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

2022 Maximum Out-of-Pocket Is 37% Higher Than It Was in 2014

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If you have a health plan that's compliant with the Affordable Care Act (ACA), your out-of-pocket maximum for in-network care is no more than $8,550 in 2021. If you have more than one person covered on your plan, the combined family out-of-pocket maximum can't exceed $17,100, although the plan must have an embedded individual out-of-pocket maximum that can't exceed $8,550. 

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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, and catastrophic plans have deductibles and out-of-pocket maximums equal to the federally allowed maximum out-of-pocket (so $8,550 in 2021). But 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. 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 in 2022, But It's Smaller Than Initially Proposed

In November 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 2022, HHS had proposed an out-of-pocket maximum of $9,100 for an individual, and $18,200 for a family (embedded individual out-of-pocket maximums are required on family plans). But when the final Notice of Benefit and Payment Parameters for 2022 was published in May 2021, the amounts had been revised and lowered. The maximum allowable out-of-pocket limit for ACA-compliant plans in 2022 is $8,700 for an individual and $17,400 for a family.

We'll get into the specifics in a moment, but it's noteworthy that the 2022 rules were proposed under the Trump administration, but finalized under the Biden administration. Public comments on the proposed $9,100 maximum out-of-pocket were overwhelmingly negative, asking the administration to take action to ensure that out-of-pocket maximums wouldn't be as high as initially proposed. Two years earlier, HHS had finalized—despite widespread public opposition—a new methodology for how the out-of-pocket maximum amounts would be determined, and it resulted in higher amounts. Under the Biden administration, in response to continued public opposition, HHS has reverted to the previous methodology for 2022 and beyond. This is why the final maximum out-of-pocket for 2022 is $8,700 for an individual, instead of $9,100.

There will continue to be numerous plans available with out-of-pocket maximums that are well below $9,100. But no ACA-compliant plans will be able to have out-of-pocket maximums above $9,100.

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 2022, the out-of-pocket maximum has increased by about 37%. But if the new methodology (implemented by the Trump administration in 2020) had continued to be used, the overall increase would have amounted to 44%.

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. Their intention was for that methodology to be permanent, but it was ultimately only used for two years; for 2022 and beyond, HHS has reverted to the prior formula.

Prior to 2020—and now for 2022 and future 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 for 2020 and 2021, HHS included premiums for individual market plans, along with employer-sponsored plans, in the calculation. The increase in out-of-pocket costs for those years would have been 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.

In the final Notice of Benefit and Payment Parameters for 2022, HHS clarified that they have reverted to the original methodology, which excludes individual market premiums from the calculation. The result is that the cap on out-of-pocket costs is $8,700 for an individual in 2022, whereas it would have been $9,100 under the methodology that the Trump administration had implemented in 2020.

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 had 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 maximum out-of-pocket is $8,550 (all of this is detailed in the Benefit and Payment Parameters for 2021).

2022 Numbers (Reverting to the Pre-2020 Methodology)

The CMS Office of the Actuary has revised the 2013 average premium amount down to $4,883. Using the new methodology that included individual market premiums (used for 2020 and 2021), CMS had come up with an average projected 2021 premium of $7,036. Using those numbers, they divided 7,036 by 4,883 and came up with 1.44. That would have called for a 44% increase in the maximum out-of-pocket from 2013 to 2022, which is where they got the proposed $9,100 maximum out-of-pocket limit for 2022 (increasing the 2013 cap—$6,350—by 44% would have amounted to $9,144, but they round down to the nearest $50, resulting in $9,100).

The public comments on that were overwhelmingly negative, with many commenters asking HHS to revert to the prior methodology that didn't include individual market premiums. The Biden administration took over after the 2022 payment amounts had been proposed, but before they were finalized. And when the 2022 rules were finalized, they confirmed that they had indeed reverted to the pre-2020 methodology and would continue to use it in future years.

The average 2013 premium increases to $5,061 (since employer-sponsored insurance was more expensive than individual market insurance in 2013). And if we only consider employer-sponsored insurance in 2021, the average premium is $6,964 (instead of $7,036 that applies when we use both employer-sponsored and individual coverage). When we divide 6,964 by 5,061, we get 1.376.

So instead of a 44% increase in maximum out-of-pocket since 2013, we get a 37.6% increase. If we increase the 2013 maximum out-of-pocket ($6,350) by 37.6%, we get $8,738. This is rounded down to the nearest $50, resulting in a maximum out-of-pocket limit of $8,700 for 2022. The family amount is always double the individual amount, so the cap on out-of-pocket costs for a family is $17,400 for a family.

Again, there will be lots of plans with maximum out-of-pocket limits well below those caps in 2022, including Gold and Platinum plans, as well as some plans at the Bronze and Silver level (and all Silver plans that have built-in cost-sharing reductions).

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, receive care that's covered under your health plan, and comply with any rules your plan might have for referrals, prior authorization, step therapy, etc., your total spending for the year will be capped at no more than $8,550 in 2021, and no more than $8,700 in 2022. 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. (Note that the rules for this are different in 2021 for people switching plans in the individual market as a result of the American Rescue Plan; many states and insurance companies are ensuring that out-of-pocket costs will transfer to 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 and self-insured 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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