Understanding Health Insurance Deductibles and Out-of-Pocket Maximums

Along with copayments and coinsurance, these are two of the most basic components of a health insurance plan. What are the differences between deductibles and out-of-pocket limits?

stethoscope on top of money

You can’t read an article or talk about health insurance without using the word deductible.

The same is true of terms like copayment and coinsurance, plus phrases such as 'out-of-pocket limits' and 'cost sharing.' Many are tripped up by deductibles and out-of-pocket limits, especially.

As common as these terms are while discussing health insurance, most people don’t know what they mean. So, what is a health insurance deductible? And what is an out-of-pocket limit? Also, what are the similarities and differences between them?

Keep reading for answers to each of those questions and many more.

What is a health insurance deductible?

A health insurance deductible is the amount of money you have to spend before your plan pays anything. Once you have spent a certain amount of your own money on health care, your insurance kicks in.

You need to spend this amount on medical care that your policy covers. If you pay for a service or treatment or drug your plan doesn’t cover, it won’t count toward your deductible. We’ll get to what counts toward your deductible shortly.

Most health plans require you to pay this amount annually. In other words, it resets every year. This period, also called a 'plan year' or 'policy year,' begins and ends at the same as a calendar year, but not always. If you don’t know when your plan resets, look at your policy, ask your employer (if you have job-based coverage), or contact your insurance company.

Do the same if you have any other questions about your health plan’s deductible.

How do health insurance deductibles work?

Imagine your insurance plan has a $3,000 deductible. You need to pay the first $3,000 toward covered care out of your own pocket.

After that, you only have to worry about copayments and coinsurance. Your plan pays the rest.

A little primer for anyone who doesn’t quite understand copays or coinsurance: 

  • A copayment (or copay) is the amount you pay for a covered health service after you’ve reached your deductible. Your plan might make you pay a $10 copay for certain drugs, for instance, or a $20 copay for a doctor visit.
  • Coinsurance is the percentage you pay for a covered health service after you’ve reached your plan’s deductible. As an example, maybe you need a treatment that costs $5,000. If your coinsurance is 20 percent, you’ll first pay your $3,000 deductible and then you’ll pay 20 percent of the remaining $2,000. (Or $400.) Your policy covers whatever is left.

Curious to learn more about which services or kinds of medical care health insurance plans tend to cover? Read our article, 'How to Find out What Your Health Insurance Plan Covers.' Or check out this one: 'Which Medical Treatments Are Covered By Health Insurance?'

What is an embedded deductible? What is an aggregate deductible? And how do these deductibles work?

Family health insurance plans are a bit more complicated than individual or self-only plans. The deductibles for family plans are either aggregate or embedded.

If your plan has an aggregate deductible, anything you pay for covered health services goes toward the deductible amount. In other words, if your plan’s aggregate deductible is $10,000, it doesn’t matter how you reach it. Your plan picks up its share of the cost for covered services after you hit its aggregate deductible.

What if your family plan has an embedded deductible? In that case, you must track two amounts throughout the policy year. The overall amount is for the whole family, while the embedded amount is for individual family members. For example, let’s say your overall deductible is $10,000, but the deductibles for each family member are $5,000. If one family member spends $5,000 on health care, your plan picks up its share of his or her medical costs for the remainder of the year. The rest of the family still pays toward their individual deductibles until they individually hit $5,000 or until the family spends $10,000.

What does and doesn’t count toward my health plan’s deductible?

In general, any money you spend on covered health or medical care counts toward your plan’s deductible.

Insurance companies structure their health plans in many different ways. Figuring out which doesn't or doesn't count toward your deductible isn’t always as simple as answering the question: does my plan cover it?

If your plan ties copayments to services like seeing your primary care physician or a specialist, your copays may not go toward your deductible. They usually do go toward your out-of-pocket limit, though.

Read through your policy to find out which payments count toward your deductible. And if that doesn’t help, contact the insurance company and ask for clarity.

As for which health or medical costs don’t count toward your plan’s deductible, that’s easier to summarize.

One example is money you spend on services your health plan doesn’t cover. Another example is money you spend on out-of-network care. This is only true if your policy doesn’t cover out-of-network providers.

Finally, don’t expect your monthly premiums to go toward your deductible. Don’t expect those payments to go toward your out-of-pocket maximum, either.

How do I know what my health insurance plan’s deductible is?

Read through your policy. Specifically, look at its benefits summary.

Both of those documents should make it clear what your deductible. It also covers which costs or services do and don’t count toward the deductible. If you're still unsure, contact your insurance company.

What is a health insurance out-of-pocket maximum or limit?

Your plan’s out-of-pocket maximum, or limit, is the most you must pay for covered health care in a year.

What you spend on your deductible, copays, and coinsurance all count toward this amount.

After you hit your out-of-pocket maximum, your plan picks up the rest of the tab. Your plan pays for 100 percent of covered healthcare costs once you reach this limit.

As you can imagine, your plan’s out-of-pocket limit is higher than its deductible.

How do health insurance out-of-pocket limits work?

Imagine you have a health insurance plan with a $5,000 out-of-pocket limit and a $3,000 deductible. Oh, and let’s say your plan’s coinsurance amount is 20 percent.

Now imagine you need your appendix removed. The surgery costs $30,000.  Thanks to your out-of-pocket limit, you only pay a part of that $30,000. Specifically, you pay just $5,000. Your plan pays the rest.

If that insurance plan didn't have an out-of-pocket limit, you’d spend $8,400. You’d need to pay your $3,000 deductible plus 20 percent of the remaining amount. That's 20 percent of $27,000, which comes to $5,400.

Understanding how out-of-pocket limits work hasn’t always been so easy. Before the Affordable Care Act (also called the ACA or Obamacare), insurance companies used all sorts of strategies to get people to pay more than their out-of-pocket maximum.

However, health plans now have to count copays, coinsurance, and deductibles toward this amount. The law also caps these amounts. For the 2018 plan year, the out-of-pocket limits tied to individual plans can’t be more than $7,350. The limits tied to family plans can’t be more than $14,700.

Health plans with lower monthly premiums usually have higher out-of-pocket maximums. And health plans with higher monthly premiums usually have lower out-of-pocket maximums.

What does and doesn’t count toward my health plan’s out-of-pocket limit?

Like deductibles, some medical costs don’t count toward your policy’s out-of-pocket maximum.

The most noteworthy one is what you spend on your plan’s monthly premiums.

Another is what you spend on health services that your plan doesn’t cover. This includes cosmetic procedures or treatments that aren’t considered medically necessary. Or it can include care you receive from out-of-network providers.

If your policy doesn’t clarify which costs do and don’t go toward your out-of-pocket limit, contact your insurance company for more information.

How do I know what my health insurance plan’s out-of-pocket limit or maximum is?

Again, you should be able to find this information in your policy document or in its benefits summary. If that’s not the case, contact the insurance company that sold you the plan or provides your coverage.

How is a health insurance deductible different from an out-of-pocket limit?

The main difference between your health insurance plan’s deductible and its out-of-pocket maximum is one amount usually is larger than the other. Your out-of-pocket limit will almost always be higher than your deductible.

Why? Out-of-pocket maximums exist to protect people from high healthcare costs. In particular, they exist to protect people in emergency situations. That includes a serious accident, a cancer diagnosis, or some other sudden disease.

A key difference between a health insurance deductible and an out-of-pocket limit is that you continue to pay some of your medical costs after you reach your deductible, but you’re done with them (for the policy or plan year, at least) after you hit your out-of-pocket limit.

Also, out-of-pocket maximums tend to be more straightforward in terms of which medical services or costs count toward them and which don’t. When it comes to deductibles, that’s far less clear. With some health plans, what you spend on copays counts. With other plans, it doesn’t. The same is true of coinsurance payments.

Confused? For more information about this last difference, read the sections above that focus on what does and doesn’t go toward your health insurance deductible or out-of-pocket limit.

Other Frequently Asked Questions

Q: Do copays count toward my health insurance deductible? Does coinsurance count toward my health insurance deductible?

A: It depends on your plan. With some health plans, the amount of money you spend on copayments or copays counts toward your yearly deductible. With others, those payments don’t count.

It's more common for health insurance plans to not count copays toward deductibles. But don’t assume that’s the case. Read through your policy or benefits summary to find out one way or another. Or contact your insurer to get up to speed.

What you spend on coinsurance doesn’t come into play here because you only start paying it after you’ve reached your deductible.

Q: Do copays count toward my health insurance out-of-pocket limit? Does coinsurance count toward my health insurance out-of-pocket limit?

A: Thanks to Obamacare, nearly all U.S. health plans must count what policyholders spend on copayments and coinsurance toward their out-of-pocket limits.

An exception: some of the old, 'grandfathered' health insurance plans that were sold before the ACA became law in 2010. If you have one of these plans, your copays and coinsurance may not go toward its out-of-pocket maximum.

Not sure if your plan does or doesn’t count copays or coinsurance costs toward your yearly out-of-pocket limit? Call your insurance company. Someone there will set you straight.

Q: How do deductibles and out-of-pocket limits change from plan type to plan type? Are the deductibles or out-of-pocket maximums tied to job-based health plans different from those tied to plans bought directly from insurance companies?

A: Deductibles and out-of-pocket limits can differ from company to company, and from plan to plan.

The same goes for the different plan types made available to Americans these days. The deductibles tied to job-based or employer-sponsored health plans often differ from those tied to marketplace plans. And the out-of-pocket maximums with one type of health plan may differ from another, too.

This is another reason why it’s so important to shop around and compare your health insurance options. Do your homework and don’t be shy about picking up the phone and asking questions. You want to get the best bang for your buck with insurance coverage that’ll keep you healthy and secure. That's why you need to know as much as you can before sign on any dotted lines.

To learn more about which type of health insurance may be the best for you, see our article about 'How to Pick a Health Insurance Plan.' When you’re done, you may want to read this one, too: 'Everything You Need to Know to Apply for Health Insurance.'


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