Why Do Health Insurance Out-of-Pocket Maximums Increase Each Year?

Proposed 2021 Maximum Out-of-Pocket Is 35% Higher Than It Was in 2014

If you have a health plan that's compliant with the Affordable Care Act (ACA), your out-of-pocket maximum is no more than $8,150 in 2020. If you have more than one person covered on your plan, the combined family out-of-pocket maximum can't exceed $16,300, although the plan must have an embedded individual out-of-pocket maximum that can't exceed $8,150. 

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This limit applies to all plans in the individual, small group, and large group insurance markets (including self-insured group plans), as long as they're not grandfathered or grandmothered (before the ACA changed the rules, health plans were free to set their own out-of-pocket limits as they saw fit, and plans that pre-date the ACA are allowed to continue to use their pre-ACA out-of-pocket caps).

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. 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 plans, and platinum plans in areas where they're available, tend to have the lowest out-of-pocket maximums, typically quite a bit lower than the maximum allowable level; catastrophic plans have out-of-pocket maximums equal to the federally-allowed maximum). Lower out-of-pocket maximums are also built into the plan design if you have a silver plan with integrated cost-sharing reductions.

Another Increase in Out-of-Pocket Maximum Expected in 2021

In February 2020, the Department of Health and Human Services (HHS) published the proposed Benefit and Payment Parameters for 2021. In it, HHS addressed a wide range of issues, including out-of-pocket maximum limits, just as they do each year.

For 2021, HHS has proposed an out-of-pocket maximum of $8,550 for an individual, and $17,100 for a family (embedded individual out-of-pocket maximums are required on family plans). These amounts may or may not be finalized as proposed. For 2020, HHS had initially proposed an out-of-pocket maximum of $8,200 for an individual and $16,400 for a family, but the amounts were revised slightly in the final version.

And regardless of what the official maximum out-of-pocket limits are for 2020, there will continue to be numerous plans available with lower out-of-pocket maximums. But no plans with effective dates of 2014 or later will be able to have out-of-pocket maximums above the level that HHS determines.

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. So as of 2020, the out-of-pocket maximum has increased by about 29%. And the proposed out-of-pocket maximum for 2021 is nearly 35% higher than the limit that applied in 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. And starting with the 2020 plan year, HHS finalized a change in how the formula works (details are in the 2020 Benefit and Payment Parameters), which ended up making the out-of-pocket maximum 2.5% higher in 2020 than it would otherwise have been.

In previous years, HHS used a formula that compared the average current annual per-enrollee total health insurance premium for employer-sponsored plans ($6,396 in 2018, which was used to calculate the changes for 2019), with the average annual per-enrollee health insurance premium for employer-sponsored plans in 2013 ($5,110). But starting with the 2020 plan year, HHS is including premiums for individual market plans, along with employer-sponsored plans, in the calculation. (The increase in out-of-pocket costs would be smaller if HHS had continued to only consider employer-sponsored plan premiums, since the average employer-sponsored plan premium was higher than the average individual market premium in 2013.)

The total average premiums for private health insurance, including both employer-sponsored coverage and individual market coverage, was $6,436 in 2019, and $4,991 in 2013. This 2013 amount was lower than the $5,110 average across only employer-sponsored plans, because individual health insurance tended to be much less expensive before the Affordable Care Act reformed the market, requiring the plans to be guaranteed-issue plans and cover essential health benefits.

2020 Numbers

So here's how the calculation worked for 2020: We divide the average 2019 private insurance premiums (employer-sponsored and individual market) by the average from 2013. That's 6,436 divided by 4,991, which equals 1.2895. That means premiums had increased by an average of about 29% from 2013 to 2019.

HHS then multiplied the out-of-pocket maximum from 2013 ($6,350) by 1.2895 in order to increase it by about 29%. That came out to $8,188, and the result was then rounded down to the nearest $50 (under the terms of the regulations that govern this process). This resulted in $8,150 as the out-of-pocket maximum for 2020.

In a nutshell, the idea is that average private insurance premiums increased by about 29% from 2013 to 2019, so out-of-pocket maximums had to also increase by roughly the same percentage from 2014 to 2020 (because they round down, the effective increase in out-of-pocket maximums was slightly smaller).

2021 Numbers

To determine the proposed out-of-pocket maximum for 2021, HHS looked at average premiums in 2013 versus average premiums in 2020 (again including average individual market premiums as well as average employer-sponsored premiums). The same $4,991 average premium is used for 2013, but the average for 2020 had grown to $6,759 (up from $6,436 in 2019). When we divide 6,759 by 4,991, we get roughly 1.354. That means the out-of-pocket maximum for 2021 has to be roughly 35.4% higher than it was in 2013, which would amount to $8,599. But since they round down to the nearest $50, the proposed maximum out-of-pocket is $8,550 (all of this is detailed in the proposed Benefit and Payment Parameters for 2021).

Although out-of-pocket maximums have increased each year since 2014, it's possible that they could decline in a future year, if average premiums start to decline.

What Does Out-of-Pocket Maximum Mean?

A plan's out-of-pocket maximum (also referred to as maximum out-of-pocket or MOOP) 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 $8,150 in 2020. 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 (HDHP) 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). And catastrophic plans always have deductibles equal to the out-of-pocket maximum that HHS sets for the year.

Once you've reached the annual out-of-pocket maximum, 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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Article Sources
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  1. Federal Register. Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2021; Notice Requirement for Non-Federal Governmental Plans. Published February 6, 2020.

  2. U.S. Department of Health and Human Services. Proposed Rule: Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2020. Published January 24, 2019.

  3. Federal Register. Department of Health and Human Services. Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2020. April 25, 2019.

  4. Center on Budget and Policy Priorities. Change to Insurance Payment Formulas Would Raise Costs for Millions With Marketplace or Employer Plans. Published January 18, 2019.

  5. Federal Register. Patient Protection and Affordable Care Act; HHS Notice of Benefit and Payment Parameters for 2019. Published April 17, 2018.

  6. Kaiser Health News. 2016 PPO Plans Remove Out-Of-Network Cost Limits, A Costly Trap For Consumers.