How the Subsidy for Your Out-Of-Pocket Maximum Works

Cost-sharing subsidies are included on silver plans if you're eligible

Image © Youra Pechkin/Getty Images

Buying health insurance is expensive, and paying the monthly premium isn’t the only cost involved with health insurance. You also have to pay deductibles, copayments, and coinsurance when you use your health insurance. These additional out-of-pocket costs, known as cost sharing, can add up to thousands of dollars per year.

The Affordable Care Act created health insurance subsidies to make buying and using health insurance more affordable for people with low and modest incomes. There are two types:

  1. Subsidies that reduce your monthly health insurance premiums so buying health insurance is more affordable. Learn more about this in, “How Does the Health Insurance Subsidy Work—Understanding the Premium Tax Credit.”
  2. Subsidies that help pay out-of-pocket costs like deductibles, copayments, and coinsurance. These are known as cost-sharing subsidies, or cost-sharing reductions. They come in two parts, although both parts are automatically incorporated into silver plans for eligible enrollees:
  3. Part two reduces your out-of-pocket maximum so you pay less when your health care expenses are high.

What Is the Out-Of-Pocket Maximum?

The out-of-pocket maximum, or the out-of-pocket limit, is the worst-case-scenario maximum amount you’ll have to pay toward cost-sharing expenses like your deductible, copayments, and coinsurance each year. Once you’ve paid enough in deductible, copayments and coinsurance to have reached the out-of-pocket maximum, your health insurance pays all your covered healthcare expenses for the rest of the year.

If you don’t use your health insurance much, your cost-sharing expenses won't reach the out-of-pocket limit. However, if you have an expensive chronic health problem or even a single catastrophic illness or injury, you could easily pay enough in coinsurance and deductible costs to reach the out-of-pocket maximum.

For example, if you fall off of a ladder and break your hip while trimming a tree, your share of the emergency room, surgery and hospitalization costs could exceed $10,000 if your health insurance policy doesn’t have an out-of-pocket limit.

However, if your health insurance policy has an out-of-pocket limit of $6,000, you stop paying once you’ve paid $6,000 toward your health care bills. After that, your  health insurance pays 100 percent of your health care bills for the rest of the year. You would pay $6000 rather than $10,000. If you needed more care later in the year, your health plan would pay the entire cost.

Prior to 2014, health plans were not required to incorporate a maximum out-of-pocket limit. Most plans did, although there was considerable variation in terms of how high the limits were from one plan to another. And some plans simply didn't cap out-of-pocket exposure at all.

That's no longer the case thanks to the ACA. With the exception of grandmothered and grandfathered plans, all plans have to cap out-of-pocket costs at no more than $6,850 for an individual in 2016 (the family limit is twice as high as the individual limit), although it will be increasing again for 2017 (the ACA's requirements do not extend to Medicare; people who have Original Medicare coverage do not have a limit on their out-of-pocket costs, which is why most Medicare enrollees have supplemental coverage, either by enrolling in Medicare Advantage instead of Original Medicare, or by purchasing a Medigap plan).

What Isn’t Included in the Out-Of-Pocket Maximum?

The out-of-pocket maximum doesn’t include your monthly health insurance premiums. It doesn’t include expenses for things that aren’t covered by health insurance or aren't essential health benefits. For example, if your health insurance doesn’t cover acupuncture services, your acupuncture expenses won’t count toward your out-of-pocket maximum. It doesn’t include the balance-billed portion of care you got from an out-of-network health care provider. Learn more in "What Doesn't Count Toward Your Out-of-Pocket Limit?"

How Much Is the Out-Of-Pocket Maximum Before the Subsidy?

All individual and family health insurance policies bought through the Affordable Care Act’s health insurance exchanges must have an out-of-pocket limit. The federal government regulates how high that limit can be, and the allowed amount changes each year.

For 2016, the out-of-pocket maximum can’t be more than about $6,850 for an individual or $13,700 for a family. A health insurance policy can, however, have an out-of-pocket limit lower than that.

How Much Does the Health Insurance Subsidy Reduce the Out-Of-Pocket Maximum?

How much the subsidy reduces your out-of-pocket limit depends on your income. The closer your income is to the federal poverty level (FPL), the more your out-of-pocket maximum will be reduced. FPL changes each year and varies depending on family size and where you live (Alaska and Hawaii have different FPLs).

The FPL used to determine your 2016 subsidy is $11,770 for an individual, $15,930 for a couple, and $20,090 for a family of three. You can find the FPL for other years and family sizes here.

Since both FPL and the federal limit on out-of-pocket maximum amounts change each year, the dollar amount of your reduction will change each year.

In order to benefit from the subsidy that reduces your out-of-pocket exposure, you must enroll in a silver plan through the exchange. Assuming you select a silver plan, for 2016 subsidies, if your income is:

  • 100-200 percent of FPL,
    • your out-of-pocket limit won’t be more than $2,250 for an individual.
    • your out-of-pocket limit won’t be more than $4,500 for a family.
  • 200-250 percent of FPL,
    • your out-of-pocket limit won’t be more than $5,450 for an individual.
    • your out-of-pocket limit won’t be more than $10,900 for a family.

For 2017, the out-of-pocket limit for applicants with income between 100 and 200 percent of FPL will increase slightly, to $2,350, while the out-of-pocket limit for people with income between 200 and 250 percent of FPL will increase to $5,700 (in both cases, the maximum family limit is twice the individual limit).

A special reduction is available for Native American Indians with incomes below 300 percent of FPL. In their case, the health insurer will eliminate all cost sharing for any of the essential health benefits.

If It’s a Subsidy, Do You Get Money?

The out-of-pocket maximum subsidy doesn't actually give you money. Instead, it potentially saves you money since you pay less before reaching your out-of-pocket maximum.

If you reach that reduced out-of-pocket maximum and continue to use health care services, your health insurance company will end up paying more for your care than if you hadn’t received the subsidy. In that case, the federal government will reimburse your health insurance company for the extra money it spent because of your subsidy.

Who Is Eligible for the Out-Of-Pocket Maximum Health Insurance Subsidy?

To be eligible for this subsidy:

  • Your income must be 100-250 percent of FPL.
  • You must get your health insurance through your state’s health insurance exchange.
  • You must choose a silver-tier health plan (unlike premium subsidies, which are calculated based on silver-tier plans, but available to be used on all metal level plans)
  • If you’re married, your tax filing status must be married filing jointly. A status of married filing separately will disqualify you. (There's a special exception if you can't file jointly due to domestic abuse circumstances.)
  • You must reside in the United States legally.
  • You can’t be incarcerated.
  • You must not be eligible for coverage from your employer that is considered affordable and provides minimum value.

How Do You Apply for This Subsidy?

You don't have to do anything extra to get the cost-sharing subsidy. If you're eligible for it based on your income, it will automatically be incorporated in the silver plans that are available to you through the exchange.

Your eligibility for premium subsidies and cost-sharing subsidies will be calculated by the exchange when you enter your personal information in their system. Be prepared to give the health insurance exchange information about your income, family size, and employer if you have a job. Find your state’s health insurance exchange.

Except for special circumstances, you can only buy health insurance through the health insurance exchange during the yearly open enrollment period. Open enrollment to get health insurance for 2017 runs from November 1, 2016 through January 31, 2017 (this applies to health insurance that you buy for yourself, as opposed to coverage that you get from an employer).

If you get the reduced out-of-pocket maximum subsidy, make sure to notify your health insurance exchange if your income changes during the year. If your income decreases, you may be eligible to have your subsidy adjusted to further reduce your out-of-pocket maximum.

How the Out-Of-Pocket Subsidy Rules and Amounts Changed

The Affordable Care Act originally stipulated that the out-of-pocket limit be reduced by

  • 2/3 for people with incomes from 100-200 percent of FPL.
  • 1/2 for people with incomes from 200-300 percent of FPL.
  • 1/3 for people with incomes from 300-400 percent of FPL.

However, that’s not how it ended up working. The Department of Health and Human Services determined it would be impossible to discount the out-of-pocket maximum that much for people making more than 250 percent of FPL without violating other parts of the law or causing an increase in the deductible for some subsidy recipients. So, in the final rule fleshing out how the subsidy works, HHS changed those figures to reduce the out-of-pocket maximum by about:​

  • 2/3 for people with incomes from 100-200 percent of FPL
  • 1/5 for people with incomes from 200-250 percent of FPL
  • No reduction for people with incomes above 250 percent of FPL.

HHS can make adjustments to these amounts each year when it publishes its “Notice of Benefit and Payment Parameters” for the coming year.

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Article Sources

  • The Patient Protection & Affordable Care Act, section 1402 (c). Accessed September 9, 2013.
  • Actuarial Value and Cost-Sharing Reductions Bulletin, Department of Health and Human Services,
  • Jost, Timothy, “Implementing Health Reform: The Benefit and Payment Parameters Final Rule” accessed on, September 9, 2013.
  • Sources:
  • The Notice of Benefit and Payment Parameters for 2014, Department of Health and Human Services, Accessed September 10, 2013.
  • Department of Health and Human Services, The Notice of Benefit and Payment Parameters for 2016, Accessed June 6, 2016.
  • Department of Health and Human Services, The Notice of Benefit and Payment Parameters for 2017. Accessed June 6, 2016.