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What’s the difference between a deductible and out-of-pocket maximum?

You just received a medical procedure and see the bill—you owe money. But don’t you pay a monthly fee for health insurance so you don’t have to pay medical bills? Not quite. 

Each year, many policyholders must spend a certain amount out of pocket on eligible medical services before their insurance plan begins paying for anything. Once they reach that dollar amount, called a deductible, the health insurance company shares the costs until the policyholder reaches his or her out-of-pocket maximum, a.k.a. the amount you must spend in order for the insurance to cover all eligible healthcare costs. Read on to understand the differences between the two.

What is a health insurance deductible?

An annual deductible is the amount of money you must spend on covered health care services before your health insurance plan begins to cover any of the costs. This is in addition to the monthly premium just to be on the plan. Typically, higher premiums translate to lower deductibles, while lower premiums tend to mean a higher deductible. Most insurance plans, including individual and employer health insurance, have a deductible. However, some health maintenance organization (HMO) plans have a low deductible or no deductible at all.

What is an out-of-pocket maximum?

An annual out-of-pocket maximum is the limit the policyholder will have to pay for healthcare services, not including the cost of the plan premium. After the policyholder reaches that amount (which the deductible and copays, among other costs, contribute to), the insurance plan will then cover all further eligible healthcare expenses for that year.

Deductible vs. out-of-pocket maximum

Essentially, a deductible is the cost a policyholder pays on health care before the insurance plan starts covering any expenses, whereas an out-of-pocket maximum is the amount a policyholder must spend on eligible healthcare expenses through copays, coinsurance, or deductibles before the insurance starts covering all covered expenses. Because of this, a policyholder’s deductible will always be lower than the out-of-pocket maximum.

“For example, a person might have a $2,000 deductible and a $5,000 maximum out-of-pocket,” says David Belk, MD, the author of True Cost of Health Care. “They might get $10,000 worth of medical care for, say, a hospitalization, surgery, and post-operative care. The first $2,000 is paid entirely by the patient. After that, the patient might have to pay either a fixed copay—$20, $50, $100 determined in advance by the insurance company, and depending on the service—or a percentage of the total payment for each covered service, which is a coinsurance.”

“Once the total of that person’s copays and coinsurances plus their deductible has totaled $5,000, they owe no more money that year for any of their medical care because their insurance will cover all further costs,” he explains.

How high can out-of-pocket maximums reach in 2020?

Although deductibles and out-of-pocket maximums vary by plan, all plans that meet the Affordable Care Act (ACA) standards set a yearly limit on how high out-of-pocket maximums can go. This year, the IRS defines high deductible health plans as those having a deductible of at least $1,400 for individuals or $2,800 for families. For 2020, out-of-pocket maximums can’t surpass $6,900 for an individual plan and $13,800 for a family plan. Costs incurred for out-of-network healthcare services do not count toward these figures.

Does the deductible apply to the out-of-pocket maximum?

First, it’s important to understand how to meet your deductible. Preventive care services like annual checkups are often provided without an additional consumer cost. Therefore, they don’t contribute toward meeting your deductible. Although it varies by plan, copays for covered office visits typically do not count toward a deductible while prescription drugs might count toward a separate prescription benefit deductible. Costs of hospitalization, surgery, lab tests, scans, and some medical devices usually count toward deductibles.

In-network, out-of-pocket expenses used to meet your deductible also apply toward the out-of-pocket maximum.

The monthly premium does not apply to either the deductible or out-of-pocket maximum. Even if you reach your out-of-pocket maximum, you’ll still have to continue paying the monthly cost of your health plan to continue receiving coverage. 

Services received from out-of-network providers also don’t count toward the out-of-pocket maximum, nor do some non-covered treatments and medications. Once the out-of-pocket maximum is met, policyholders should not have to pay any costs—including copayments and coinsurance—for any and all in-network medical care.

Deductible vs. out-of-pocket maximum: What counts?
Counts Does not count
  • Hospitalization
  • Surgery
  • Lab tests
  • Scans
  • Some medical devices
  • Prescriptions—although, they might count toward a separate deductible
  • Out-of-network services
  • Copays
  • Monthly premiums
Out-of-pocket limit
  • All out-of-pocket expenses spent to meet the deductible
  • Copays
  • Out-of-network services
  • Monthly premiums

How to save on healthcare costs

Do you have a high deductible and/or out-of-pocket maximum? There are still ways to save.

  • If all your out-of-pocket medical costs—in other words, the costs not paid for by your health plan—for the given year combined make up more than 10% of your annual gross income, you might be able to take a medical expense deduction on your taxes on a portion of your costs
  • Set up a health savings account (HSA), where you can deposit money tax-free for healthcare costs. Unlike a flexible savings account (FSA), HSA funds roll over year after year. If you don’t use all the money set aside in your HSA in 2020, you’ll have it for 2021 and beyond.
  • Save on healthcare costs by using SingleCare coupons for prescription drugs. Any out-of-pocket costs used with a SingleCare coupon will not count toward a deductible or out-of-pocket maximum but will save on costs nonetheless.