Deductible vs. Out-of-Pocket Maximum: What’s the Difference?
The deductible is the amount you must pay for healthcare before insurance coverage begins, while the out-of-pocket maximum is the maximum amount you have to pay for covered services in a given period, after which insurance covers 100% of eligible expenses.
Until you meet your health insurance policy’s deductible, you must pay the full cost of medical services out of pocket. For example, if your deductible is $1,500, your insurance coverage will only take effect once you have paid $1,500 out of pocket for covered healthcare services. Your deductible will reset to $1,500 at the beginning of each year.
After meeting your deductible, you must still pay coinsurance and copays until you reach your policy’s maximum out-of-pocket costs (MOOP). The expenses used to meet your deductible count toward your out-of-pocket maximum, as do copays most of the time. (Some commercial insurance plans do not count the copay towards the MOOP.) Premiums do not.
After you hit your MOOP limit, your insurance policy will pay for 100% of all covered healthcare services, but you must continue paying your plan’s premium.
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The Importance of Understanding Your Policy’s Cost Components
Health insurance policies differ in what they cover, how much coverage they provide, and which health providers are in-network. If you do not understand your policy’s specific cost components, you could end up with unexpected or unnecessary healthcare expenses.
Your health policy’s terms determine your deductible, out-of-pocket maximum, copayments, coinsurance, premium, and network — all of which are vital to understand so you can use your policy effectively. Knowing the terms of your deductible and MOOP can help you plan and budget for medical services.
For example, you can expect to pay more out of pocket for healthcare toward the beginning of the calendar year since your deductible resets every 12 months. Understanding your deductible can help you budget each year.
Deductible vs. Out-of-Pocket Maximum
Deductible | Out-of-Pocket Maximum | |
|---|---|---|
Types | – Individual – Embedded family deductible – Aggregate family deductible | – Individual – Family |
Cost | – Up to $7,050 (individual) – Up to $14,100 (family) | – Up to $9,100 (individual) – Up to $18,200 (family) |
Relationship to Premium | Lower deductible plans tend to have higher monthly premiums, and vice versa. | Plans with lower MOOP limits tend to have higher monthly premiums, and vice versa. |
Impact on Insurance | You must meet your deductible before your policy’s coverage kicks in. Some exceptions apply. | After you hit your plan’s MOOP limit, your policy will pay for 100% of all covered health expenses. You will only have to pay your premiums. |
What Applies? | Expenses related to: – Certain medical devices – Hospitalization – Lab Tests – Prescriptions (varies by plan) – Scans – Surgery | – All out-of-pocket expenses applied toward deductible – Copays (in some circumstances) |
What Does Not Apply? | – Copays – Health expenses not covered by your plan – Out-of-network healthcare and services – Plan premiums | – Health expenses not covered by your plan – Out-of-network healthcare and services – Plan premiums |
What Is a Deductible?
A deductible defines the amount you must pay out of pocket for covered medical services before your insurance plan starts to pay for expenses. Your deductible may only apply to some services; for example, many plans pay for checkups and other preventative benefits before you meet your deductible. For all other benefits, however, you must pay 100% of the cost out of pocket until you have spent the amount specified by your deductible.
How Does It Work?
Deductibles vary among insurance policies; plans with higher deductibles tend to have lower monthly premiums.
Most covered healthcare expenses apply toward your deductible, but copays, monthly premiums, and out-of-network care and services do not. Once you’ve spent enough out of pocket to meet your deductible, your insurance policy will start covering health expenses according to your plan’s terms. You must pay copays and coinsurance until you’ve hit your MOOP limit.
Your deductible resets at the end of every plan year.
What Is an Out-of-Pocket Maximum?
Your out-of-pocket maximum determines the most you will have to pay for covered health services during a plan year. After you reach your MOOP limit, your policy should pay for 100% of all covered health expenses and bills until the end of the plan year.
MOOP limits vary, but the federal Health Insurance Marketplace caps MOOP amounts for participating plans. For the 2023 plan year, the out-of-pocket maximum for a Marketplace plan cannot exceed $9,100 for an individual plan or $17,400 for a family plan.
How Does It Work?
Out-of-pocket limits protect beneficiaries in worst-case scenarios where they need extensive (and expensive) medical care. As such, MOOP limits tend to be high. For people earning 400% of the federal poverty level (FPL), the average out-of-pocket maximum was equal to 9.1% of their annual income. This percentage increases as income decreases; for those living in poverty, the average MOOP limit was 36.4% of their annual income.
While copays and coinsurance do not count toward your deductible limit, they do apply toward your out-of-pocket maximum. Premiums, however, do not, and you must continue paying monthly premiums even after reaching your out-of-pocket limit. Like deductibles, MOOP limits reset at the end of each plan year.
Types of Deductibles vs. Out-of-Pocket Maximums
Deductible | Out-of-Pocket Maximum | |
|---|---|---|
Types | – Individual – Embedded family deductible – Aggregate family deductible | – Individual – Family |
Deductibles fall into two main categories: individual and family. Individual deductibles are straightforward; the deductible applies to the sole policyholder and any qualifying healthcare payments they make count toward their deductible.
Family deductibles are more complex and can be either aggregate or embedded. An aggregate deductible applies one deductible amount to all of the family members on an insurance plan, whose out-of-pocket medical expenses all apply toward the aggregate deductible.
With an embedded deductible, you might have a family deductible plus individual deductibles for each beneficiary on the family plan. When any beneficiary meets their individual deductible, the plan’s coverage kicks in for that person only. When the whole family meets their family deductible, the plan starts covering expenses for all beneficiaries on the plan.
Out-of-pocket limits function similarly. On an individual plan, the beneficiary simply has to meet their out-of-pocket max before the plan starts covering 100% of medical costs. A family plan, however, might feature both a family MOOP limit and individual out-of-pocket maximums.
Cost of Deductibles vs. Out-of-Pocket Maximums
Deductible | Out-of-Pocket Maximum | |
|---|---|---|
Cost | – Up to $7,050 (individual) – Up to $14,100 (family) | – Up to $9,100 (individual) – Up to $18,200 (family) |
Plans with higher deductibles and out-of-pocket limits tend to have lower monthly premiums. Likewise, you can expect to pay more for your monthly premium to get a plan with a low deductible and out-of-pocket maximum.
If you are pregnant, have a chronic condition, or need regular medical attention for any other reason, it may be cheaper in the long term to pay a higher monthly premium for a lower deductible and MOOP limit as this allows your plan to start covering your health expenses more quickly.
Deductible vs. Out-of-Pocket Maximum Relationship to Insurance Premiums
Deductible | Out-of-Pocket Maximum | |
|---|---|---|
Relationship to Premium | Lower deductible plans tend to have higher monthly premiums, and vice versa. | Plans with lower MOOP limits tend to have higher monthly premiums, and vice versa. |
Remember that your plan’s monthly premium does not count toward its deductible or out-of-pocket maximum. Even after you’ve reached both of these limits, you must continue paying your plan’s premium.
Generally speaking: The lower your plan’s deductible and out-of-pocket maximum, the higher its monthly premium —and vice versa. Some people would prefer to pay less month-to-month but more up-front for care when they need it. Others feel more secure paying higher premiums each month in exchange for more robust healthcare coverage.
Deductible vs. Out-of-Pocket Maximum Impact on Insurance
Deductible | Out-of-Pocket Maximum | |
|---|---|---|
Impact on Insurance | You must meet your deductible before your policy’s coverage kicks in. Some exceptions apply. | After you hit your plan’s MOOP limit, your policy will pay for 100% of all covered health expenses. You will only have to pay your premiums. |
Deductibles and out-of-pocket limits greatly impact an insurance policy since they determine both the price of your premium and how much you must pay for healthcare. While your deductible remains unmet, you must pay 100% of covered medical expenses unless your plan specifies otherwise.
Even after you meet your deductible, copays can add up over time if you require frequent care. That’s where your out-of-pocket maximum comes in — copays apply toward your MOOP, and once you hit that limit, your plan should pay for all covered health expenses.
What Counts Toward the Deductible vs. Out-of-Pocket Maximum?
Deductible | Out-of-Pocket Maximum | |
|---|---|---|
What Applies? | Expenses related to: – Certain medical devices – Hospitalization – Lab Tests – Prescriptions (varies by plan) – Scans – Surgery | – All out-of-pocket expenses applied toward deductible – Copays (in some circumstances) |
What Does Not Apply? | – Copays – Health expenses not covered by your plan – Out-of-network healthcare and services – Plan premiums | – Health expenses not covered by your plan – Out-of-network healthcare and services – Plan premiums |
You can meet your deductible by paying out of pocket for covered healthcare and services. These may include expenses associated with hospital stays, lab tests, surgery, and medical equipment. Prescription drugs sometimes count toward your deductible, too, but some plans set separate deductibles for prescriptions. Copays and coinsurance do not apply toward your deductible.
Your deductible counts toward your out-of-pocket maximum. Say you have a $1,000 deductible and a $2,000 out-of-pocket maximum; once you spend $1,000 on qualifying medical services, that amount also counts toward your MOOP.
Remember, however, that copays apply toward your out-of-pocket limit but not your deductible, and many plans cover certain health services even before the deductible is met. If you pay copays for those covered services, you could approach your out-of-pocket maximum before meeting your deductible.
How Do High Deductible Plans Impact Out-of-Pocket Maximums?
High deductible health plans (HDHPs) set higher deductible amounts than traditional insurance plans. As of the 2023 plan year, the IRS defines a high deductible as $1,400 for an individual plan or $2,800 for a family plan.
High deductibles come with high out-of-pocket limits. The IRS caps out-of-pocket expenses for HDHPs at $7,050 and $14,100 for individual and family plans, respectively. Out-of-network medical costs do not count toward these MOOP limits.
HDHPs are often paired with health savings accounts (HSAs), which allow you to set aside pretax income for eligible medical expenses. Many employers offering employer-sponsored health plans make HSA contributions to sweeten the deal for employees with HDHPs. In some cases, employer HSA contributions can help you meet your high deductible without breaking the bank.
Since high deductible health plans require more out-of-pocket spending before coverage takes effect, they best serve people who are relatively healthy and need infrequent medical care.
Ways to Save on Healthcare Costs
Depending on your circumstances, healthcare can be expensive. But, thankfully, there are ways to save:
- Open a flexible spending account or an HSA if you can. These accounts can help you save on overall healthcare expenses by setting aside pretax income to pay for them.
- Switch to generic prescription drugs wherever possible. Generic medicines use the same active ingredients as their name-brand counterparts but typically cost less.
- Use your benefits for preventative services to catch any health conditions early and save on treatment in the long run.
- For surgeries and other medical procedures, consider seeking treatment at an outpatient facility rather than a hospital. Outpatient clinics are often cheaper.
- Make sure to see in-network healthcare providers.
Putting It All Together
Your health plan’s deductible determines how much you’ll have to pay out of pocket for covered medical services before your coverage takes over and starts paying. And once you hit your out-of-pocket maximum, you’ll no longer have to pay copays or coinsurance, either, and your plan will cover 100% of eligible healthcare expenses.
Plans with lower deductibles and MOOPs tend to have higher monthly premiums, but they provide more cost-effective coverage to beneficiaries who need regular care. Alternatively, high-deductible health plans with lower premiums and HSAs can lead to savings for healthy people requiring infrequent care.
Whether you’re choosing a new health plan or reviewing the terms of your current one, understanding the deductible and out-of-pocket maximum can help you understand the boundaries of your coverage so you can plan and budget accordingly.