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Deductible vs. Out-of-Pocket Max: Health Insurance Basics

Deductible vs. Out-of-Pocket Max: Health Insurance Basics

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A deductible is what you pay first for your health care. For each policy year, you'll pay the full cost of doctors and treatments until your total spending reaches the deductible amount. Then you'll pay a portion of your health care costs as defined by your policy until you reach your out-of-pocket maximum. The out-of-pocket maximum is the upper limit on what you'll have to pay in a calendar year, and after your spending reaches this amount, the insurance company will pay all costs for covered health care services.

What's the difference between a deductible and an out-of-pocket limit?

Your insurance deductible is relevant at the beginning of your health insurance policy, and your out-of-pocket maximum is relevant after you've had significant health care during a policy year.

deductible vs. out-of-pocket max
  • Deductible: You pay 100% of your health care costs until your spending totals your deductible amount.
  • Coinsurance/copay: You'll pay a portion of your health care costs until your total spending reaches your out-of-pocket limit.
  • Out-of-pocket limit: You'll pay 0% for covered health services after your out-of-pocket limit.

What does annual deductible mean?

A health insurance deductible is the amount of money you pay out of pocket for health care services before your insurance plan starts contributing to the cost.

For example, if your deductible is $1,000, you'll pay in full for the first $1,000 of your health care. Your insurer will keep a running total of how much you pay, and when you hit $1,000, the cost-sharing benefits of your health insurance plan begin. This could mean, for example, that instead of paying the full price of $250 for an X-ray, you could pay $50, and the insurance company will pay $200.

In health insurance, the deductible works on an annual basis, and after your new policy year begins, the running total of what you've paid will reset to zero. This could mean that your health care costs will be higher in the first part of the calendar year until you hit your deductible amount. Then for the rest of the year, you'll get the cost-sharing benefits of your insurance plan, and you'll pay less for covered health care services.

What does out-of-pocket maximum mean?

An out-of-pocket maximum is a cap on what you'll have to pay for covered health care services in a year.

For example, if your out-of-pocket max is $3,000, the amount you pay for your deductible, copayments and coinsurance will be added together, and when the running total reaches $3,000, your health insurance company will start to pay the full cost for all covered health care services.

Your out-of-pocket limit also works on an annual basis, and the total resets to zero in the new policy year. Your out-of-pocket max helps protect you from a worst-case scenario where you need significant medical care. After your expenditures reach this limit, you won't have any out-of-pocket costs for additional treatments and services that are covered by your policy.

Deductible vs. out-of-pocket max insurance timeline

When you're looking at your costs for health care and health insurance, the timing will determine whether the deductible or out-of-pocket max will be more relevant to you. Let's look at how these structural features of your insurance policy will work during the calendar year.

Monthly payments

No matter what your health care needs are, you'll pay a monthly bill to have health insurance. This amount, called your premium, will stay the same throughout the year, and free preventive care is usually included. This can include wellness visits to your doctor and preventive screenings for issues like high blood pressure.

Phase 1: Before you reach your deductible

In the first part of your policy year, you'll pay out of pocket for many health care services beyond preventive care. This can include doctor's visits when you're sick, a trip to an urgent care center after an injury, tests such as an MRI, and more. You'll pay for all of these services in full until your total expenses add up to your deductible amount.

Your deductible amount is an important part of your policy because this first phase can have a big impact on the total amount you spend on health care each year. For example, people with high-deductible health plans may never reach their deductible amount, and they could be paying thousands of dollars for their health care without ever receiving any cost-sharing benefits.

Phase 2: After you meet your deductible amount

In the next part of your policy year, you'll get the benefit of sharing the cost of your health care with your health insurance company. Covered services will be billed at rates listed on your policy for copayments or coinsurance.

You'll pay a part of the bill such as a 15% coinsurance or a flat rate of a $50 copay. The insurance company will pay the rest of the bill.

The amount of money you're spending on health care is usually lower during this phase because you'll be paying only a portion of your health care costs. The running total of how much you spend continues to add up, and if your expenses reach your out-of-pocket maximum, you'll move to phase three of your health insurance policy.

Phase 3: After you reach your out-of-pocket maximum

The third phase of your policy year begins after your total spending for covered health care adds up to your policy's out-of-pocket maximum. After this threshold, your insurance company will pay 100% of the cost of covered health services.

Many people won't spend enough on health care to reach their out-of-pocket maximum, and this limit is most relevant for those who have significant health issues and may need ongoing care or expensive treatments. For people in these situations, choosing a plan with a lower out-of-pocket max is a way to minimize total health care costs.

The out-of-pocket max also provides a useful safety net for otherwise healthy people who have a surprise injury or accident. Health care costs can add up quickly, and this maximum spending limit can help you avoid astronomical health care costs that can lead to significant medical debt or bankruptcy.

How much is a typical deductible?

The average health insurance deductible is between $1,902 and $4,786 for plans purchased on the health insurance marketplace. Those who get their health insurance through an employer typically have lower deductibles, and the average deductible is $1,644 for covered workers.

However, there is a full range of possible plans with different deductible amounts. On one end, there are no-deductible health insurance plans where the cost-sharing benefits of your insurance policy begin right away. In contrast, high-deductible health plans mean that you're responsible for a large portion of your health care costs before the insurance company contributes.

Deductibles can also vary based on the number of people in the household who are covered. In these cases, deductibles are tracked both by individual and by family. If an individual reaches their deductible, the cost-sharing benefits begin for that person only. If the family deductible is reached, cost-sharing benefits begin for everyone in the household.

Counts toward your deductible
  • Amount spent on covered doctors, treatments and health services
  • What you spend on copayments or coinsurance
Excluded from your deductible

How much is a typical out-of-pocket max?

For those who have health insurance through their employer, the average out-of-pocket maximum is $4,039.

The out-of-pocket maximum for plans on the health insurance marketplace is usually higher than plans through an employer. However, the federal limit on an out-of-pocket maximum prevents it from becoming too high. In the current year, the out-of-pocket maximum can't be higher than $8,700 for an individual and $17,400 for a family for all insurance plans on the health insurance marketplace according to the final HHS rule. The federal limit is updated annually by the Department of Health and Human Services (HHS).

Counts toward your out-of-pocket max
  • Payments toward deductible
  • What you spend on copayments or coinsurance
Excluded from your out-of-pocket max
  • Amount spent on monthly insurance bills
  • Spending for out-of-network services or other uncovered health services

Does your deductible count toward the out-of-pocket maximum?

Yes, the amount you spend toward your deductible counts toward what you need to spend to reach your out-of-pocket max. So if you have a health insurance plan with a $1,000 deductible and a $3,000 out-of-pocket maximum, you'll pay $2,000 after your deductible amount before your out-of-pocket limit is reached.

Choosing the best health insurance policy

The deductible and out-of-pocket max are two very important factors when deciding which health insurance plan is right for your needs.

In general, you'll pay more each month to get better cost-sharing benefits, such as lower deductibles, lower out-of-pocket maximums, and lower copayments or coinsurance. These higher monthly costs may be worth it if you're expecting to need significant medical care in the upcoming year.

Choosing a plan with lower monthly payments can be good for those who are young and healthy, but it means higher deductibles, higher out-of-pocket maximums, and paying higher copayments or coinsurance for health services.

Comparing health insurance quotes can help you optimize how much you pay each month versus the policy's yearly deductible amount, cost-sharing benefits and out-of-pocket maximum.

Deductible vs. out-of-pocket max vs. coinsurance

Low amount
High amount
DeductibleLow deductibles usually mean higher monthly bills, but you'll get the cost-sharing benefits sooner.High deductibles can be a good choice for healthy people who don't expect significant medical bills.
Out-of-pocket maxA low out-of-pocket maximum gives you the most protection from major medical expenses.Having a high out-of-pocket max gives you the biggest risk that you'll face very high medical costs if you need significant health care.
Coinsurance and copayLower coinsurance and copayments can help you reduce your spending if you need moderate amounts of medical services, and you don't expect to reach the out-of-pocket max.Affordable plans with higher coinsurance and copayments can help you save money if you don't expect to need significant medical care.

Frequently asked questions

Why is an out-of-pocket max higher than a deductible?

An out-of-pocket maximum is always higher than (or equal to) a deductible. The deductible is the first threshold you reach at the beginning of the policy year, and after you reach your deductible, the cost-sharing benefits of the insurance policy begin. The out-of-pocket maximum is the next threshold, and when your total spending reaches the out-of-pocket maximum, your plan begins covering the full cost for included health services.

What happens when you meet your out-of-pocket maximum?

After your total health care spending toward the deductible, copayments and coinsurance reaches the out-of-pocket max, your health insurance policy will start paying 100% of the cost of covered health services.

How can your deductible and out-of-pocket max help you pay less?

Choosing a high-deductible plan is one way for young, healthy or low-risk people to save on health insurance because they will spend less on monthly bills and are less likely to have high medical costs. If you have significant medical needs, choosing a plan with a low deductible and out-of-pocket maximum can help you pay less overall because even though you'll pay more each month, you'll get better cost-sharing benefits.

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