Your deductible and the out-of-pocket maximum are two key features of your health insurance coverage that are important for you to understand. The deductible is the amount that you need to pay out-of-pocket before your coverage kicks in for the year. Your out-of-pocket maximum is the maximum amount that you will need to pay for the year before your policy kicks in to cover all additional costs for that year.
What is a health insurance deductible?
The annual deductible on your health insurance policy is the amount that you will need to pay before your policy coverage kicks in to cover a portion of your expenses. Expenses for medical care, doctor’s visits, prescription drugs and other costs covered by the policy will count towards the expenses to satisfy your annual deductible.
Policy related costs like monthly premiums, copays (in most cases) and medical care received that is outside of what is covered under the policy generally will not count towards satisfying the deductible.
Policy deductibles are set by the insurance company, in some cases in conjunction with your employer or the organization offering group coverage if your coverage is through a group policy.
Some policies may have separate deductibles for care by in-network providers and for out-of-network care. Who is considered in-network and who is out-of-network will be defined by the policy. Some policies may also have a separate deductible for prescription drugs as well.
Policy deductibles can vary widely. Some policies may have a $0 deductible. Some plans may have annual deductibles that are well in excess of $3,000 or even $4,000.
High deductible health insurance plans must have a deductible of least $1,400 for an individual and $2,800 for a family per IRS rules. These plans qualify for the usage of a health savings account (HSA) in conjunction with the policy. An HSA is a medical savings account that allows you to contribute up to $3,600 for an individual and $7,200 for a family in 2021. Those who are 55 or over can contribute an extra $1,000 on top of these limits for 2021.
HSA contributions are made on a pre-tax basis. Withdrawals to cover the cost of qualified medical expenses are tax-free. There is a wide range of medical expenses that qualify including expenses incurred before your plan’s deductible is met and copays.
A major advantage of an HSA over some other types of medical savings plan is that any money not used from the HSA can be carried over from year-to-year. Many financial experts refer to the HSA as an additional retirement savings account in addition to options like an IRA or a 401(k) due to this feature. Money in an HSA can be invested in some cases and can be used to cover medical costs in retirement if the funds are not needed during your working years.
In general, the higher a plan’s deductible, the lower the monthly premium for the coverage will be. This is because with a higher deductible the insurance company’s costs to cover your medical expenses will be lower.
What is an out-of-pocket maximum?
Your health insurance plan’s out-of-pocket maximum represents that maximum that you will need to spend out of pocket for covered expenses for that policy year. After reaching this point, your policy will cover all expenses that are covered by the policy.
Out-of-pocket maximums will vary by policy. For example, the IRS rules state that the out-of-pocket maximums for a high deductible health plan is $7,000 for an individual and $14,000 for a family for 2021. Some plans may have higher out-of-pocket maximums, others may be lower.
The Department of Health and Human Services establishes out of pocket maximums for health insurance plans that want to be compliant with ACA (Affordable Care Act). For 20201 these limits are $8,550 for an individual and $17,100 for a family.
Out-of-pocket expenses that generally count towards reaching your policy’s out-of-pocket maximum include:
- Coinsurance payments
- Money that you spent to meet the deductible
Expenses that will not count towards meeting the out-of-pocket maximum include:
- Monthly policy premiums
- Expenses for treatments or services not covered by the policy
- Expenses incurred in a prior policy year
- Most out-of-network expenses
As with deductibles, the higher your policy’s out-of-pocket maximum, the lower your premium is likely to be. Higher limits here mean lower costs for the insurance company.
Do deductibles count towards out-of-pocket?
Generally, all expenses incurred to meet your annual deductible will also count towards meeting your annual out-of-pocket maximum. Copays assessed for services once your deductible is met will also count towards your out-of-pocket maximum.
Monthly premiums and services procured from out-of-network providers will not count towards satisfying your out-of-pocket maximum for the year. However in-network expenses that are applied to your deductible will generally count towards meeting the out-of-pocket maximum.
Limits on annual spending
The limits on annual spending for a health insurance policy, such as the out-of-pocket maximums described above, allow you to plan for the maximum amount that you might have to spend for covered health and medical expenses out of your own pocket. This can help with your budgeting and overall financial planning.
It is important to know and understand the types of medical expenses that are covered under the out-of-pocket limits and what types are not. If you need services that are not covered by the plan, these costs will not be part of the annual spending limits of the plan, and you will generally be liable for paying these expenses yourself.
If you have an HSA or perhaps an FSA (flexible spending account) in conjunction with your plan you may be able to apply money from these accounts towards these uncovered expenses.
It's important that you know your policy limits, such as your deductible and the out-of-pocket maximum, to ensure that you can reasonably plan what your medical care will cost you during the year.