The health insurance out-of-pocket maximum is the largest amount of money you pay toward the cost of your healthcare each year. After you’ve paid enough in deductibles, copays, and coinsurance to reach your out-of-pocket maximum, the health insurance company pays for all of the rest of your healthcare that year.
But, it doesn’t always work that way. Although it’s designed to limit your financial risk when you have high healthcare costs, it exposes your health insurance company to more risk. So, health insurance companies have developed creative techniques to mitigate that risk. These techniques cause confusion about what counts toward your out-of-pocket maximum, what your health insurer pays for after you’ve reached it, and how much your out-of-pocket limit really is.
What's not confusing is that premiums never count toward your out-of-pocket limit, and you must continue paying them for as long as you want coverage.
How the Out-Of-Pocket Maximum Usually Works
Let’s look at an example: You have a deductible of $1,000, a coinsurance of 20%, and an out-of-pocket limit of $5,000 per year.
You break your ankle when you trip over your cat while walking down the stairs. You’re taken to surgery that night. Your surgical site becomes infected. You’re hospitalized for two weeks, have two surgeries, and get IV antibiotics at home through home health care for another three weeks.
Here's how your bills would stack up without an out-of-pocket maximum versus with an out-of-pocket maximum of $5,000:
- Your emergency room bill is $4,000.
Without an out-of-pocket limit, you pay the $1,000 deductible and $600 in coinsurance.
With an out-of-pocket limit, you pay the same $1,000 deductible and $600 in coinsurance.
- Your hospital bill is $40,000.
Without an out-of-pocket limit, you pay $8,000 coinsurance.
With an out-of-pocket limit, you pay only $3,400. You've reached your out-of-pocket maximum and you stop paying.
- Your home health care bill is $3,000.
Without an out-of-pocket limit, you pay $600 coinsurance.
With an out-of-pocket limit, you don't pay anything. Your health insurer pays the entire cost of your home health care because you've already reached the out-of-pocket maximum.
- The total cost of your broken ankle is $47,000.
Without an out-of-pocket limit, you pay $10,200; your insurer pays $36,800.
With the out-of-pocket limit, you pay $5,000; your insurer pays $42,000.
- You need more health care services later in the year.
Without an out-of-pocket limit, you pay the 20 percent coinsurance.
With the out-of-pocket limit, you pay nothing.
Consumer Beware! What to Watch Out For
Your out-of-pocket limit of $5000 saved you a lot of money, but it cost your health insurance company as much as it saved you. In an effort to control their costs so they can offer lower premiums, some health insurers have adjusted their rules for out-of-pocket limits. These adjustments shift more of the cost of your healthcare onto you: you pay more, and they pay less. Insurers use three basic techniques to do this:
- The first technique makes it harder for you to reach the limit by not crediting all of your expenses toward the out-of-pocket maximum. An insurer may decide not to credit one or more of these toward the limit:
- Coinsurance for drugs
- Coinsurance for tests
- Coinsurance for out-of-network care
- In the second technique, the insurer doesn’t pay 100% of your healthcare costs after you reach your out-of-pocket limit.
For example, a health plan may require that you continue to pay a copay each time you see the doctor even though you’ve already reached the out-of-pocket maximum. In this case, reaching the maximum would protect you from paying coinsurance for the rest of the year, but not copays.
Learn the difference between copays and coinsurance.
Some health plans exclude prescription drug coinsurance from the out-of-pocket maximum. In this case, you’ll have to continue paying your share of the prescription costs even after you’ve reached your out-of-pocket limit. If you have a coinsurance of 30% for drugs, and you’re on a high-priced biologic drug that costs $30,000 per year, you’ll pay $9,000 for that drug, even though you have a $5,000 out-of-pocket maximum.
- The third technique creates separate out-of-pocket maximums for different parts of your health insurance coverage. The most common example has an out-of-pocket maximum for prescription drugs, and a separate out-of-pocket maximum for everything else.
After you reach the out-of-pocket limit for drugs, the insurer covers 100% of the cost of your prescriptions, but you continue to pay your share of non-drug costs. After you reach the out-of-pocket maximum for all other coverage, the insurer covers 100% of your non-drug healthcare costs, but you continue to pay your share of drug costs unless you’ve also met the out-of-pocket maximum for drugs.
The health insurance company doesn’t cover 100% of your healthcare until you’ve reached both out-of-pocket limits. If each limit is $5000, you pay $10,000 before the health plan starts paying 100%.
How Do I Protect Myself?
Each health plan provides a Summary of Benefits and Coverage that details what the out-of-pocket limit is, as well as what does and doesn’t get credited toward it. Take note of this when you’re comparing plans during open enrollment, or when you’re shopping for health insurance. You can also call your health plan and ask.
There's nothing unethical about health insurers trying to limit their risk. The burden is on you to make sure you fully understand the rules of your health plan. It's important for you to understand how much you could be on the hook for each year so that you can budget appropriately and make contingency plans for a worst-case scenario.
The Affordable Care Act & Out-Of-Pocket Maximums
The Affordable Care Act makes out-of-pocket maximums less complicated. The ACA requires that deductibles, copays, and coinsurance all get credited. It also places limits how much the out-of-pocket maximum can be each year, after which the health plan must pay 100% of all costs.
Most of these protections begin on January 1, 2014. However, some large health plans have until January 1, 2015 before they’ll have to comply, and grandfathered plans don’t have to comply with all of the ACA’s rules.
Even after The ACA protections kick in, there’ll still be some costs you’ll be responsible for paying after meeting the out-of-pocket maximum. These include:
- Your health insurance premiums
- Things that aren’t covered by your health plan, like cosmetic surgery
- Things your health plan decides aren’t medically necessary
- The balance-billed portion of out-of-network healthcare expenses
The Affordable Care Act also created a health insurance subsidy that lowers the out-of-pocket maximum for eligible people of modest means. Learn more about this in "How the Subsidy to Reduce Your Out-Of-Pocket Maximum Works."