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The difference between deductibles and out-of-pocket maximums

Navigating insurance plans and policies can be confusing.

Terms such as copay, deductible, in-network, out-of-network, out-of-pocket and premium aren’t words most of us use in regular conversation. However, they are all critical components that need to be taken into account when looking at a health insurance plan.

In this blog, we’ll explain the difference between a deductible and an out-of-pocket maximum as they relate to a health insurance plan.

Health insurance is one of the most common types of insurance in which a person will monitor the deductible and out-of-pocket maximum on a regular basis.

What is a deductible?

A health insurance deductible is the amount of money an insured must spend on covered health care services before the policy will begin to cover any of the costs.

A deductible is separate from the monthly premium, or money you pay to be insured under the plan.

When you sign up for a health insurance policy, you will most likely have the option to choose from several deductible amounts. Deductibles can range from $500 to $1,500 for an individual and $1,000 to $3,000 for a family, but can be higher in both cases depending on the type of plan you choose.

Deductibles differ for individual and family policies. If you’re the only one covered on the plan (individual policy), then you are the only one who has to meet the deductible before insurance will start contributing.

However, if you have a plan that includes family members (family policy), there may be an individual deductible for each family member and a family deductible that applies to everyone. For example, the individual health insurance deductible could be $500, with a family deductible of $1,500.

How does a deductible work?

Say you have an individual policy with a deductible of $500. After the first of the year, you visit a physician, and the eligible/allowed for medical services is $300. You are responsible for that $300; however, that money goes toward your deductible.

Your next visit also costs $300. You are responsible for only $200 of that bill because you will have met your $500 deductible. The remaining $100 will be covered based on the details of your plan, which is called coinsurance.

What is coinsurance?

Coinsurance is the percentage of covered medical services you pay after you meet your deductible. Your health plan pays the rest. For example, if you have an “80/20” health plan, it means your plan covers 80 percent of the eligible/allowed medical expenses and you pay 20 percent—until you reach your out-of-pocket maximum.

Coinsurance only applies to covered services. If you have expenses for services that are not covered under your health plan, you will be responsible for those charges.

What is a co-pay?

Co-pays (or co-payments) are set amounts you pay to your medical provider when you receive services. Co-pays typically start at $10 and go up from there, depending on the type of health care you receive.

Different co-pays usually apply to office visits, specialist visits, urgent care, emergency room visits and prescriptions. Co-pays are usually not subject to the deductible being met, however some plans apply copays once a deductible has been met.

Does a deductible apply to all medical expenses?

Not necessarily. Most health plans cover some preventive care services at no charge when provided by a doctor or other provider in the plan’s network.

For instance, common covered preventive care services include:

  • Cancer screenings, including mammograms and colonoscopies
  • Screenings for blood pressure, cholesterol, depression, obesity and Type 2 diabetes
  • Pediatric screenings for hearing, vision, autism and developmental disorders
  • Routine immunizations
  • Annual check-ups

This list is not all-inclusive and it’s important to check your health plan to identify its specific covered preventive care services. Depending on your plan, copays or services included in that copay may not apply to the deductible.

What about prescriptions?

Prescription drugs may be covered even if you don’t meet your deductible. However, certain health plans may require a separate deductible for prescription drugs before health insurance helps to shoulder the costs.

Usually, once this single deductible is met, your prescriptions will be covered at your plan’s designated amount. This doesn’t mean your prescriptions will be free, though. You may still have to pay some form of co-pay, even after a deductible is met.

If you have a combined prescription deductible, your medical and prescription costs will count toward one total deductible.

What is an out-of-pocket maximum?

An out-of-pocket maximum, sometimes referred to as an out-of-pocket limit, is the cap on what you as a policyholder have to pay for covered health care services, not including your monthly premium.

After you reach this amount, your health insurance plan will then cover all further eligible health care expenses for the year.

The out-of-pocket limit doesn’t include:

  • Your monthly premiums
  • Anything you spend for services your health plan doesn’t cover
  • Out-of-network care and services
  • Costs above the allowed amount for a service that a provider may charge

Health plans that cover more than one person on a plan often have an individual out-of-pocket maximum, as well as a family out-of-pocket maximum.

Individual Out-of-Pocket Maximum

If someone on the plan reaches his or her individual out-of-pocket maximum, the plan starts paying 100 percent of the covered care for the rest of the plan year. Any expenses individuals pay also go toward meeting the family out-of-pocket maximum.

Family Out-of-Pocket Maximum

Out-of-pocket costs for each individual go toward meeting the family out-of-pocket maximum. This may include costs for deductibles, coinsurance and copays. If the family out-of-pocket maximum is met, the plan takes over paying 100 percent of everyone’s covered costs for the rest of the plan year.

How an Out-of-Pocket Maximum Works

Let’s say you have a health insurance plan with a $2,000 deductible, a 30 percent coinsurance for all care after meeting the deductible and a $5,000 out-of-pocket maximum. On your first day of coverage, you get into a car accident, and the total cost of your medical care is $15,000.

In this case, you would meet your deductible of $2,000 and pay 30 percent of the coinsurance, which, in this case, would be $3,900 for a total of $5,900.

However, since this total exceeds your out-of-pocket limit of $5,000, you would most likely end up paying only $3,000 of the coinsurance, since you would hit your out-of-pocket maximum of $5,000. Your insurance would then cover the remaining $10,000.

This example takes into account that you are using in-network provider services; so it’s important to check your specific plan for details, as not all plans are the same.

If your health plan covers only in-network provider services, then all your out-of-pocket expenditures for covered benefits will go toward your out-of-pocket maximum.

If your plan covers health service provided out of network, then depending on the design of the plan, you may have a different out-of-pocket maximum for in-network and out of network services.

If you cover a dependent or have multiple dependents under a family plan, there will be an individual out-of-pocket maximum and a family out-of-pocket maximum.

A family out-of-pocket maximum adds up all the family members’ costs for deductibles, coinsurance and co-pays when calculating whether the maximum is met or not.

Are there any expenses that do not count toward my out-of-pocket maximum?

There are a number of expenses that may not count toward your out-of-pocket maximum.

If you elect to have a service performed that is not covered under your health plan, the cost for that service will not apply to your out-of-pocket maximum. These could be medical services such as cosmetic treatments, weight loss surgery and some alternative medicines, for example.

  • Costs Above the Allowed Amount: Most health insurance plans set an allowed amount for various services. If a doctor or facility charges more than that, your plan is not going to cover that cost. This means it will not be applied to your out-of-pocket maximum, either.
  • Out-of-Network Care and Services: Most health plans have a network of doctors. These doctors agree to give plan customers discounted rates for using their services. If you go to doctors or facilities that do not participate in your plan’s network, your costs may not be covered. What you pay for out-of-network care may not be applied to your out-of-pocket maximum. It’s important to ensure providers are in your plan’s network before seeing them.
  • Plan Premiums: Whether you purchase a health care plan on your own or through your employer, you will typically have a monthly plan premium. This cost doesn’t count toward your out-of-pocket maximum.
  • Most Preventive Care: Preventative care that is covered 100 percent under your health insurance plan will not count toward your out-of-pocket maximum.
  • Prescription Drugs: Whether or not the cost of prescription drugs counts toward the out-of-pocket maximum will depend on how your health plan covers this type of care to begin with. Deductibles and co-pays you pay for prescriptions will generally be applied toward your out-of-pocket maximum.

What is the maximum out-of-pocket cost?

The maximum out-of-pocket limit is federally mandated. The amount of money that individuals will have to pay out-of-pocket in 2021 is $8,550 and $17,100 for families. However, your plan may have a lower out-of-pocket maximum—most do. The out-of-pocket maximum resets annually.

How To Make the Most of Your Out-of-Pocket Maximum

Once you reach your out-of-pocket maximum, your health plan will pay for 100 percent of most covered health benefits for the rest of that policy period. The next policy period (plan year), it starts all over again – note: the policy year may not coincide with the calendar year.

If you still have time left in your policy period (plan year) and are close to reaching your out-of-pocket maximum, you may want to:

  • Schedule exams, follow-up visits or medical tests that you may have been putting off.
  • Discuss and schedule elective procedures that you and your health care provider have been considering. You may have held off scheduling some procedures because it wasn’t an emergency; but when you’ve reached your out-of-pocket maximum, it may be the right time to get things taken care of.
  • Stock up on non-perishable medical supplies that you need on a regular basis if they are covered by your plan.
  • Purchase a 90-day supply of long-term maintenance prescriptions before your policy period ends, depending on your plan.

To avoid unexpected costs, remember to review your policy, certificate or plan booklet, get referrals from your health care provider and contact your health insurance company about pre-authorization before receiving certain medical services and prescriptions.

Deductible vs. Out-of-Pocket Maximum

A deductible in a health insurance plan is the cost a policyholder pays on health care before the plan starts covering any health care expenses, unless they are preventative services or, in some cases, prescriptions.

An out-of-pocket maximum is the cap on what you as a policyholder have to pay for health care services, not including your monthly premium. After you reach this amount, your health insurance plan will then cover all further eligible health care expenses for the year. Your monthly premium, out-of-network services and services not covered by your plan are not included in the out-of-pocket maximum.

Typically, plans with low deductibles and out-of-pocket limits will also have higher premiums. These plans might make sense if you anticipate needing a lot of care. On the other hand, if you don’t consume much health care, choosing a higher deductible/out-of-pocket limit could lower your overall costs.

Shopping for a Health Insurance Plan

Deductibles and out-of-pocket limits can differ from company to company and plan to plan. Employer-sponsored health plans often differ from the plans found in a health insurance marketplace, or exchange, which is either accessible through the federal government or a particular state.

When selecting a health plan from your employer or shopping around for insurance coverage, make sure you do your homework, make comparisons and determine the type of coverage you need based on your overall health and medical needs. By doing this, you’ll be sure to get the most value for your money and the type of coverage that will be most beneficial to you and your family. Contact our Benefits department to learn more.

Not sure where to start? Talk to someone who wants to listen.

A great plan starts with a conversation. Let’s talk about what you need.

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