UPDATED: Sep 10, 2013
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The cost of your health insurance is not determined by monthly premiums alone. To get a more realistic idea of how much an insurance policy will cost, you also need to know how much money you will spend out of your own pocket. Policies with high out-of-pocket costs will usually cost less per month, but they may not be practical if you do not have the money available to cover these expenses. This is why knowing your out-of-pocket limit (or out-of-pocket maximum) is so important.
By balancing your out-of-pocket expenses with your monthly premiums, you can find the best price to fit your needs. Different people will have different insurance needs, so it pays to do some research and carefully consider what you really need from your policy.
What Goes Into an Out-of-Pocket Maximum?
Nearly all health insurance policies will require you to pay for a portion of your health care costs. The exact amount you pay will vary depending on the type of policy you have and what type of care you receive. There are a few types of expenses you can expect to pay out of your pocket:
- Deductible – This is the amount that you must pay for your treatment before your insurance kicks in. The deductible usually does not apply to preventative care or prescription drugs, but it will be applied to any specialist visits, emergency room visits, surgeries and other medical costs. Deductible amounts vary from one policy to the next, and are applied on an annual basis.
- Copayment – A flat dollar amount that you are responsible for paying when you receive medical care. The copay is determined by the insurance company and will differ depending on the type of care you receive. For example, you might have a $100 copay for an emergency room visit and just a $25 copay for an office visit.
- Coinsurance – This is another type of payment that comes out of your pocket. Unlike a copay, the coinsurance is calculated on a percentage of the total cost of care. Coinsurance will usually be higher if you use a doctor outside of your network of preferred providers.
The total amount of these expenses that you will be expected to pay is your out-of-pocket limit.
What Happens Once the Limit is Reached?
After your annual spending limit has been reached, you will not need to pay any further copayments, coinsurance or deductibles when obtaining medical attention. At the end of the year, your spending limit will reset, and you will need to continue paying any out-of-pocket expenses listed on your policy.
Some people with high-deductible or catastrophe insurance plans choose to use a health savings account to pay for these out-of-pocket expenses. Because policies with high out-of-pocket maximums are usually cheaper than those with lower ones, combining this type of policy with an HSA can result in more savings.