An Embedded Deductible and How It Works

An embedded deductible is a system that combines individual and family deductibles in a family health insurance policy. Each person has their own deductible but the family also has a maximum total deductible if multiple family members need medical care during the year.

This article will explain what you need to know about embedded deductibles, and how you can plan for your potential out-of-pocket costs under your family health plan.

In some cases, high-deductible health plans (HDHPs) historically used aggregate deductibles instead, but embedded deductibles are common for all other plans when multiple family members are enrolled in a plan together. And embedded deductibles have become the norm for HDHPs as well.

When a health plan has embedded deductibles, it just means that a single member of a family doesn't have to meet the full family deductible for after-deductible benefits to kick in.

Instead, the person's after-deductible benefits will go into effect as soon as he or she has met the individual deductible, even if the coverage is through a family plan.

(After-deductible benefits usually mean that you transition to paying coinsurance instead of the full bill, but some plans have no coinsurance and the maximum out-of-pocket is met as soon as the deductible is met. Check the details of your policy so that you know how it works.)

Since 2016, there have been rules apply to the total out-of-pocket costs that any one person on a plan can be required to pay in out-of-pocket costs during the year. Aggregate deductibles are still allowed, but all family plans must have embedded individual out-of-pocket maximums.

That means, in 2023, no individual member of a family can be required to pay more than $9,100 in out-of-pocket costs during the year for in-network care. (increasing to $9,450 in 2024), although many plans have lower out-of-pocket limits than the maximum allowed by law.

(Note that these limits and rules do not apply to grandmothered or grandfathered health plans, nor do they apply to plans that aren't regulated by the ACA, such as short-term health insurance or health care sharing ministry plans.)

How It Works

With an embedded deductible, your health plan will keep track of two different types of health insurance deductibles for each family member: the individual deductible and the family deductible.

The family deductible is usually twice as high as the individual deductible, although this can vary from one policy to another. When a family member has a healthcare expense, the money he pays toward his individual deductible is also credited toward the family deductible.

There are two ways coverage will kick-in, and the health plan will begin paying for the healthcare expenses of any particular family member:

The first way:

• One family member has had enough personal healthcare expenses to meet their individual deductible.
• The health plan begins paying post-deductible benefits for this person—usually a transition to coinsurance—but not those of other family members (unless it's care that's covered before the deductible, like certain preventive care, or covered with a copay rather than counting toward the deductible.)

The second way:

• Multiple family members have each paid enough in individual deductibles that, added together, the family deductible has been met.
• The health plan begins providing post-deductible benefits for the entire family, regardless of how much or how little some have paid toward their individual deductible.

Pros and Cons

The problem with an embedded family deductible is that to get coverage for the whole family, you have to pool the individual deductible expenses of at least two family members.

This isn't true for an aggregate deductible, which pays for everyone even if just one person meets the aggregate deductible amount, assuming it's low enough that the person doesn't exceed the maximum out-of-pocket costs allowed under the Affordable Care Act (ACA).

With an embedded deductible, even if a single family member has very high healthcare expenses, those expenses alone won’t be sufficient to meet the family deductible.

Why? Because as soon as that individual meets their lower individual deductible, the post-deductible benefits kick in and begin paying.

That person may then be required to pay other types of cost-sharing like copays or coinsurance, but those other out-of-pocket expenses don’t get credited toward the family deductible. Only the money they paid toward the individual deductible gets credited toward the family deductible.

Those cost-sharing expenses do, however, get counted toward's the family's out-of-pocket maximum. But again, if the expenses are for just one person, they can't exceed the maximum limits allowed by law—that is, $9,100 in 2023, or whatever lower limit the plan has.

(The family's maximum out-of-pocket will generally be twice as much as the individual maximum out-of-pocket, but once the individual meets their maximum out-of-pocket limit, the health plan will start to pay 100% of covered in-network care. That means no more money will apply towards the family's out-of-pocket limit unless another family member needs medical care during the same year.)

That means that at least one other member of the family would have to also meet the individual deductible over the course of the year for the family deductible to be met and after-deductible benefits to kick in for all covered members of the family.

The benefit of an embedded family deductible is that after-deductible health insurance benefits kick in for the sickest members of the family sooner than for other family members.

Because these sick family members have higher healthcare expenses, they reach their individual deductible sooner than they would if the plan had an aggregate deductible, and health insurance then starts paying for all or most of their healthcare expenses.

It’s thanks to the embedded deductible system that their insurance benefits kick in and start paying before the family deductible has been met.

2016 Changes

All of the above still applies, but starting in 2016 a new requirement was added, stipulating that no single individual can be required to pay more in out-of-pocket costs (in-network) than the maximum allowable out-of-pocket for that year ($9,100 in 2023, and $9,450 in 2024).

So, for example, before 2016, it was possible to have a health plan that did not have embedded deductibles or embedded out-of-pocket maximums.

Let's say the plan had a $10,000 family deductible, and then 100% coverage after that (this sort of plan design was only common on high-deductible health plans).

If only a single member of the family incurred medical expenses during the year, they would have had to pay $10,000 before the coverage kicked in. That sort of plan design is no longer allowed because the out-of-pocket costs would have to be capped at $9,100 in 2023 (and many health plans have lower limits).

The plan could still have a family deductible of $10,000, but more than one person would have to incur medical expenses to reach that deductible.

Summary

Virtually all health plans have embedded deductibles. This just means that if multiple family members have coverage under the policy (and the plan therefore has a family deductible), each family member will have their own individual deductible.

So a single family member will not need to meet the family deductible based solely on their own medical expenses. Instead, post-deductible benefits will kick in for a given family member once they've met their own embedded deductible, even if the family deductible has not yet been met.

A Word From Verywell

When you're shopping for health insurance as a family, you'll often see health plans displayed with the family deductible amount. But in almost all cases, those plans will also have embedded individual deductibles. Don't let the family deductible amount scare you; chances are, any one individual in the family will have a deductible that's half the amount of the family deductible. But you'll want to read the policy details to be sure you understand how the coverage will work.