Each year, many policyholders spend a certain amount out of pocket on eligible medical services before their insurance plan pays for anything. Once they reach a dollar amount, called a deductible, the health insurance company shares the costs until the policyholder reaches his or her out-of-pocket maximum.
The out-of-pocket maximum is the amount you must spend in order for the insurance to cover all eligible healthcare costs.
Read on to understand the differences between the two. We will explain each term first.
What is an Insurance Deductible?
In general usage, the term deductible may describe one of several types of clauses that are used by insurance companies as a threshold for policy payments.
Deductibles are typically used to deter the large number of claims that a consumer can be reasonably expected to pay for. By restricting its coverage to significant enough events to incur enormous costs, the insurance firm expects to pay out slightly smaller amounts much less frequently, incurring much higher savings.
As a result, insurance premiums are typically cheaper when they involve higher deductibles. For example, health insurance companies offer plans with high premiums and low deductibles or plans with low premiums and high deductibles.
The consumer with the $6,000 deductible will have to pay $6,000 in health care costs before the insurance plan pays anything. The consumer with the $12,700 deductible will have to pay $12,700.
An annual deductible is the amount of money you must spend on covered health care services before your health insurance plan covers any of the costs. It is how much you are expected to pay per year for medical services your plan covers.
This is besides the monthly premium just to be on the plan. Typically, higher premiums translate to lower deductibles, while lower premiums mean a higher deductible.
When you meet your deductible for the year in qualifying medical services and expenses, you’ll then pay a set copay or coinsurance (a percentage of the provider’s charge for your medical needs) until you reach the out-of-pocket maximum.
Most insurance plans, including individual and employer health insurance, have a deductible. However, some health maintenance organization (HMO) plans have a low deductible or not deductible at all.
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What is an Out-of-Pocket Maximum?
An annual out-of-pocket maximum is a limit the policyholder will have to pay for healthcare services, not including the cost of the plan premium.
After the policyholder reaches that amount (which the deductible and copays, among other costs, contribute to), the insurance plan will then cover all further eligible healthcare expenses for that year.
Your out-of-pocket maximum or limit is the most you will ever have to pay out of your own pocket for annual health care. This limit includes the deductible, copays, and coinsurance you will continue to pay after you reach the deductible.
When this maximum is met, any dollar over that amount will be 100% covered by your insurance provider. However, your monthly premium, out-of-network services, and services not covered by your plan are not included in the out-of-pocket maximum.
Typically, the out-of-pocket maximum is higher than your deductible amount to account for the collective costs of many out-of-pocket expenses such as deductibles, coinsurance, and copayments.
The type of plan you purchase can determine the amount of out-of-pocket maximum vs. deductible costs you will incur.
Deductible VS Out-of-Pocket
Essentially, a deductible is a cost a policyholder pays on health care before the insurance plan covers any expenses, whereas an out-of-pocket maximum is an amount a policyholder must spend on eligible healthcare expenses through copays, coinsurance, or deductibles before the insurance covers all covered expenses.
Because of this, a policyholder’s deductible will always be lower than the out-of-pocket maximum.
Let’s say you purchase a health plan with a $3,000 deductible and 20% coinsurance. You receive two procedures during the year you have the plan, one that costs $1,000, and another that costs $2,500.
You would have to pay the full $1,000 for the first procedure plus $2,000 toward the second procedure. After that, you would only have to pay $100 (20%) of the remaining $500.
Your insurance company would pay for the rest. In the event you need additional health services later in the year, you would continue to pay 20% of the costs.
The deductible, therefore, does not represent the maximum amount you have to pay before an insurer pays for everything. It represents the total amount you must pay before the insurance company helps you pay for a percentage of your care.
An out-of-pocket expense (or out-of-pocket cost, OOP) is the direct payment of money that may or may not be later reimbursed from a third-party source.
The services rendered and other in-kind expenses are not considered out-of-pocket expenses; the same goes for depreciation of capital goods or depletion.
Deductible VS Out-of-Pocket Max Insurance Timeline
When you’re looking at your costs for health care and health insurance, the timing will determine whether the deductible or out-of-pocket max will be more relevant to you.
Let’s look at how these structural features of your insurance policy will work during the calendar year.
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Monthly Payments
No matter what your health care needs are, you’ll pay a monthly bill to have health insurance. This amount, called your premium, will stay the same throughout the year, and free preventive care is usually included.
This can include wellness visits to your doctor and preventive screenings for issues like high blood pressure.
Phase 1: Before you reach your deductible
In the first part of your policy year, you’ll pay out of pocket for many health care services beyond preventive care.
This can include doctor’s visits when you’re sick, a trip to an urgent care centre after an injury, tests such as an MRI, and more. You’ll pay for these services in full until your total expenses add up to your deductible amount.
Your deductible amount is an important part of your policy because this first phase can have a big impact on the total amount you spend on health care each year.
For example, people with high-deductible health plans may never reach their deductible amount, and they could pay thousands of dollars for their health care without ever receiving any cost-sharing benefits.
Phase 2: After you meet your deductible amount
In the next part of your policy year, you’ll get the benefit of sharing the cost of your health care with your health insurance company. Covered services will be billed at rates listed on your policy for copayments or coinsurance.
You’ll pay a part of the bill such as a 15% coinsurance or a flat rate of a $50 copay. The insurance company will pay the rest of the bill.
The amount of money you’re spending on health care is usually lower during this phase because you’ll be paying only a portion of your health care costs.
The running total of how much you spend continues to add up, and if your expenses reach your out-of-pocket maximum, you’ll move to phase three of your health insurance policy.
Phase 3: After you reach your out-of-pocket maximum
The third phase of your policy year begins after your total spending for covered health care adds up to your policy’s out-of-pocket maximum. After this threshold, your insurance company will pay 100% of the cost of covered health services.
Many people won’t spend enough on health care to reach their out-of-pocket maximum, and this limit is most relevant for those who have significant health issues and may need ongoing care or expensive treatments.
For people in these situations, choosing a plan with a lower out-of-pocket max is a way to minimize total health care costs.
The out-of-pocket max also provides a useful safety net for otherwise healthy people who have a surprise injury or accident. Health care costs can add up quickly, and this maximum spending limit can help you avoid astronomical health care costs that can lead to significant medical debt or bankruptcy.
Conclusion
Typically, plans with low deductibles and out-of-pocket limits will also have higher premiums. These plans might make sense if you expect to need lots of care.
On the other hand, if you consume little health care, choosing a higher deductible/out-of-pocket limit could lower your overall costs.
References
- https://www.investopedia.com/terms/o/outofpocket.asp
- https://en.wikipedia.org/wiki/Out-of-pocket_expense
- https://www.healthmarkets.com/resources/health-insurance/deductible-vs-pocket-limit-whats-difference/
- https://www.healthmarkets.com/content/out-of-pocket-maximum-vs-deductible
- https://www.policygenius.com/health-insurance/deductible-vs-out-of-pocket-maximum/
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