Health Insurance

Understanding Your Out-of-pocket Maximum vs. Your Deductible

Your deductible and out-of-pocket maximum are both part of the health care costs that you must pay before your insurer pays 100%, but there are many key differences between the two.

AdobeStock 386177927

Health insurance can be complicated to understand regarding coverages and what you pay. When learning about your policy, it is helpful to understand the deductible vs. out-of-pocket maximum.

The Difference Between a Deductible vs. Out-of-Pocket Limits

As the policyholder, a deductible and out-of-pocket maximum are both medical expenses you cover. It is essential to understand that the monthly premium you pay does not count towards the deductible or out-of-pocket maximum and is simply the price you pay to have coverage.

Every policy year, both the deductible and out-of-pocket maximum will start over. You will be responsible for all your health care costs until the deductible is met. Then, as you continue to pay for your medical care, those are all added to your out-of-pocket maximum. Once that is met, the insurance company pays the rest of your medical costs.

What Is a Health Insurance Deductible?

As your policy plan year begins, you will pay toward your medical services until you meet your deductible. For example, if you have a hospital stay that costs $1,000 and your deductible is $1,500, you still have $500 to pay before your insurance coverage kicks in and starts paying towards your health care costs.

What Is an Out-of-Pocket Maximum?

An out-of-pocket maximum is the total amount of money you will pay towards your health care costs, regardless of the price. For example, if you have met your $1,500 deductible and your out-of-pocket maximum is $6,000, you will spend $4,500 more, and then your health insurance carrier will pay for your health care costs moving forward for the rest of the policy period.

Deductible vs. Out-of-Pocket Costs

An out-of-pocket maximum is an amount that you must pay on eligible healthcare expenses through copays, coinsurance, or deductibles before your insurance begins covering any expenses. The deductible is the amount you pay towards health care before your insurance policy begins paying for coverage. Thus, your deductible is always lower than your maximum out-of-pocket expense.

Premiums, which you usually pay monthly, do not count toward your out-of-pocket maximum as they are not paying for any health care costs. Only those expenses that are for medical care count towards the out-of-pocket maximum.

How They Work

When your policy begins, you will pay for healthcare costs out-of-pocket which will count towards your deductible. Once the deductible is met, your plan begins to pay coverage based on whatever copays or coinsurance agreements are in place. All of these add up within the out-of-pocket maximum, including the deductible.

Differences

It’s critical to know that while many medical costs are applied to your deductible and, ultimately, your out-of-pocket maximum, not everything is. Your monthly premiums are not considered a health care cost and do not apply. Out-of-network health care costs, over-the-counter medicines, and prescriptions not covered by your plan do not apply either.

How Much Is a Typical Out-of-Pocket Maximum?

Despite variances in deductibles and out-of-pocket maximums depending on your plan, all Affordable Care Act (ACA) plans to set a yearly limit on out-of-pocket maximums. An individual’s out-of-pocket maximum can’t exceed $7,050, and the family’s out-of-pocket maximum can’t exceed $14,100 in 2022.

If you have a health insurance plan through your employer, you may see a lower out-of-pocket maximum of around $4,000 or less.

How Much Is a Typical Deductible?

Typically, the average deductible on a health insurance policy can range anywhere from $500 to $5,000 or more. ACA plans through the Health Insurance Marketplace in 2022 have an individual deductible of $1,400 and $2,800 for families.

Nevertheless, different deductible amounts are available with different plans. A no-deductible health insurance plan begins paying for health care costs immediately upon purchase, usually for higher premiums. On the other hand, high-deductible health plans require you to pay a large portion of your medical bills before the insurance company begins to pay.

Deductible vs. Out-of-Pocket Maximum Insurance Timeline

When you purchase your health insurance policy, there will be an effective date when it starts. Once that date begins, any of your expenses for health care (doctors, hospital, therapy, prescriptions, etc.) will be paid by you and count towards your policy deductible.

Then, after you reach your deductible, your plan will start to pay some healthcare costs based on your coverage. Be sure to understand your portion of health care costs in coinsurance and copays. All of those will then count towards your out-of-pocket maximum. Once your out-of-pocket maximum is reached, your policy will pay for 100% of your remaining costs for the rest of the policy period.

Phase 1: Before You Reach Your Deductible

You will pay any healthcare-related costs in full. For example, if you go to the doctor and receive a bill for $100 and need a prescription for $20, you will pay a total of $120. You will then have paid $120 of your deductible amount.

Phase 2: After You Meet Your Deductible Amount

Once your deductible is met, you will start sharing the health care costs with your insurance company. Whether this is in the form of a copay or coinsurance, you pay a portion out-of-pocket until you meet your out-of-pocket maximum.

Phase 3: After You Reach Your Out-of-Pocket Maximum

After you have reached the out-of-pocket maximum, the insurance company will pay 100% of your remaining healthcare costs incurred during the rest of the policy period. Remember, your deductible and out-of-pocket maximum will reset at the beginning of the following plan year.

How to Save on Healthcare Costs

A lower deductible, a lower out-of-pocket maximum, and a lower copay or coinsurance will generally cost you more each month. If you expect to need significant medical care in the next year, these higher monthly fees may be worth it.

If you are young and healthy, you may want to choose a plan with lower monthly payments. However, you will have higher deductibles, out-of-pocket maximums, copayments, or coinsurance.

Comparing quotes is the best way to save money on healthcare costs. And be sure to look at more than just the monthly premium. Pay attention to the deductible, coinsurance, copays, and out-of-pocket maximum.

Track Your Expenses for Your Taxes

You might be able to deduct a portion of your out-of-pocket medical expenses from your taxes if your out-of-pocket medical costs make up more than 10% of your annual gross income. Keep track of all your health care costs with a spreadsheet or receipts.

Choose Outpatient Care if It’s an Option

If you need to have a procedure done, and it can be done as an outpatient option, choose to do so. The longer you are in a medical facility, the more it will cost. If you have not met your out-of-pocket maximum, you are better off trying to save money this way.

Always Use In-network Providers

As mentioned above, out-of-network medical providers don’t count toward your out-of-pocket maximum. Be sure to check with your insurance plan before seeing any new doctor or other practitioners. If you don’t, you could end up paying a hefty bill out-of-pocket which would be unfortunate if it didn’t count toward your out-of-pocket maximum.

Check Your Prescription Medication Options

Prescription drugs can truly break the bank. Ask your provider if there is a generic option for your medications. Sometimes you can save money by using a mail-order prescription company or by filling your prescription for a higher number of days at a time. Be sure to also check for prescription savings cards or coupons.

Purchase Catastrophic Coverage

You may be able to benefit from catastrophic coverage if you are relatively healthy and expect to remain that way. The low premiums and high deductibles of this type of plan make it an attractive option. Young, single people with no children are best suited for this type of coverage.