How the out-of-pocket maximum works

The health insurance out-of-pocket maximum is the most money you will have to pay for the cost of your health care each year, assuming you receive care that is covered by your insurance plan and uses network hospitals and doctors.

After you’ve paid enough deductibles, copays, and coinsurance to reach your out-of-pocket maximum, your health insurance company pays for the rest of your medically necessary care for the remainder of that year.

But, it doesn’t always work that way. Although the out-of-pocket maximum is designed to limit your financial risk when you have high health care costs, it exposes your health insurance company to more financial risk. So health insurance companies developed creative techniques to mitigate that risk. These techniques cause confusion about what counts toward your out-of-pocket maximum, what your health insurer pays after you’ve reached it, and the actual amount of your out-of-pocket limit.

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How the Out-of-Pocket Maximum Usually Works

Let’s look at an example: you have a $ 1,000 deductible, 20 percent coinsurance, and a $ 5,000 out-of-pocket limit per year.

You break your ankle. They take you to surgery that night. Your surgical site becomes infected. He’s hospitalized for two weeks, has two surgeries, and receives antibiotics intravenously at home through home health care for another three weeks.

This is how your bills will accumulate  no  maximum payout compared  with  a maximum disbursement of $ 5,000:

  • His emergency room bill is $ 4,000.
    • Without an out-of-pocket limit, you pay the $ 1,000 deductible and $ 600 coinsurance.
    • With an out-of-pocket limit, you pay the same $ 1,000 deductible and $ 600 coinsurance.
  • His hospital bill is $ 40,000.
    • Without an out-of-pocket limit, you pay $ 8,000 coinsurance (20 percent).
    • With an out-of-pocket limit, you pay only $ 3,400. You have reached your out-of-pocket maximum and 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).
  • His home health care bill is $ 3,000.
    • Without an out-of-pocket limit, you pay $ 600 coinsurance.
    • With an out-of-pocket limit, you pay nothing. Your health insurer pays the full cost of your home health care because you have already reached your 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 health care services later in the year.
    • Without an out-of-pocket limit, you would pay the 20 percent coinsurance.
    • With the out-of-pocket limit, you pay nothing.

Out-of-pocket rules varied considerably

Your $ 5,000 out-of-pocket limit saved you a lot of money, but it cost your health insurance company as much as it saved you. Before the Affordable Care Act began regulating out-of-pocket limits, some health insurers used different strategies to keep their costs (and premiums) as low as possible. These adjustments changed the cost of your health care the most – you pay more and pay less. Insurers used three basic techniques to do this, none of which are allowed any longer, thanks to the ACA:

  1. Deductible
  2. Copayments
  3. Coinsurance for drugs.
  4. Coinsurance for exams.
  5. Coinsurance for out-of-network care
  6. 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 an out-of-pocket maximum for everything else.
    1. Once you reached the out-of-pocket limit for drugs, the insurer covered 100 percent of the cost of your prescriptions but continued to pay its share of the non-drug costs. Once reached the maximum of-pocket costs for all other coverages, the insurance covered 100 percent of their health care costs not related to drugs, but continued to pay their share of drug costs unless they also comply with the maximum pocket requirements for drugs.
    2. The health insurance company did not cover 100 percent of your medical care until you reached both out-of-pocket limits. If each limit was $ 5,000, you paid $ 10,000 before the health plan started paying 100 percent.

The Affordable Care Act and Out-of-Pocket Maximum

These risk mitigation techniques were not only confusing to consumers, but they also left people feeling as though they had 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. Set a limit on how much your out-of-pocket maximum can be each year. Requires all deductibles, copays, and coinsurance to be credited toward the out-of-pocket limit. This requirement eliminates the number one risk mitigation technique for health insurers.

The ACA requires health plans to pay 100 percent of the costs of covered care from network providers for the remainder of the year after the out-of-pocket limit has been reached. This requirement eliminates technique number two.

How do I protect myself?

Don’t be swayed by complacency because consumer protections are in place. There are still some costs you will have to pay after you reach your out-of-pocket maximum. These include:

  • The things your health plan decides are not medically necessary.
  • Things that are not covered by your health plan like cosmetic surgery.
  • The cost-sharing for things that are not considered essential health benefits. These nonessential benefits are additional benefits that your health plan does not have to provide, but rather choose.
  • 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 and what is credited and what is not. Take note of this when comparing plans during open enrollment or when shopping for health insurance. You can also call your health plan and ask.

There is nothing ethical about health insurers trying to limit your risk as long as they act within the law and provide a clear explanation of the terms of the policy. The burden is on you to make sure you fully understand the rules of your health plan. You need to understand how much could be on the hook each year so that you can properly budget and make worst-case contingency plans.