Why are health insurance out-of-pocket maximums going up again?

The maximum out-of-pocket will 12.6% higher than it was in 2014

The out-of-pocket maximum on your health insurance plan could go up in 2017
Since 2014, there's been a cap on health plans' out-of-pocket maximum. It will increase again in 2017.. Geri Lavrov/Creative RF/Getty Images

If you have a health plan that's compliant with the Affordable Care Act (ACA), your out-of-pocket maximum is $6,850 in 2016. If you have more than one person your plan, the combined family out-of-pocket maximum can't exceed $13,700, although the plan must have an embedded individual out-of-pocket maximum that can't exceed $6,850. 

It's important to understand that your plan's maximum out-of-pocket can be lower than these amounts...

it just can't be higher (unless you have a grandfathered or grandmothered plan). So you might have a policy with a $1,000 deductible and a maximum out-of-pocket of $4,000. That's within the guidelines of the regulations, and is quite common, depending on the metal level of the plan (bronze plans tend to have the highest out-of-pocket maximums - often at the highest possible level - while gold and platinum plans tend to have the lowest out-of-pocket maximums, typically quite a bit lower than the maximum allowable level).

A higher out-of-pocket maximum in 2017

In February 2016, the Department of Health and Human Services (HHS) released Benefit and Payment Parameters for 2017. In it, HHS addressed a wide range of issues, including out-of-pocket maximum limits.

For 2017, HHS has set the out-of-pocket maximum at $7,150 for an individual, and $14,300 for a family (embedded individual out-of-pocket maximums will still be required on family plans).

Again, there will be plenty of plans available with lower out-of-pocket maximums. But no new plans will be able to have out-of-pocket maximums above this level.

For perspective, the out-of-pocket maximum in 2014 - the first year that ACA-compliant plans were available - was $6,350 for an individual, and $12,700 for a family.

By 2017, the out-of-pocket maximum will have increased by 12.6% since 2014.

Why does the out-of-pocket maximum increase each year?

Essentially, it's a method of keeping premiums in check, and keeping up with medical inflation. HHS uses a formula that compares the average current annual per-enrollee health insurance premium for employer-sponsored plans ($6,076 in 2016), with the average annual per-enrollee health insurance premium for employer-sponsored plans in 2013 ($5,365).

In this case, we take 6076 - 5365 = 711. We then take 711 divided by 5365 to see the percentage increase in average per-enrollee premiums for employer-sponsored plans. We get 0.1325256291, or about 13.25%.

Now we take the initial out-of-pocket maximum that was established for 2014 ($6,350), and increase it by 13.25%. We end up with about $7,191. 

But there's a provision in the regulation that requires HHS to round down to the nearest $50, so the result is rounded down to $7,150.

In a nutshell, the idea is that average employer-sponsored premium have increased by about 13.25% from 2013 to 2016, so out-of-pocket maximums must also increase by roughly the same percentage from 2014 to 2017 (because they round down, the effective increase in out-of-pocket maximums is only about 12.6% instead).

With this formula, it's also possible that out-of-pocket maximums could decline from one year to the next, if average employer-sponsored premiums declined. 2017 will be only the fourth year of having mandated limits on out-of-pocket maximums (before 2014, insurers were free to set their out-of-pocket maximums as they saw fit). And although out-of-pocket maximums have increased each year thus far, there's no rule that says they will continue to do so every year.

What does out-of-pocket maximum mean?

A plan's out-of-pocket maximum (also referred to as maximum out-of-pocket) is the total amount that the patient would have to pay in a given year for in-network treatment that's classified as essential health benefits. If you receive care outside your plan's network, the out-of-pocket maximum can be higher, or it can be unlimited.

As long as you stay in-network and receive care that's covered under your health plan, your total spending for the year will be capped at no more than $6,850 in 2016. That includes a combination of your

  • deductible (the amount you pay before most benefits kick in) 
  • copays (the smaller amount that you pay to see a doctor, fill a prescription, visit a specialist, go to the emergency room, etc), and
  • coinsurance (the percentage of the claim that you pay after you've paid your deductible, but before you've met your out-of-pocket maximum).

Not all plans include all three of those areas of spending. For example, an HSA-qualified High Deductible Health Plan typically won't include copays, but will have a deductible and may or may not have coinsurance (in some cases, the deductible on the HDHP is the full out-of-pocket maximum, while other HDHPs will have a deductible plus coinsurance in order to reach the out-of-pocket maximum).

Once you've reached the out-of-pocket maximum for the year, your health plan will pay 100% of your in-network, covered costs for the remainder of the year. But if you switch plans mid-year (as a result of a qualifying event that triggers a special enrollment period), your out-of-pocket costs will start over with the new plan. And even if you keep the same plan year after year, your out-of-pocket costs will start over at the start of each year. 

The ACA's requirement that health plans cap out-of-pocket costs applies to individual and group plans, including large group plans. But grandfathered plans are exempt, as are grandmothered individual and small group plans. Large group plans are not required to cover the ACA's essential health benefits, but to the extent that they do, they cannot require the member to pay more in out-of-pocket costs than the annual maximum that applies for that year. 

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