Most people find insurance confusing. For agents, this isn’t a big surprise; we see the confusion on our clients’ faces when we try to explain their options to them, and we regularly hear clients use insurance terms like copay and coinsurance interchangeably.
It gets even more confusing when a single term has multiple definitions that vary by the type of policy – and sometimes even within the same policy. For example, health insurance plans can have at least four different types of deductibles:
- Plan Year Deductibles
- Calendar Year Deductibles
- Benefit Period Deductibles
- Specific Deductibles
In this article, we’ll try to explain the differences between these four, and hopefully that will help you when you’re trying to explain them to your clients.
Plan Year Deductibles
As the name implies, a plan year deductible starts at the beginning of the plan year and re-sets twelve months later, on the plan’s anniversary date. For example, if a health plan has a $3,000 deductible and is effective March 1, the deductible would begin March 1 and, once satisfied, would not be owed again until March 1 of the next year. A member who meets her $3,000 deductible in September, for instance, will not have to pay toward the deductible again if she has another big claim in January.
While plan year deductibles might make sense to employees since they line up with the benefit year, the problem is that most health plans don’t operate this way, which can cause confusion when switching from one carrier that has a plan year deductible to another whose deductible re-sets January 1. It can also be challenging for new employees who have met some or all of their deductible on a previous plan.
Calendar Year Deductibles
To reduce some of the confusion and make deductibles more uniform from one plan to the next, most health (and many ancillary) carriers use a calendar-year deductible that starts over at the beginning of each year, regardless of when the plan’s anniversary date is.
The uniformity is what makes calendar year deductibles easier than plan year deductibles. A new employee who was on a calendar-year deductible plan with his previous job can usually get credit for any deductible already met, and all employees can get this sort of credit when a company switches from one carrier to another. For example, if the company switches from a $3,000 deductible plan with Acme Insurance Company to a $3,000 deductible plan with XZY Insurance Company, the employees can simply submit proof that they’ve met a portion of the deductible during the current calendar year and XYZ Insurance will credit them that amount toward the deductible on their new plan.
It can get tricky, though, when an employee switches from a lower-deductible to a higher-deductible plan during the same calendar year because most carriers only offer deductible—not out-of-pocket—credit.
Let’s say that ABC Company’s health insurance plan renews July 1 and Sally has already met both the $2,000 deductible and $5,000 out-of-pocket limit on her current plan. If, on July 1, she switches to a plan with a $5,000 deductible and no coinsurance after the deductible, she’ll have an additional $3,000 for the remainder of the year. That’s because her insurer will credit her for the $2,000 deductible she’s already met but not the other $3,000 she’s paid out of pocket. Starting July 1, she’ll have credit for $2,000 of her new $5,000 deductible.
In the individual market, most plans have a calendar-year deductible, but this also lines up with their plan year since policies purchased during the annual enrollment period or during a special enrollment period renew January 1.
Benefit Period Deductibles
If you sell Medicare-related products, you are probably familiar with the third type of deductible: the benefit-period deductible. Medicare Part A, instead of having a calendar-year deductible like most group or individual plans, has what’s called a “benefit-period deductible.” As Medicare.gov explains, if a Medicare beneficiary is admitted to the hospital, is then released for 60 days or more, than then goes back into the hospital, he will have a new deductible to meet because it’s a new benefit period. So, while the deductible under Medicare Part A is only $1,484, which is less than the deductible on many group and individual health plans, it can hit multiple times in one year.
That’s one of the advantages of a Medicare Advantage plan. Yes, most Advantage plans also have a deductible to meet for major services, but it’s a calendar-year deductible that only applies once a year. And many Medicare supplements, including the popular Medigap Plan G, eliminate the Part A deductible altogether.
Last but not least, some health plans have a separate calendar-year deductible for certain benefits. A good example is prescription benefits on a group health plan. While prescriptions are covered by a flat-dollar copayment on some plans and are subject to the plan deductible on other plans, there are some plans that have a separate, up-front deductible for prescriptions. For instance, the Rx copayments may not kick in until the member has paid the first $300 of prescription costs.
That’s Not All…
Keep in mind that, while you might only help clients with their health insurance needs, they do have other types of insurance as well, like homeowner’s insurance and auto insurance. For those types of policies, people normally have a per-occurrence deductible. If you get in a wreck or a tree falls on your roof, for instance, you pay an up-front amount and the insurance pays the rest. If you immediately have another claim after the first repair is made, you will have another deductible to pay. When explaining how the deductible works on your clients’ health insurance policies, it may be helpful to contrast it with the per-occurrence deductibles they may already be familiar with.
One other note
Typically, a health insurance policy will not have more than two deductibles that you have to explain to your clients (a calendar year deductible with a separate Rx deductible, for instance), so explaining all of the different types of deductibles would be overkill. Instead, you should tell your clients what they need to know, but don’t confuse them further with information that doesn’t apply to them. Simple is almost always better.