An out-of-pocket expense is a nonreimbursable expense paid by a patient. This could include any medical benefits that your health plan doesn't consider "covered services." But out-of-pocket expenses can also include covered expenses that you are responsible for before your health-plan benefits kick in at 100 percent coverage. When the insurance company pays all of your expenses and you have to pay only your monthly premium, you have reached the out-of-pocket maximum.
Here's where things get a little tricky. Not all of your out-of-pocket expenses go toward this out-of-pocket maximum. So where does a deductible fit in? Would co-pays and monthly premiums count toward the maximum? What about coinsurance?
Let's find out.
A quick explanation of a deductible and coinsurance could be helpful here. A deductible is the amount of money you have to pay before the insurance benefits begin. As a rule, higher deductibles result in lower premiums because the policyholder is willing to shoulder more of the burden of medical expenses.
The deductible and the monthly premium are just the first of many expenses that you must pay. Once you've met the deductible, you may then have to meet a coinsurance amount. Coinsurance is an expense to be paid by the insured that is a percentage of the provider's charge. For example, if a plan has 80/20 coinsurance, you will be required to pay 20 percent of covered services after you have met the deductible and before you reach the out-of-pocket max.
Please be aware that coinsurance and those co-payments that we are all familiar with are not the same thing. A co-payment is a specific dollar amount that you are required to pay at the time of the doctor's visit. In most cases, co-payments are not subject to the deductible, which means that you don't have to meet a deductible before you can take advantage of co-pays. Therefore, the payment does not count toward your out-of-pocket expense maximum.
Now let's learn more about this out-of-pocket expense maximum.
Out-of-Pocket Expense Maximums
An out-of-pocket expense maximum, or cap, is the amount that you have to meet in order for the insurance company to pay 100 percent of your policy's benefits. As we mentioned before, the out-of-pocket expenses that can be applied toward this maximum amount include your deductible and coinsurance. Co-payments and your monthly insurance premium do not apply to the out-of-pocket expense maximum.
What exactly is the purpose of this cap? It benefits both you and the insurance company. The benefits to the insurance company are obvious. If health care expenses are shared with the policyholder, it cuts down costs. However, it can also help you by ensuring that your medical bills are covered in the event of a catastrophic medical situation. For example, caps are normally set at around $2,000 to $3,000 per year but can vary widely. Many healthy people rarely meet the cap. But if you have a sudden illness or chronic condition, you could easily meet the cap in the first month or two alone. After that, the insurance company will cover you 100 percent to the policy maximum for the remainder of the year, ensuring proper health care during a critical time. Once you meet your out-of-pocket expense maximum, your insurance company will then cover 100 percent of the "reasonable" or "customary" fee of a provider. These fees are determined by your insurance company. If, however, a provider's fee does not fall into the "reasonable" or "customary" category, you could be responsible for paying at least a portion (if not all) of the fee.
Many policies also have what is known as a lifetime maximum. Once a lifetime maximum is met, the insurance company is no longer responsible for your medical expenses. If this happens, you would unfortunately have to seek coverage elsewhere, which can be very difficult with existing conditions or outstanding medical claims/bills.
As with anything in health care, yearly out-of-pocket expense maximums differ greatly by plan. Let's find out exactly how.
Out-of-Pocket Expense Types
Not every insurance plan includes an out-of-pocket expense maximum. According to a study by the Agency for Health Care Research and Quality, an estimated 17 million Americans under the age of 65 were underinsured in 2003. In this study, "underinsured" refers to people who have insurance but do not have protection from high out-of-pocket expenses, and who spend more than 10 percent of their family income on out-of-pocket health care expenses.
So, which plans actually offer an out-of-pocket expense cap? Of course, there is no straightforward answer, but it usually depends on the type of plan. Fee-for-service plans, sometimes referred to as indemnity insurance, pay a portion of a covered medical expense that you or your medical provider submits. These types of policies have deductibles and coinsurance and so usually come with an out-of-pocket expense maximum. The maximum amount for a given plan can vary by the agreement your employer makes with the insurance company.
Managed care plans include health maintenance organizations (HMOs), preferred provider organizations (PPOs) and point-of-service plans (POS). These types of plans may or may not include an out-of-pocket expense maximum. Normally, if you have an HMO plan, you'll have very little out-of-pocket expenses because deductibles and coinsurance are generally not part of the plan -- as long as you stay within the HMO network. So out-of-pocket expense maximums are usually not a factor in these plans. However, if you have a POS or PPO plan, you may have this type of maximum. In these plans, if you go out of network, you'll seem to fall into the rules found in a fee-for-service plan with deductibles and coinsurance costs. Because of this, many PPO and POS plans include an out-of-pocket expense maximum only when a patient goes out of the network.
For more information on out-of-pocket expenses, see the links on the next page.
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More Great Links
- Out-of-Pocket Health Care Costs Up. http://www.webmd.com/news/20061212/out-of-pocket-health-care-costs-up
- Buyer's Guide to Health Insurance. http://www.quotit.net/resources/terms_health2.htm
- AHRQ: Check Up On Health Insurance Choices. http://www.ahrq.gov/consumer/insuranceqa/