When Your Out-Of-Pocket Maximum Isn’t Really The Maximum Amount You’ll Spend
In our FAQ What Type of Health Insurance Is Best For Me?, we discuss costs to consider when selecting a health insurance plan. One of these costs is “Out-of-Pocket Maximum” (OOPM). On this page, we explain why you might end up spending far more than your out-of-pocket maximum dollar amount. The reason concerns your health insurance company’s definition of OOPM. In many cases, your insurer allows for care that is “in-network” and “out-of-network.” Oftentimes, your Out-of-Pocket Maximum applies to 100% of in-network care costs, but doesn’t apply to 100% of out-of-network care costs. And this is how you might end up spending thousands of dollars more than your insurance policy’s out-of-pocket maximum. Unfortunately, many policyholders aren’t aware of this fact and spend far more than they expected to. Out-of-Pocket Maximum is confusing and we break it down on this page.
How The Affordable Care Act Changed Your Maximum Healthcare Costs
Before the Affordable Care Act was enacted in 2010, health insurance companies put annual or lifetime limits on how much they would pay for a policyholder’s care. At the time, if the cost of a policyholder’s medical care exceeded the set limit, the remaining expenses would be the policyholder’s responsibility. As a result, many people were left having to pay excessive health care costs. As a remedy, the Affordable Care Act removed annual and lifetime limits, and instituted an annual Out-of-Pocket Maximum. The goal of the Out-of-Pocket Maximum is to protect policyholders by ensuring they won’t be required to pay anything above a certain agreed-upon amount.
How Is Out-Of-Pocket Maximum Defined?
The term Out-of-Pocket Maximum is typically defined as “the most you have to pay for covered services in a plan year.” Once you factor in deductibles, copays, coinsurance, prescription costs, and everything else you end up paying for, however, the meaning can be confusing.
Health insurance policies are cost-sharing agreements, meaning the policy determines how much the insurance is responsible for and how much the policyholder is responsible for. Insurance companies typically use a combination of deductibles, copayments, and coinsurance for policyholders to pay their share. Most insurance plans provide a Summary of Benefits that lists a policyholder’s deductible, copayment, coinsurance, and out-of-pocket maximum.
Factoring In Your Deductible, Copayment, and Coinsurance
A policyholder typically has a deductible set at a certain dollar amount per plan year. The deductible is the amount that a policyholder must pay before the insurance plan will begin paying its share of the cost for covered services. Some services like annual checkups and preventive care are often not subject to the deductible, and you can receive coverage for these services regardless of your deductible’s status. For other care, such as visiting a specialist, a policyholder often must pay the full price of each service until they reach their yearly deductible amount. Once the deductible amount is met, the policyholder is only responsible for the copayment or coinsurance amount. Copayment is a set price (e.g., $10) that a policyholder must pay for a certain service, while coinsurance is a set percentage (e.g., 20%).
Once a policyholder has met their deductible, they are still responsible for copays and coinsurance until they have reached their Out-of-Pocket Maximum, which is another set dollar amount provided by each plan. Generally, all payments towards the deductible, as well as all eligible copayments and coinsurance, apply to the Out-of-Pocket Maximum.
Real Numbers Example
Let’s say a policyholder’s deductible is $5,000 and their Out-of-Pocket Maximum is $10,000. At the beginning of the policy year, this policyholder will be required to pay for services in full until they have reached $5,000. After reaching $5,000, the policyholder will only be responsible for copays or coinsurance amounts. If the policyholder goes on to spend $5,000 more on copays or coinsurance, they will then meet their $10,000 Out-of-Pocket Maximum. Once this happens, the insurance must cover all eligible expenses, and the policyholder is no longer responsible for copayment or coinsurance. This ensures that regardless of the price of an insured’s medical care, the insured will not be responsible for costs over a certain amount within the policy year. Deductibles and Out-of-Pocket Maximums reset at the beginning of each policy year.
How Do Eligible Costs and Allowable Amounts Factor In?
We previously mentioned that eligible costs will be applied to the Out-of-Pocket Maximum, but what costs are eligible? And what happens to the ineligible costs that exceed the Out-of-Pocket Maximum?
To answer this question, we need to understand in-network and out-of-network cost sharing policies and the definition of an Allowable Amount. Most health insurance plans contract with a network of providers. As a part of this contract, insurance companies and providers negotiate a discounted rate. A doctor may agree to only charge $200 per appointment for policyholders of a specific insurance company, rather than the $400 they would typically charge. It is advantageous for both sides to negotiate these discounted rates; it keeps costs low for the insurance company, and it guarantees patients for the providers. Each policy determines how an insurance company and its insureds share the cost of in-network services, typically each paying a percentage of the cost.
Out-Of-Network Services Are Calculated Differently For Cost-Sharing
If you were to visit an out-of-network provider, however, the cost-sharing works a little differently. Because out-of-network providers have not agreed to discounted rates, they will charge the full price for all services. Some plans, like an HMO (Health Maintenance Organization), do not allow any out-of-network care (other than emergency services) because it is so much more expensive. Plans like a PPO (Preferred Provider Organization) do allow an insured person to receive out-of-network care, but at a higher price. To discourage patients from going out-of-network, the cost-sharing is typically different. Instead of an 80/20 split between the insurance and the insured for in-network care, for example, it may be 50/50 or worse for out-of-network care.
Insurance companies, at the end of the day, are businesses that aim to maximize their profits. If a policyholder could be treated by an in-network provider that offers a discounted rate of $200 per appointment, but chooses to see an out-of-network provider that charges $400 per appointment, insurance companies don’t want to be responsible for the extra costs. This is where the Allowable Amount comes in. Allowable Amount is often defined as “the maximum payment the plan will pay for a covered health care service.” A health insurance company may allow its insured to see out-of-network providers, but it is not agreeing to pay more for them to do so. If the typical negotiated rate for a certain service in-network is $200, the insurance may set the Allowable Amount for this service out-of-network at $200 also. $200 would be considered covered and eligible, and the remaining $200 would be considered non-covered and ineligible.
In the example above, if the cost-sharing is 50/50, the insurance would pay 50% of the Allowable Amount, not the entire cost. The insured would then be responsible for the remaining 50% of the Allowable Amount plus the entirety of the non-covered cost. Only the payment under the Allowable Amount is considered eligible and applied to the deductible and the Out-of-Pocket Maximum. The remaining non-covered cost is ineligible and does not apply to these at all.
How Out-Of-Network Allowable and Eligible Amounts Impact your Out-Of-Pocket Maximum
Let’s break this down further with another example. Say you are enrolled in a Gold PPO plan, which specifies that the insurance company will pay 80% of the cost for in-network services, and you will pay for the remaining 20%. For in-network specialist visits, your insurance has negotiated a rate of $200 per appointment. In this case, your insurance would pay 80% of $200, which is $160, and you would pay 20% of $200, which is $40. $40 would be the total price for the insured.
But say that your plan specifies that for out-of-network services, the insurance will pay 50% of the Allowable Amount and you will pay the remaining 50%. Remember, the Allowable Amount is set by your insurance company and may be the same amount they pay in-network. So, if you visit an out-of-network provider that charges $400 but your insurance’s Allowable Amount is $200, your insurance will only pay 50% of $200. The insurance pays $100 and you pay $100, but you also pay the remaining $200 that the plan considers non-covered. Despite you paying $300 total, only your half of the Allowable Amount, $100, goes toward your deductible and Out-of-Pocket Maximum. Thus, the same services in-network and out-of-network not only cost different amounts, but also apply different amounts toward your Out-of-Pocket Maximum.
Out-Of-Pocket Maximum May Not Equal Your Total Out-Of-Pocket Spending
Many policyholders aren’t aware of this specification. When you hear the phrase Out-of-Pocket Maximum, it makes sense to assume that no matter what care you receive, you will not be required to spend any more than this amount. Many people receive care from out-of-network providers thinking that they will have to pay more out-of-pocket, but that these costs will ultimately be applied toward the Out-of-Pocket Maximum. Unfortunately, anything that exceeds the Allowable Amount is the insured’s responsibility. When seeking out-of-network care, there’s a possibility that what you really end up paying is much more than the Out-of-Pocket Maximum agreed upon in your plan.
Consider Out-Of-Network Providers Carefully
While there are many reasons a policyholder would need to get medical care out-of-network, it is important that you consider all your in-network options first. All in-network care falls within the Allowable Amount, so a policyholder won’t have to pay for any non-covered costs, and all the money that they pay out-of-pocket will actually be applied to their Out-of-Pocket Maximum. It is only in out-of-network circumstances that there may be non-covered, ineligible costs. If you can, stay in-network to avoid these surprise costs. If you must go out-of-network, make sure that you are aware of the Allowable Amount for the service you need. This way, you can be prepared for the true cost of the service, which is your share of the Allowable Amount in addition to whatever is considered non-covered.
About The Law Offices of Scott Glovsky
Claremont, Los Angeles, and Pasadena-based Law Offices of Scott Glovsky has been fighting for the rights of insurance policyholders for nearly 25 years. Scott Glovsky is recognized as one of the most experienced, compassionate, and well-respected insurance attorneys in the country. We’ve helped many insurance policyholders get the care they desperately need and are already paying for. Results of our cases have impacted millions of California insurance policyholders by forcing insurers to change their behavior – including their processes of reviewing requests for medically necessary treatments.