to $2,700. Your insurance wouldn't help with your medical bills, because you're still $2,300 short of reaching your annual deductible.
The deductible is an important part of an insurance policy. Without a deductible, people could use their insurance policy to pay for everything, like a sort of credit card. That would put insurers out of business. So the deductible acts as a way of proving you really need help paying your bills. This is what insurance exists for – the particularly difficult times.
Before reaching your deductible
Until you reach your deductible, you pay out of pocket for your healthcare. However, sometimes you will pay prices that have been negotiated by your insurer, meaning they are better than the healthcare provider's list prices. This is why it's fair to say health insurance is "just a medical discount plan" until you reach your deductible.
Interestingly, the prices negotiated by insurers are not necessarily the best prices. While insurers do tend to receive big discounts from list prices, those list prices are deliberately inflated to allow for those big discounts. In effect, the insurer prices are the normal market prices. After all, insurers have little incentive to play hardball in negotiations – if they can't get a discount they simply raise their premiums. You can get much better prices being a member of the Pocketero network, which has a best-price commitment.
After reaching your deductible
After reaching your deductible, your insurer will generally cover the majority of your medical bills. You might still be liable for a small coinsurance (like 10%) or copay (like $25), but it is generally negligible in comparison to the amount covered. This is the sweet spot with insurance – the part where you're getting clear value from the policy you pay for every month.
There is a twist. The amount you have paid toward your deductible resets every year. So the clock is ticking on your heavily subsidized healthcare. Unsurprisingly, this dynamic leads many people into a healthcare frenzy after reaching their deductible, seeking healthcare they wouldn't otherwise. This lasts until they are finished or the insurance year ends and the amount paid toward the deductible resets at zero. That may seem dysfunctional, but it is a common dynamic of insurance and one reason insurers charge so much more than we might expect.
Is health insurance worth the cost?
Health insurance won't help before reaching the deductible, encourages a feeding frenzy after reaching the deductible, and offers negotiated prices aren't necessarily very good. Why bother with it? Because it has the power to protect you from financial catastrophe. If you get very sick or injured (like cancer or car crash), health insurance can protect you from much of the financial harm. That catastrophic protection is what insurance is good at. It isn't particularly good at anything else.
If you don't expect to reach your deductible for the year, you will be paying out of pocket for your healthcare. In that case, you don't want to rely on your health insurers negotiated prices. You're better off using Pocketero to get the best prices on your healthcare when paying out of pocket.