What is out of pocket maximum in health insurance

An annual deductible is the amount of money you must spend on covered health care services before your health insurance plan begins to cover any of the costs. An annual out-of-pocket maximum is the limit the policyholder will have to pay for healthcare services, not including the cost of the plan premium.

Health insurance deductible? | Out-of-pocket maximum | Out-of-pocket maximums in 2022? | How to save on healthcare costs |
FAQs

You just received a medical procedure and see the bill—you owe money. But don’t you pay a monthly premium for health insurance so you don’t have to pay medical bills? Not quite. 

Each year, many policyholders must spend a certain amount out of pocket on eligible medical services before their insurance plan begins paying for anything. Once they reach that dollar amount, called a deductible, the health insurance company shares the costs until the policyholder reaches their out-of-pocket maximum, a.k.a. the amount they must spend in order for the insurance to cover all remaining eligible healthcare costs. Read on to understand the differences between the two.

What is a health insurance deductible?

An annual deductible is the amount of money you must spend on covered health care services before your health insurance plan begins to cover any of the costs. This is in addition to the monthly premium just to be on the plan. Typically, higher premiums translate to low deductibles, while lower premiums tend to mean a higher deductible. Most insurance plans have a deductible including individual and employer health insurance. Although, some health maintenance organization (HMO) plans have a low deductible or no deductible at all.

What is an out-of-pocket maximum?

An annual out-of-pocket maximum is the limit the policyholder will have to pay for healthcare services, not including the cost of the plan premium. After the policyholder reaches that amount—which things like the deductible and copays contribute to—the insurance plan will then cover all further eligible healthcare expenses for that year.

Deductible vs. out-of-pocket maximum

Essentially, a deductible is the cost a policyholder pays on health care before their insurance starts covering any expenses, whereas an out-of-pocket maximum is the amount a policyholder must spend on eligible healthcare expenses through copays, coinsurance, or deductibles before their insurance starts covering all covered expenses. Because of this, a policyholder’s deductible will always be lower than the out-of-pocket maximum.

“For example, a person might have a $2,000 deductible and a $5,000 maximum out-of-pocket,” says David Belk, MD, the author of True Cost of Health Care. “They might get $10,000 worth of medical care for, say, a hospitalization, surgery and post-operative care. The first $2,000 is paid entirely by the patient. After that, the patient might have to pay either a fixed copay—$20, $50, $100 determined in advance by the insurance company and depending on the service—or a percentage of the total payment for each covered service, which is a coinsurance.”

“Once the total of that person’s copays and coinsurances plus their deductible has totaled $5,000, they owe no more money that year for any of their medical care because their insurance will cover all further costs,” he explains.

How high can out-of-pocket maximums reach in 2022?

Although deductibles and out-of-pocket maximums vary by plan, all plans that meet Affordable Care Act (ACA) standards set a yearly limit on how high out-of-pocket maximums can go. This year, the IRS defines high deductible health plans as those having a deductible of at least $1,400 for individuals or $2,800 for families. For 2022, out-of-pocket maximums can’t surpass $7,050 for an individual plan and $14,100 for a family plan. Costs incurred for out of network health care services do not count towards these figures.

Does the deductible apply to the out-of-pocket maximum?

First, it’s important to understand how to meet your deductible. Preventive care services like annual checkups are often provided without an additional consumer cost via health plans, and therefore don’t contribute toward meeting your deductible. Although it varies by plan, prescription drugs might count toward a separate prescription benefit deductible. Costs of hospitalization, surgery, lab tests, scans, and some medical devices usually count toward deductibles.

In-network, out-of-pocket expenses used to meet your deductible also apply toward the out-of-pocket maximum.

The monthly premium does not apply to either the deductible or out-of-pocket maximum, meaning that even if you reach your out-of-pocket maximum, you’ll still have to continue paying the monthly cost of your health plan to continue receiving coverage from your insurance company. 

Services received from out-of-network providers also don’t count toward the out-of-pocket maximum, nor do some non-covered treatments and medications. Once the out-of-pocket maximum is met, policyholders should not have to pay any costs—whether that’s copayments or coinsurance—for any and all covered in-network medical care.

How to save on healthcare costs

Do you have a high deductible and/or out-of-pocket maximum? There are still ways to save.

• If all your out-of-pocket medical costs—in other words, the costs not paid for by your health plan—for the given year combined make up more than 10% of your annual gross income, you might be able to take a medical expense deduction on your taxes on a portion of your costs
• Set up a Health Savings Account (HSA),  where you can deposit money tax-free for healthcare costs. Unlike a Flexible Savings Account (FSA), HSA funds roll over year after year, so if you don’t use them in 2022, you’ll have them for 2023.
• Save on healthcare costs by using SingleCare coupons for prescription drugs. Please note that any out-of-pocket costs used with a SingleCare coupon will not count toward a deductible or out-of-pocket maximum but will save on costs nonetheless.

Frequently asked questions about deductibles and out-of-pocket maximums

What happens when you meet your out-of-pocket maximum?

When you hit your out-of-pocket maximum, you should not be billed for covered care or services received during the remainder of the plan year—even at the point of sale. It is conceivable that you may be billed prior to the insurance companies’ systems being fully updated, in which case you should save receipts for incurred costs to attempt retroactive reimbursement.

What happens when you reach your deductible?

When you reach your deductible, your plan will start to pay for a portion of the care you receive. So at the point of sale, you will either be billed a percentage of the cost (coinsurance) a or a flat fee (copay).

Do deductibles count towards out-of-pocket?

Yes. Deductibles count towards out-of-pocket expenses.

Is it better to have a higher deductible or out-of-pocket maximum?

It’s better to have a lower OOP maximum. Its nice to have a lower deductible, but the trade off is likely higher premiums. So it depends on how much care you receive during the year. If you use few healthcare services and are pretty healthy, it may be better to have a higher deductible and lower premiums.

Is deductible included in out-of-pocket maximum?

Yes. Deductible payments are included in out-of-pocket maximums.

What is the difference between a health insurance deductible vs. premium?

A premium is the monthly cost to be enrolled in a plan. A deductible is the amount a consumer must pay out-of-pocket at the start of a benefit or calendar year before the plan pays anything. Sometimes these are high. Sometimes the deductible is $0.

An out-of-pocket maximum is the most you have to pay per year for covered healthcare services. When you have spent this amount in your plan year on deductibles, copayments, and coinsurance for in-network care and services, your health insurer will pay for 100% of your healthcare services.

An out-of-pocket maximum helps you to control the cost of your healthcare because you know the maximum you will ever have to pay in a year. The out-of-pocket maximum for marketplace plans can't be above a set amount each year. For the 2022 plan year, this amount is $8,700 for an individual and $17,400 for a family.

Out-of-pocket maximums help individuals and families avoid major financial problems associated with high healthcare costs in years when they need a lot of treatment. There are some exceptions, though, so make sure you understand what is and isn't covered. Otherwise, you may end up with a nasty surprise.

• An out-of-pocket maximum, also referred to as an out-of-pocket limit, is the most a health insurance policyholder will pay each year for covered healthcare expenses.
• When this limit is reached, your health plan will cover 100% of your qualified expenses.
• You can generally choose from a range of plans with different out-of-pocket limits. However, plans with lower out-of-pocket maximums normally have higher premiums, and those with higher out-of-pocket maximums have lower premiums.
• Some individuals (or families) may qualify for lower out-of-pocket maximums if they earn under certain income thresholds or meet other requirements.

In general, an out-of-pocket maximum is the most you have to pay per year for covered healthcare services. When you have spent up to this amount on your healthcare in a year, your healthcare insurer will pay for 100% of your healthcare costs. Deductibles, copayments, and coinsurance all count toward your out-of-pocket maximum under the Affordable Care Act.

In practice, however, it's a little more complicated than that.

For example, there are some costs that aren't included in your out-of-pocket maximum. These include:

• Your insurance premiums
• Anything you spend for services your plan doesn't cover
• Out-of-network care and services
• Costs above the allowed amount for a service that a provider may charge

These exceptions mean that even when you reach your out-of-pocket maximum for the year, you will still have to pay your premiums to stay covered. You should also be careful to use in-network healthcare providers if you want to control the costs of your healthcare, because out-of-network costs don't count toward your out-of-pocket maximum.

Also, costs that aren't considered covered expenses don't count toward the out-of-pocket maximum. For example, if the insured pays $2,000 for an elective surgery that isn't covered, that amount will not count toward the maximum. This means that you could end up paying more than the out-of-pocket limit in a given year.

The highest out-of-pocket maximum you will have to pay is controlled by federal law. The government has set limits that control how much healthcare insurers can charge for covered services per year. These are:

• For the 2022 plan year: The out-of-pocket limit for a Marketplace plan can’t be more than $8,700 for an individual and $17,400 for a family.
• For the 2021 plan year: The out-of-pocket limit for a Marketplace plan can’t be more than $8,550 for an individual and $17,100 for a family.

Different healthcare plans have different out-of-pocket maximum limits, so you may have a choice when it comes to your out-of-pocket maximum.

In general, you should choose the plan with the lowest out-of-pocket maximum. This will keep the maximum amount you spend per year as low as possible. However, insurance companies balance the out-of-pocket maximums they offer against the premiums they charge.

This means that plans with low out-of-pocket maximums have high premiums and vice versa. For example, Health Insurance Marketplace Bronze and Silver health plans generally have lower monthly premiums and higher out-of-pocket limits. The Gold and Platinum plans, which have higher monthly premiums, typically have lower out-of-pocket limits.

Lower-income individuals and families may qualify for reduced out-of-pocket maximums through cost-sharing reduction discounts. To be eligible, you must meet income requirements and enroll in a Health Insurance Marketplace plan in the Silver category.

Cost-sharing reductions offer a range of benefits:

• You'll have a lower deductible. For example, if a particular Silver plan has a $750 deductible, and you qualify for cost-sharing reductions, your deductible for the same plan could be $300 or $500, depending on your income.
• You'll have lower copayments or coinsurance. These are the payments you make each time you get care—for example, $30 for a doctor visit.
• You'll have a lower out-of-pocket maximum. Instead of $5,000, your out-of-pocket maximum for a particular Silver plan could be $3,000.

These are just examples, though. In order to see how cost-sharing reductions can affect how much you pay for healthcare, shop for Silver plans in the Marketplace.

There are also special cost-sharing reduction rules for American Indians and Alaska Natives.

An out-of-pocket maximum is different from a plan's deductible.

The money you pay for covered services goes toward your deductible first. The deductible is the amount you must pay before your insurance kicks in. Then, when you've met the deductible, you may be responsible for a percentage of covered costs (this is called coinsurance). These payments count toward your out-of-pocket maximum. When you reach that amount, the insurance plan pays 100% of covered expenses.

Here's an example of how out-of-pocket maximums work. Suppose your out-of-pocket maximum is $6,000, your deductible is $4,500, and your coinsurance is 40%.

If you have covered surgery that costs $10,000, you'll first pay your $4,500 deductible, which then leaves a $5,500 bill. Because your coinsurance is 40%, you would owe another $2,200, and the insurance company would cover the remaining $3,300—that is, if you didn't have an out-of-pocket maximum.

However, your annual expenses are capped at $6,000. You've already paid $4,500, so you pay only $1,500 of the $5,500 balance. The insurance company picks up the remaining $4,000. Your total cost for the surgery is $6,000, and follow-up visits with your in-network doctor are paid by your insurance because you've already met your out-of-pocket maximum for the year.

An out-of-pocket maximum is, in general, the maximum you will pay for healthcare in a year. However, there are important exceptions, so make sure you understand what is and isn't covered in your out-of-pocket maximum.

Lower-income individuals and families may qualify for reduced out-of-pocket maximums through cost-sharing reduction discounts. To be eligible, you must meet income requirements and enroll in a Health Insurance Marketplace plan in the Silver category.