Embedded and Nonembedded Deductibles

In the complex health insurance landscape, employers are continually seeking ways to optimize coverage while managing costs. Two crucial concepts that play a pivotal role in this pursuit are embedded and nonembedded deductibles. These terms may sound technical, but a solid understanding can empower employers to make informed decisions about their health insurance plans.

This article provides an overview of embedded and nonembedded deductibles.

Deductibles

A deductible is the amount an individual must pay out of pocket for medical care before the health insurance company will begin paying. For example, if there’s an $800 deductible, the person must pay for all health care costs until they reach $800. After that, the insurance will start paying, aside from copays or coinsurance. Deductibles reset annually.

The deductible may not apply to all health care services, such as preventive care, which may be covered by an individual’s insurance regardless of whether they’ve met the deductible. Additionally, not every medical expense counts toward the deductible. For example, for a service such as plastic surgery, which is typically not a covered benefit, those out-of-pocket expenses won’t help meet the deductible.

Health Insurance plans can cover an individual or a family. If the plan is for family coverage, the deductible can be designed as either embedded or nonembedded.  

Embedded Deductibles

Embedded deductibles are a key feature in health insurance plans that impact how costs are shared between employers and employees. In this model, each individual covered by the health insurance plan has their own separate deductible as well as a family deductible. Each member must meet their deductible individually before the coverage begins. Accordingly, if a family member meets their deductible, the insurance company will start paying according to the plan’s coverage for that individual. If only one person meets an individual deductible, the rest of the family still must pay their deductible. However, out-of-pocket expenses used to meet an individual deductible are counted toward meeting the family deductible, which is generally two to four times larger than an individual deductible. Once the family deductible is met, all family members will have medical expenses paid according to the plan’s coverage, even if not all members have met their individual deductibles. Having an embedded deductible is most common for non-high deductible health plans.

For example, if a family has an embedded deductible of $5,000 per person, each family member must accumulate $5,000 in medical expenses before their coverage activates. This can result in higher out-of-pocket costs for families with multiple members requiring medical attention.

An embedded deductible can protect individual family members against high out-of-pocket costs. While embedded deductibles provide a more individualized approach to insurance coverage, they can potentially lead to increased administrative complexity for employers, as they need to track and manage multiple deductibles within a single plan. 

Nonembedded Deductibles

Nonembedded deductibles operate differently. In fact, this model is simpler than an embedded deductible because it assigns a single deductible to the entire family or group, encompassing all members covered under the plan. All family member’s out-of-pocket expenses count toward the family deductible until it is met, and then they are all covered with the health plan’s usual copays or coinsurance. This means that once the total deductible is met, the insurance coverage kicks in for all individuals within that group, regardless of whether they’ve individually met their deductibles.

Using the same example, if a family has a $5,000 nonembedded deductible, any family member can contribute to reaching that threshold. Once the family’s cumulative medical expenses reach $5,000, the insurance coverage activates for all members, even if some individuals haven’t personally met their deductible.

Nonembedded deductibles promote a shared responsibility among covered individuals, fostering a sense of collective financial accountability for health-related costs. However, because the total family deductible must be met before any individual health costs are covered, it can take longer for insurance to kick in and cost more to receive post-deductible claim payments. This can result in cost savings for employers, as they only need to track and manage a single deductible for the entire group.