Could Your Business Cut Costs with Embedded Deductibles?

The Kaiser Family Foundation (KFF)’s 25^th Employer Health Benefits Survey reported that the average cost of employee premiums in 2023 for employer-sponsored health coverage was $8,431 for single coverage and $23,968 for family coverage. That’s an increase of 7 percent from 2022.

For employers, this meant covering a total of 83% for single employees and 71% for family premium coverage.

As a result of these increases, small businesses in Houston and around the country are looking for ways to cut costs. One option they’re considering are embedded deductibles.

But are embedded deductibles the best option for cost savings? How do they affect employees? Are they good or bad for attracting top-tier talent? Is there a better option to reduce health insurance costs?

In the following article, we’ll answer these questions and help you better understand what options are available to your small business in Houston.  

What is An Embedded Deductible?

Embedded deductibles, or OOPMs are singular, lower deductibles inside a family deductible. There is a family deductible and an individual deductible.

 Once a person or employee on a family plan hits this lower threshold, the plan pays as if the individual hit the deductible, regardless of whether the family plan deductible has been reached.

How do Embedded Deductibles Work?

Here is a brief example of how embedded deductibles work.

Let’s say your company offers a group health insurance plan in Houston with the following features:

Monthly company contribution towards health insurance premiums: $1000

Individual deductible: $500 (this amount applies to each individual on the plan before insurance coverage kicks in)

Family deductible: $1,500 (the total amount the family must pay before the insurance coverage kicks in)

Employee Family (2 Members)

• Employee 1: Monthly medical expenses:  = $800
• Employee 2: Monthly medical expenses = $200

Without Embedded Deductible

In this situation, your company would pay $1000 towards the monthly premium, regardless of the employees’ medical expenses. Since there’s no embedded deductible, the entire expense counts toward the family deductible.

With the Embedded Deductible

With embedded deductibles, each employee has their own deductible to meet before the insurance kicks in for them. However, once an individual meets their deductible, they get coverage regardless of whether the family deductible is met.

Here’s how the costs work in this scenario:

Employee 1: Since their expenses $800 exceed their individual deductible ($500), the company covers the remaining $300.

Employee 2: Since their expenses ($200) are less than their individual deductible ($500), the company only covers $200 (they haven’t met their deductible).

In Summary

Embedded deductibles can lower the company’s costs compared to traditional plans without embedded deductibles. In the example we provided, the company saved $500. Employees may benefit from lower out-of-pocket costs if their medical expenses exceed the individual deductible. However, they might also have higher upfront costs if they haven’t met their deductible yet.

Understanding Embedded Deductibles in Your Group Health Insurance Plan

Employees can meet their individual deductibles independently of the family deductible with embedded deductibles. That is the number one difference with group health insurance plans with an embedded deductible. Ultimately, the advantage is employees can potentially start receiving coverage for their healthcare expenses sooner.

Comparing Aggregate vs Embedded vs Traditional Deductibles

Traditional Deductible

Structure: A single deductible applies to the entire family. All covered members (employee, spouse, dependents) must collectively reach the deductible amount before the insurance company starts sharing costs (coinsurance) or covering expenses entirely.

Pros for Employers: Potentially lower administrative costs than plans with multiple deductibles. This may encourage employees to be more mindful of healthcare costs since the entire family unit is responsible for reaching the deductible.

Cons for Employers: Traditional deductibles may cause higher employee dissatisfaction, especially for families with many medical expenses, who will face a larger upfront financial burden before coverage kicks in.

Pros for Employees: It is easier to understand that they only have one deductible to keep track of. Once their deductible is met, the entire family benefits from coverage.

Cons for Employees: This can lead to higher upfront costs for families with frequent healthcare expenses. They also don’t have as much flexibility with their plan as they would with individual deductibles.

Aggregate Deductible

Structure: Aggregate deductibles require a single, higher deductible that applies to the entire family that is covered. However, where they differ is the individual expenses of each covered member contribute to the family deductible. Once the family expenses reach the deductible, everyone gets coverage.

Pros for Employers: Employers could enjoy lower premiums than traditional plans. It could also encourage employees to focus on cost-cutting services.

Cons for Employers: Less predictable costs than traditional plans, especially if several family members have high medical expenses.

Pros for Employees: Healthy families can quickly reach the family deductible, lowering out-of-pocket expenses.

Embedded Deductible

Structure: embedded deductibles combine two different types of deductibles, the individual and the family deductible. The family deductible applies to the total combined expenses of all members.

Pros for Employers: Potentially lower premiums compared to traditional plans. It could also encourage cost-consciousness within your employee ranks as they will reach individual coverage sooner.

Cons for Employers: It is more complex to administer than traditional plans, and it could also cause dissatisfaction among your employees who have high medical expenses due to multiple deductibles. Requires more communication with employees.

Pros for Employees: It can benefit healthy individuals, as they can reach their deductible and receive coverage sooner, potentially lowering out-of-pocket costs. Offers more flexibility compared to traditional plans.

Cons for Employees: Most complex structure to understand, with both family and individual deductibles to consider. It can also lead to higher costs for families with high medical expenses.