How the Out-of-Pocket Maximum Works

Out-of-Pocket Max: How It Works and How the ACA Regulates It

Man falling through a safety net.
Your health insurance out-of-pocket limit is your safety net. Does it really offer the protection you expect?. Image © Mick Wiggins/Ikon Images/Getty Images

The health insurance out-of-pocket maximum is the largest amount of money you'll have to pay toward the cost of your healthcare each year, assuming you receive care that's covered by your insurance plan and use in-network hospitals and doctors.

After you’ve paid enough in deductibles, co-pays and coinsurance to reach your out-of-pocket maximum, your health insurance company pays for all of the rest of your in-network, medically necessary healthcare for the remainder of that year.

But, it doesn’t always work that way. Although the out-of-pocket maximum is designed to limit your financial risk when you have high healthcare costs, it exposes your health insurance company to more financial risk. So, health insurance companies 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.

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 percent, and an out-of-pocket limit of $5,000 per year.

You break your ankle. 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 (20 percent).
    With an out-of-pocket limit, you pay only $3,400. You've reached your out-of-pocket maximum and you stop paying (the $5,000 total comes from your $1000 deductible, $600 coinsurance for the ER visit, and $3,400 coinsurance for the hospital bill).
     
  • 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'd pay the 20 percent coinsurance.
    With the out-of-pocket limit, you pay nothing.

Out-Of-Pocket Rules Varied Considerably Prior to 2014

Your out-of-pocket limit of $5,000 saved you a lot of money, but it cost your health insurance company as much as it saved you.

Before the Affordable Care Act began regulating out-of-pocket limits, some health insurers used different strategies to keep their costs (and premiums) as low as possible. These adjustments shifted more of the cost of your healthcare on you: you pay more, and they pay less. Insurers used three basic techniques to do this, none of which are allowed any longer, thanks to the ACA:

  1. The first technique made it harder for you to reach the limit by not crediting all of your expenses toward the out-of-pocket maximum. An insurer may have decided not to credit one or more of these toward the limit:
    • Deductible
    • Copayments
    • Coinsurance for drugs
    • Coinsurance for tests
    • Coinsurance for out-of-network care
    Let’s say your health plan’s rules didn’t credit the deductible toward your out-of-pocket maximum. If you had a $1,000 deductible and a $5,000 out-of-pocket maximum, you’d actually have to pay $6000 before your insurer started picking up 100 percent of the costs. A 2013 study by HealthPocket showed 38 percent of privately purchased health plans didn’t credit the deductible toward the out-of-pocket maximum.
     
  2. In the second technique, the insurer didn’t pay 100 percent of your health care costs after you reached your out-of-pocket limit.

    For example, a health plan may have required that you continue to pay a copay each time you see the doctor even though you’d already reached the out-of-pocket maximum. In this case, reaching the maximum would have protected you from paying coinsurance for the rest of the year, but not from paying copays.

    Learn the difference between copays and coinsurance.

    Some health plans excluded prescription drug coinsurance from the out-of-pocket maximum. In this case, you’d have to continue paying your share of the prescription costs even after you’d reached your out-of-pocket limit. If you had a coinsurance of 30 percent for drugs, and you were on a high-priced biologic drug that costs $30,000 per year, you'd pay $9,000 for that drug even though you had a $5,000 out-of-pocket maximum.
     
  3. The third technique created separate out-of-pocket maximums for different parts of your health insurance coverage. The most common example had an out-of-pocket maximum for prescription drugs and a separate out-of-pocket maximum for everything else.

    After you reached the out-of-pocket limit for drugs, the insurer covered 100 percent of the cost of your prescriptions, but you continued to pay your share of non-drug costs. After you reached the out-of-pocket maximum for all other coverage, the insurer covered 100 percent of your non-drug health care costs, but you continued to pay your share of drug costs unless you’d also met the out-of-pocket maximum for drugs.

    The health insurance company didn’t cover 100 percent of your health care until you had reached both out-of-pocket limits. If each limit was $5,000, you paid $10,000 before the health plan started paying 100 percent.

The Affordable Care Act & Out-Of-Pocket Maximums

Not only were these risk-mitigation techniques confusing for consumers, but they also left people feeling like they'd been treated unfairly. After all, if you had an out-of-pocket maximum of $5,000, then why should you have had to pay $9,000 out-of-pocket for a prescription drug that was covered by your health plan? Lawmakers responded to this consumer frustration by regulating health insurance out-of-pocket limits.

The Affordable Care Act makes out-of-pocket maximums less complicated. It places a limit on how much the out-of-pocket maximum can be each year. It requires that deductibles, copays, and coinsurance all get credited toward the out-of-pocket limit. This requirement eliminates health insurers' risk-mitigation technique number one.

The ACA requires health plans to pay 100 percent of costs for covered care from in-network providers for the rest of the year once the out-of-pocket limit has been reached. This requirement eliminates technique number two.

In 2017, non-grandfathered health plans cannot have out-of-pocket maximums in excess of $7,150 for a single individual, or $14,300 for a family (and individual out-of-pocket limits must be embedded in family health plans, so a single member of the family cannot be required to pay more than $7,150).

The ACA also created a health insurance subsidy that lowers the out-of-pocket maximum for eligible people of modest means.

The subsidy and most of the ACA's consumer protections began on January 1, 2014. However, some large group health plans didn't have to comply until plan years beginning on or after January 1, 2015 (if they administered medical and prescription coverage separately, they were allowed to have separate out-of-pocket limits in 2014). And grandfathered plans don’t have to comply with all of the ACA’s rules, so they can continue to use their old rules regarding out-of-pocket maximums.

How Do I Protect Myself?

Don't get lulled into complacency because consumer protections are in place. There are still some costs you’ll be responsible for paying after meeting the out-of-pocket maximum. These include:

  • Things your health plan decides aren’t medically necessary.
  • The balance-billed portion and cost-sharing for out-of-network health care.
  • Things that aren’t covered by your health plan like cosmetic surgery.
  • Cost-sharing for things that aren't considered essential health benefits. These non-essential benefits are extra perks your health plan doesn't have to provide but chooses to.
  • Your health insurance premiums.

Each health plan provides a Summary of Benefits and Coverage or a summary Plan Description that details what the out-of-pocket limit is as well as what does and doesn’t get credited for 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 as long as they're acting within the law and provide a clear explanation of a policy's terms. The burden is on you to make sure you fully understand the rules of your health plan. You need 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.

Updated by Louise Norris.

Sources:

Centers for Medicare and Medicaid Services, Affordable Care Act Implementation FAQs Set 18.

Department of Health and Human ServicesPatient Protection and Affordable Care Act; Standards Related to Essential Health Benefits, Actuarial Value, and Accreditation. February 25, 2013.

United States Department of Labor. FAQs about Affordable Care Act Implementation Part XII. February 20, 2013.

United States Department of Labor. FAQs about Affordable Care Act Implementation (Part XVIII) and Mental Health Parity Implementation, January 9, 2014.

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