Health Insurance Deductible vs. Out-of-Pocket Maximum

Health insurance can be tricky to understand, especially when it comes to knowing what out-of-pocket costs you’ll pay, including copays and coinsurance.

There are annual limits on what you have to pay out of pocket, as long as you use providers in your insurance network. You won't approach the out-of-pocket limits, though, unless you need a lot of medical services, and there are two types of limits: the deductible and the annual out-of-pocket maximum.

Here’s how they work.

Deductible first, then out-of-pocket max

What you pay goes toward your deductible first. Once you've met that amount for the year, further payments accumulate on top of that deductible amount until you meet your out-of-pocket max. We’ll explain how the limits work, but let’s define them first:

Deductible: The deductible is how much you are expected to pay per year for medical services your plan covers. After you "meet your deductible," you will only be responsible for a percentage of the cost of service (called coinsurance), a copay or a flat fee, depending on your policy.

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Out-of-pocket maximum: Those post-deductible charges add up, which is where the out-of-pocket maximum comes in. Once you spend this much on in-network services, your insurance covers 100% of covered benefits for the rest of the year.

Which medical costs count toward your deductible and out-of-pocket maximum depend on your health plan, so it’s important to read your policy summary. Depending on your plan, any one of the following scenarios may apply to you:

• Copays and coinsurance usually don't count toward your deductible.

• In some policies, you will have you pay in full for all medical services up to your deductible amount.

• Your insurer may need to authorize in advance a diagnostic exam such as blood tests, or imaging exams like MRIs or X-rays. If you don’t get authorization, the insurer might deny the charges and what you pay will not count toward your spending limits.

If you have a high-deductible health plan, your deductible may be as high as your out-of-pocket maximum, making you eligible for a health savings account.

Limits on annual spending

It’s important to note that not all plans have deductibles, but all plans do have out-of-pocket maximums, which is a requirement of Obamacare.

Obamacare also requires the federal government to set annual limits on out-of-pocket maximums that apply to every health plan sold in America. There are different out-of-pocket maximums for individuals and family plans that have two or more members. In 2016, your out-of-pocket maximum can be no more than:

• $6,850 for an individual plan.

• $13,700 for a family plan.

Starting in 2016, individual limits apply to everyone with coverage, even those who are part of a family plan. For example, if you have three people on a family plan, the total the family spends on medical costs out-of-pocket cannot exceed $13,700. However, if one person on the plan incurs covered costs that year amounting to more than $6,850, the individual limit applies.

Optimize your deductible and out-of-pocket maximum

Those limits are high and would be difficult for most Americans to pay. You’re more likely to meet your deductible and out-of-pocket maximum if you have a chronic condition, or need several prescription drugs or other expensive care. If that sounds familiar, these guidelines can help you save on your care:

• Stay in your plan's provider network whenever possible. Only in-network services count toward your deductibles and out-of-pocket maximums in most plans.

• Know what your plan covers. If any medical need, from a brand-name medication to outpatient surgery, isn’t covered by your policy, the money you spend on it is not going to count toward your deductible or out-of-pocket maximum.

• Before getting any care besides a primary physician visit, such as an imaging exam or specialist visit, check your policy to verify whether you need prior authorization. If you do, the doctor referring you for that care should obtain the authorization on your behalf.

• Plan your medical expenses whenever possible, such as when you’re having a baby, a scheduled surgery or an imaging procedure.

• Use free preventive care services as outlined in your policy. Getting preventive care now can also lower costs down the road by catching and treating a health problem before it gets out of hand.