Business News Select | SMPost | Terms

Term: Out-of-Pocket Limit

21 Nov 2014

The maximum a health insurance policyholder will pay for covered health care over the course of the policy year. The out-of-pocket limit, also called the out-of-pocket maximum, helps the policyholder control risk by placing a cap on the most they could spend. It also helps the insurer control risk by making the policyholder responsible for a portion of his or her health care costs. After the policyholder meets the out-of-pocket limit, the health insurance company pays 100% of allowed health care expenses, which helps the individual avoid major financial problems associated with high health care costs in years when he or she needs a lot of treatment.

Health insurance premiums do not count toward the out-of-pocket limit. In addition, because some types of health care coverage a policyholder may want to receive (such as elective surgery) might not be covered by the health insurance plan, a policyholder could still end up paying more than the out-of-pocket limit in any given year. Balance billing charges for out-of-network services also do not count toward out-of-pocket limits.

Deductibles, co-payments and co-insurance count toward the out-of-pocket maximum under the Affordable Care Act (ACA). In addition, the ACA limits out-of-pocket maximums to $6,350 for individuals and $12,700 for families in 2014, while the 2015 maximums are $6,600 and $13,200, respectively.

Marketplace bronze and silver health insurance plans, which have lower monthly premiums, have higher out-of-pocket limits. The gold and platinum plans, which have higher monthly premiums, have lower out-of-pocket limits. Lower-income individuals and families can qualify for the lower out-of-pocket maximums associated with the gold and platinum plans while paying the lower premiums of a silver plan.

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 co-insurance is 40%. If you have covered surgery that costs $10,000, you’ll first pay your $4,500 deductible, which leaves $5,500 of the bill. Since your co-insurance is 40%, without an out-of-pocket maximum, you would owe another $2,200 and the insurance company would cover the remaining $3,300. But because your annual expenses are capped at $6,000 and you’ve already paid $4,500, you only pay $1,500 of the $5,500 balance, and the insurance company picks up the remaining $4,000. Your total cost for the surgery is $6,000, and your follow-up visits with your in-network doctor are completely paid for by your insurance since you’ve met your out-of-pocket maximum for the year.

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