What Is an Out-of-Pocket Maximum?

An out-of-pocket maximum is the most a health insurance policyholder will pay each year for covered healthcare expenses. It is also called the out-of-pocket limit. Setting a limit helps policyholders control risk by capping their share of healthcare costs. It also helps insurers control risk by making policyholders responsible for part of their healthcare costs.

After a policyholder meets the out-of-pocket maximum, their health insurance company pays 100% of allowed healthcare expenses. This helps individuals and families avoid major financial problems associated with high healthcare costs in years when they need a lot of treatment.

KEY TAKEAWAYS

  • Out-of-pocket maximum, also referred to as out-of-pocket limit, is the most a health insurance policyholder will pay each year for covered healthcare expenses.
  • Once this limit is reached, the health plan will cover 100% of qualified expenses.
  • There is a range of out-of-pocket limits an individual or family may choose from, such as lower out-of-pocket maximums and higher premiums or higher out-of-pocket maximums and lower premiums.
  • Some individuals or families may qualify for lower out-of-pocket maximums through cost-sharing reduction discounts if they earn under certain income thresholds and meet other requirements.

Understanding Out-of-Pocket Maximums

Within a given healthcare plan year, out-of-pocket maximums are the highest amount an individual will pay for services that are included under their health insurance coverage. When this maximum is reached, the health plan covers the rest of the eligible costs. Health insurance premiums don't count toward the out-of-pocket maximum. Nor do balance billing charges for services an insured individual receives from out-of-network providers.

Also, costs that aren't considered covered expenses don't go toward the out-of-pocket maximum. For example, if the insured pays $2,000 for an elective surgery that isn't covered, that amount will not count toward the maximum. That means that a policyholder could end up paying more than the out-of-pocket limit in a given year.

Still, deductibles, copayments, and coinsurance all count toward the out-of-pocket maximum under the Affordable Care Act. For 2021, the out-of-pocket maximums are $8,550 for individuals and $17,100 for families. These limits were previously $8,150 and $16,300, respectively, for 2020.

Health Insurance Marketplace bronze and silver health plans have lower monthly premiums and higher out-of-pocket limits. The gold and platinum plans, which have higher monthly premiums, typically have lower out-of-pocket limits.

However, lower-income individuals and families may qualify for reduced out-of-pocket maximums through cost-sharing reduction discounts. To be eligible, you must meet income requirements and enroll in a Health Insurance Marketplace plan in the silver category.

Out-of-Pocket Maximum vs. Deductible

An out-of-pocket maximum differs from a plan's deductible. Amounts you pay for covered services go toward your deductible first. That's the amount you must pay before your insurance kicks in.

Once you meet the deductible, you may be responsible for a percentage of covered costs (called coinsurance). These payments help you meet your out-of-pocket maximum. Once you reach that amount, the insurance plan pays 100% of covered expenses.

Out-of-Pocket Maximum Example

Here's an example of how out-of-pocket maximums work. Suppose your out-of-pocket maximum is $6,000, your deductible is $4,500, and your coinsurance is 40%.

If you have covered surgery that costs $10,000, you'll first pay your $4,500 deductible, which then leaves a $5,500 bill. Because your coinsurance is 40%, you would owe another $2,200 and the insurance company would cover the remaining $3,300—that is, if you didn't have an out-of-pocket maximum.

However, your annual expenses are capped at $6,000. You've already paid $4,500, so you pay only $1,500 of the $5,500 balance. The insurance company picks up the remaining $4,000. Your total cost for the surgery is $6,000, and follow-up visits with your in-network doctor are paid by your insurance since you've met your out-of-pocket maximum for the year.