It’s known by a few terms – “out-of-pocket max, “maximum out-of-pocket,” “maximum liability,” and a few others – and that’s only part of the confusion: What is it, and what does it mean for your insurance coverage?
As explained in “What is a Deductible?,” your health insurance deductible is the amount which you are expected to pay first toward medical expenses in the calendar year before your insurance company starts paying. Most people are familiar with the idea of a deductible because it’s also a term used in automobile insurance, but after that the terms diverge.
Once you’ve met your deductible, your insurance starts paying for your medical expenses – but typically, not in full. Most insurance plans have a “co-insurance” after the deductible, perhaps 80/20 or 70/30. That’s the percentage that the insurance company pays of expenses above the deductible, vs. the percentage that you pay. (The big number is the insurance company’s.)
EXAMPLE:
You have coverage with a $2000 annual deductible and an 80/20 co-insurance. On January 2, you get injured and incur medical expenses of $4,000. The first $2,000 goes against your deductible; you are responsible for that amount in full. The remaining $2,000 is subject to the co-insurance, which means that the insurance company pays 80% ($1600) and you pay 20% ($400).
Does that mean that you’ll pay your 20% all year long, no matter how much your medical bills rack up?
No. That’s where the “out-of-pocket max” comes in.
All ACA-compliant health insurance coverage includes an out-of-pocket maximum amount, which is typically two to three times the deductible amount. This is the cap on how much you would have to pay for deductible and co-insurance together in a calendar year, no matter how many medical claims you incurred or how expensive your care is.
CONTINUING OUR EXAMPLE:
The coverage above also includes a $5,000 out-of-pocket maximum. In addition to the injury above, you later contract an illness which requires a hospital stay; by the time you’re discharged, the hospital and doctor fees add up to $20,000.
You’ve already met your deductible for this calendar year, so co-insurance starts in immediately. 20% of $20,000 is $4,000, BUT you’ve already paid $2,400 toward your earlier injury ($2,000 deductible plus $400 co-insurance). Because you have an out-of-pocket maximum of $5,000, you are only responsible for $2,600 of this bill; the insurance company pays the remaining $17,400.
And what if you have further medical claims in the same year? They are all above the out-of-pocket maximum, so they are all paid 100% by the insurance company, no matter how expensive they are, until the next calendar year begins and you start over with a new annual deductible.
(Important note: Most insurance plans include copays, such as for office visits or prescriptions, in the out-of-pocket maximum — but some don’t, which means that even after you’ve met that maximum, you would still be responsible for those copays. Check your Summary of Benefits and Coverage (SBC) or other plan documents to be sure.)
