Deductible vs. Out-of-Pocket Limit: A Breakdown

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Claire Smith 23-06-2021

Find Out How Much You’re Really Paying for Health Insurance

health insurance deductible vs out of pocket

Trying to predict how much you will have to pay for health care, and how much will be covered by your insurer, can be a bit of a puzzle. What is the difference between a deductible and an out-of-pocket limit in health insurance?

The breakdown can be simplified if you think of your medical expenses in terms of three categories: What you always have to pay, What you have to pay a portion of, and What you never have to pay.

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What You Will Always Have To Pay?

Your monthly premiums are always going to be your responsibility, even if you’ve reached your annual out-of-pocket max. So simply put those aside and forget about them for the purposes of understanding your deductible.

Your annual deductible varies from policy to policy. Most people have high-deductible health plans (HDHPs) which require low monthly premiums in exchange for the highest possible deductible. You always have to pay your deductible before your insurer will kick in to cover medical expenses. 

HDHPs are not recommended if you anticipate needing some medical attention due to an ongoing condition. As with all insurance, if you think you will be needing it, it would be wise to pay a high monthly premium. You will save way, way more in the long run since you’ll have a lower deductible and a lower out-of-pocket max.

What You Have to Pay a Portion of?

Once you’ve reached your deductible limit, you will still have to pay for the coinsurance portion of a medical bill, and any copay portion, which is a fixed amount that can range from $15 per bill to hundreds per bill. In other words, after you have paid your deductible, your insurance company will start paying a portion of your medical bills, but not all.

Usually, it’s a sizable portion: Under Medicare Plan B for instance, you only have to pay 20% of approved medical expenses. So your life does get a little bit sunnier after you’ve hit your deductible, which, as it happens, most people don’t if they are relatively healthy.

What You Will Never Have to Pay For?

You will not have to pay expenses over and above your out-of-pocket limit. This is when life gets a whole lot better for you financially! 

This out-of-pocket limit differs from plan by plan, but there is a maximum that you can be charged, and that limit is set by the Affordable Care Act (ACA). In 2021, the maximum annual out-of-pocket for individuals is $8,550, and for a family, it is $17,100. 

In theory, this protects most people from bankruptcy due to medical expenses. (In practice, studies have shown that 4 out of 10 Americans would have to borrow money to pay an unexpected bill of $1000.)

Your annual out-of-pocket max is reached by combining the following types of fees:

  • Deductible
  • Coinsurance (i.e. the 20% you pay for expenses past the deductible)
  • CoPay (some plans still require you to pay a fixed fee, such as $100 per service, after the deductible has been met)

Remember that your insurance company will never pay for your monthly premiums. That will always be something you are responsible for, even if you’ve reached yours out-of-pocket limit.

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To Summarize Difference Between a Deductible and Out-Of-Pocket Maximum:

Your insurance provider starts covering a portion of health care costs once you hit your deductible, and then covers all costs after you reach your out-of-pocket maximum.

Let’s look at a scenario to drive this home.

  1. Imagine that you’ve purchased a health plan with a $4,000 deductible with a coinsurance portion at 20%.
  2. Now let’s say you have an accident and you need two minor surgeries during the year you have the plan, one that costs $2,000 and another that costs $3,500.
  3. You would have to pay the full $2,000 for the first surgery plus $2,000 toward the second procedure.
  4. After that, you would only have to pay $300 (20%) of the remaining $1500, and your insurance company would pay for the rest.
  5. If you need additional health services later in the year (such as bloodwork or x-rays) you would continue to pay 20% of the costs, until you’ve hit the out of pocket limit on your insurance plan (or until you’ve hit $8,550)

You need to really get to know your insurance plan inside and out. One way you could be hit with a surprise bill is if you have multiple deductibles that you weren’t away of, such as one deductible for your spending at in-network health care providers, one deductible for out-of-network medical costs, and yet another for prescription drugs.

Tip: There Are Ways To Save Money!

If $8,550 sounds like a heck of a lot, consider opening up a health savings account (HSA). This is a way to set aside money to cover your medical costs, and it’s available to anyone with a high deductible health plan. 

Basically, this is a special account with a dedicated debit card that you draw from only for approved medical expenses. It comes off your paycheque, and your employer might even contribute to it. The benefits are: 

  • You own the account, so you don’t lose it if you switch jobs
  • It will roll over to future years if you don’t use it
  • You cannot be taxed on the interest earned on it
  • It’s pre-tax, which means it will lower your annual taxable income amount
  • You can even withdraw from it for non-approved expenses if you are willing to take a tax hit

This kind of account is far better than a flexible savings account (FSA) or a health reimbursement account (HRA) which are owned by your employer, take deductions from your paycheque, but expire at the end of the calendar year!

As you can see, there is a lot to know about your insurance plan when it comes to your deductible vs your out-of-pocket limit, so it’s important to work with an insurance agent when choosing the best option for you and your family. 

Claire SmithClaire is a creative entrepreneur with a variety of marketing and content creation skills, including blog and web copy writing, research, and strategy. She has a Masters in Cultural Studies from Queen's University and is known for thinking laterally about marketing, based on her deep knowledge of people and behavior.