Catastrophic Health Insurance Overview

Nurses and doctors wheeling a patient on a gurney

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Catastrophic health insurance is a specific type of health coverage defined under the Affordable Care Act. Prior to the ACA, "catastrophic coverage" was a generic term that referred to any sort of health plan with high out-of-pocket costs and limited coverage for routine health needs. But the ACA created catastrophic health plans as a new type of plan available in the individual market. As defined by the ACA, catastrophic plans are not available as employer-sponsored coverage.

Catastrophic plans: What They Cover and How They Work

Catastrophic plans will serve as a financial safety net in case you have very high medical costs during the year. They also include the same fully covered preventive care benefits that all ACA-compliant plans provide, as well as three non-preventive office visits per year that are covered with copays.

And although most services are counted towards the deductible until you meet it, essential health benefits are covered on all catastrophic plans ("covered" means that the costs count towards the deductible until you meet it, and then the health plan pays for the rest of your essential health benefits needs for the remainder of the year).

But other than specific preventive care and up to three non-preventive office visits, you have to meet your deductible before your catastrophic health plan will start to pay for your care (although you will be able to pay the health plan's negotiated rates during this time, instead of having to pay the full amount that the medical provider bills).

And the deductible on a catastrophic health plan is so high that most enrollees don't meet it in a given year. It's equal to the annual out-of-pocket maximum, so for 2020 health plans, it's $8,150. That means there's no coinsurance on catastrophic plans—once you hit the deductible, the plan will start to pay for 100% of your covered services for the rest of the year.

So if you do end up with a year where you have very high medical costs, your catastrophic plan will kick in and start to pay your expenses. And racking up more than $8,150 in medical costs is much easier than you might think it would be. Any sort of inpatient hospital care is almost guaranteed to get you there, and so are a lot of outpatient procedures.

What Defines a Catastrophic Health Plan

Catastrophic health insurance offered on the Affordable Care Act’s health insurance exchanges (and outside the exchanges):

  • Limits who can enroll. Not everyone is eligible to buy a catastrophic plan.
  • Premium subsidies can't be used to help pay the monthly premiums.
  • Has a very high deductible, equal to the maximum allowable out-of-pocket limit. [The ACA requires the federal government to set a limit on how high health plans' out-of-pocket caps can be. It changes each year, so catastrophic health plans' deductibles change each year as well. In 2014, it was $6,350, but it's grown to $8,150 in 2020.]
  • Covers all of the essential health benefits, including certain preventive care with no out-of-pocket costs.
  • Covers three non-preventive primary care office visits each year with a copay (other than that, the member pays for their own costs until the deductible is met).

The deductibles on catastrophic health plans tend to be much higher than the deductibles on other plans, although it's common to see bronze plans with similar out-of-pocket maximums and deductible that are nearly as high (bronze plans often have slightly lower deductibles and then some level of coinsurance until the out-of-pocket maximum is reached, whereas the deductible on a catastrophic plan uses up the full out-of-pocket maximum).

Once you’ve paid enough out of your own pocket to meet the deductible, the catastrophic health plan will start paying for 100% of your covered health care expenses, as long as you stay in-network.

What’s a covered health care expense? A catastrophic plan has to cover the same essential health benefits that all of the other Obamacare health plans have to cover. For example, it must pay for medically necessary care like doctor visits, blood tests, maternity care, mental health care and substance abuse treatment. However, it won’t start paying for those benefits until you’ve paid your deductible.

There are two exceptions to that rule:

  • Catastrophic health insurance must pay for preventive health care even if you haven’t paid your deductible. This includes things like your yearly flu shot, screening mammogram, well-woman visit, and contraception.
  • Catastrophic health plans must pay for you to see your primary care provider three times per year without having to pay the deductible first. But they can require you to pay a copay for these visits.

Who Can Buy a Catastrophic Plan?

Only certain people qualify to buy catastrophic health insurance in the individual insurance market. You have to either be under the age of 30 or have a hardship exemption (which includes affordability exemptions) from the ACA's individual mandate penalty. The federal government has expanded the list of circumstances that make people eligible for hardship exemptions, so more people than ever before are able to purchase catastrophic plans.

And even though the federal penalty for being uninsured was eliminated after the end of 2018, an exemption is still necessary in order to buy a catastrophic plan if you're 30 or older. Here's the page on HealthCare.gov where you can find the exemption form.

Cost

If you’re eligible for a premium subsidy to help you pay your monthly health insurance premiums, you can’t use that subsidy with a catastrophic health plan. You have to pick a bronze, silver, gold, or platinum plan to use the subsidy.

Some bronze plans have deductibles nearly as high as catastrophic plans (and total out-of-pocket costs that are equal to those on catastrophic plans), but no coverage for non-preventive primary care visits before the deductible. Although premium subsidies can't be used on catastrophic plans, a healthy young person who doesn't qualify for premium subsidies might find a catastrophic plan to be a better deal than a bronze plan.

Although bronze plans tend to have out-of-pocket maximums that are the same as catastrophic plans, the catastrophic plans are generally less expensive. This is due in large part to the fact that catastrophic plans are pooled separately for risk adjustment calculations (here's the 2018 risk adjustment report; you can see that catastrophic plans only share risk adjustment dollars with other catastrophic plans). Bronze plans tend to be selected by fairly healthy applicants, but that means the insurers with significant bronze plan enrollment generally have to send money (via the risk adjustment program) to insurers that tend to enroll less healthy people, who may select silver, gold, or platinum health plans. But catastrophic plans, which also tend to be selected by young, healthy people, don't have to send risk adjustment money to balance out the risk in metal-level plans. This helps to keep prices lower for catastrophic plans.

Hidden Benefit of Catastrophic Health Insurance

Even if you don’t spend enough on health care to meet your catastrophic health plan’s deductible, you’ll still pay less on out-of-pocket medical expenses with a catastrophic plan than if you had no health insurance coverage at all. A catastrophic plan can be an HMO, PPO, EPO, or POS plan. These plans all negotiate discounted rates with the doctors, hospitals, labs, and pharmacies that are in their network of providers. As a subscriber to the catastrophic health plan, you get the benefit of these discounted rates even before you’ve paid your deductible.

Here’s an example. Let’s say you haven’t met your catastrophic plan’s $8,150 deductible yet. You injure your ankle and need an ankle X-ray. The rack rate for your X-ray is $200. Without your catastrophic health insurance, you’d have to pay $200 out-of-pocket. Now let's say that the in-network discount rate for health plan members is $98. Since you’re a member of the health plan using an in-network X-ray facility, you’ll only have to pay the $98 discounted rate. You’ll pay $102 less than you’d pay if you were uninsured.

Beware When Shopping for Catastrophic Health Insurance

It’s easy to make the mistake of thinking that a catastrophic health insurance plan is the same thing as a high deductible health plan (HDHP). After all, a catastrophic plan has a high deductible, so it must be a high deductible health plan, right?

Wrong.

A qualified HDHP is a very specific type of health insurance designed to be used with a health savings account. Learn the difference between an HDHP and a catastrophic plan, and what might happen if you buy a catastrophic plan when you thought you were buying an HDHP.

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  1. Norris L. What is the ACA’s catastrophic plan and who is eligible?. healthinsurance.org. January 1, 2020.

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