How the Out-of-Pocket Maximum Works

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

The health insurance out-of-pocket maximum is the largest amount of money you'll have to pay toward the cost of your health care 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 health care for the remainder of that year (note that Original Medicare doesn't have an out-of-pocket maximum, so the information in this article doesn't apply to Original Medicare).

A person settling his family's medical bill
 Sturti / Getty Images

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. You’re taken to surgery that night. Your surgical site becomes infected. You’re hospitalized for a week, 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%).
  • 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 healthcare 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 healthcare services later in the year.
  • Without an out-of-pocket limit, you'd pay the 20% coinsurance.
  • With the out-of-pocket limit, you pay nothing, because you've already met your out-of-pocket maximum for the year.

This example makes it obvious how important an out-of-pocket maximum is. Without it, you'd continue paying a percentage of your medical costs forever. But since virtually all health plans have out-of-pocket caps, people with extensive medical needs end up getting 100% coverage from their health plans at some point during the year, and don't have to start over again on out-of-pocket costs until the next year.

Out-Of-Pocket Rules Varied Considerably Prior to 2014

In the example above, 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 implemented federal caps on out-of-pocket costs, 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 health care 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. Not including the deductible in the out-of-pocket maximum. The first technique made it harder for you to reach the limit by not crediting all of your medically necessary expenses toward the out-of-pocket maximum. 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. Continuing to require copays after the out-of-pocket maximum was met. In the second technique, the insurer didn’t pay 100 percent of your healthcare 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% 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. [Note that Medicare Part D does not have an out-of-pocket maximum, and that's true regardless of whether the plan is purchased on its own or integrated with a Medicare Advantage plan. So although Medicare Advantage plans are required to cap out-of-pocket costs at no more than $6,700 (increasing to $7,550 in 2021), that does not include the cost of medications; the ACA did not change this.]
  1. Multiple out-of-pocket maximums within the same policy. 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% 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% of your non-drug healthcare 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.

As noted above, there is still no cap on out-of-pocket costs under Original Medicare or Medicare Part D. Most Medicare Advantage plans have integrated Part D coverage, but enrollees' drug costs do not count towards the plan's out-of-pocket limit. This is different from how out-of-pocket limits work for non-Medicare plans: Since prescription drugs are an essential health benefit, out-of-pocket costs for them are counted towards the plan's out-of-pocket maximum on non-Medicare policies.

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 (the limit is indexed each year in the annual Notice of Benefit and Payment Parameters, published by HHS). 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% of costs for covered essential health benefits from in-network providers for the rest of the year once the out-of-pocket limit has been reached (note that although non-grandfathered employer-sponsored large group plans are not specifically required to cover essential health benefits, they are required to cap out-of-pocket costs for any essential health benefits that they do cover, and most large group plans opt to cover all or most of the essential health benefits). This requirement eliminates technique number two.

And the ACA also requires plans to have one out-of-pocket maximum that applies to all essential health benefits, so separate out-of-pocket maximums for prescription drugs are not allowed—eliminating technique number three (as noted above, this does not apply to prescription drug coverage under Medicare Advantage plans).

In 2020, non-grandfathered health plans cannot have out-of-pocket maximums in excess of $8,150 for a single individual, or $16,300 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 $8,150). As is always the case, health plans can have out-of-pocket limits well below these amounts (and many do), but not above them.

For 2021, the maximum allowable out-of-pocket limits are $8,550 for an individual and $17,100 for a family. 

The ACA also created a health insurance subsidy that lowers the out-of-pocket maximum for eligible people of modest means. This benefit, called a cost-sharing reduction, is no longer being funded by the federal government but is still available to all eligible enrollees who purchase individual/family silver health plans in the exchange.

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 fully comply with the out-of-pocket rules 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. ​In states that still allow them to exist, ​grandmothered plans can also continue to use their pre-ACA 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.
  • Services for which you failed to properly obtain prior authorization, even if they're considered medically necessary and would otherwise have been covered.
  • The balance-billed portion and cost-sharing for out-of-network health care (even if your health plan covers out-of-network care, the out-of-pocket rules don't apply; the insurer can impose a much larger out-of-pocket cap on services that are obtained outside the network, or can choose to have no out-of-pocket cap at all for those services).
  • 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.

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Article Sources
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