When you need medical care, bills can add up fast — especially with an unexpected hospitalization or illness. But if you have health coverage, you can rest easy, knowing that you have built-in help covering costs.
In fact, health plans have a limit to how much you’re required to pay for covered services each year. This limit is called the out-of-pocket maximum. Understanding what it is and how it works can help you plan for upcoming medical expenses.
What is an out-of-pocket maximum? A simple definition
Your out-of-pocket maximum (or OOP maximum) is the highest amount you can expect to pay for covered care in a plan year. Once you’ve reached your out-of-pocket maximum, your health coverage provider will pay for 100% of covered care.
Unexpected medical care can add up to tens of thousands of dollars, a figure that even careful savers may struggle to pay for alone. The limit on out-of-pocket costs protects you from sole responsibility for expensive — and often unpredictable — medical bills. When you reach the maximum, you’ve fulfilled your financial obligation for covered healthcare services for the year, and your plan covers the rest of the costs.
What happens when you hit your out-of-pocket maximum?
If you expect large or frequent medical bills in a year—for example, major surgery, a hospital stay, pregnancy or childbirth — you might reach your out-of-pocket maximum. Once you reach this upper limit, you no longer share costs with your plan provider. Instead, your plan takes over 100% of the cost of covered medical services for the rest of the year.
How do out-of-pocket maximums work?
Let’s say your plan has a $4,000 out-of-pocket maximum. Once you’ve paid $4,000 toward your covered health expenses (such as hospital bills, prescriptions and copays), you pay $0 out of pocket for covered medical costs for the rest of the year. That means that even if you get a $20,000 medical bill for covered services, your plan provider will pay the full amount.
This continues until your plan year ends and your out-of-pocket maximum resets for the next year.
Out-of-pocket maximum vs. deductible: What’s the difference?
Your deductible and out-of-pocket maximum are two health plan limits that dictate how much you pay for medical services.
A deductible is the amount you must pay for covered health expenses before your plan provider will start sharing costs with you. Once you’ve reached your deductible, you unlock cost-sharing. Typically this is a copay (a flat fee for covered services) or coinsurance (a percentage of the total cost for covered services). Cost-sharing continues until you reach your out-of-pocket maximum.
The out-of-pocket maximum is just that – the maximum amount you’ll pay for care under your plan. Once you’ve hit the maximum, you’re done paying out of pocket for covered expenses for the rest of the year.
What counts toward your out-of-pocket maximum (copays, coinsurance, deductible)
Typically, all covered, in-network medical expenses count toward your out-of-pocket maximum, including:
- Your deductible
- Coinsurance and copays
- Prescription costs
- Hospital bills
- Payments for covered lab tests, exams, imaging and scans
- Outpatient and inpatient surgery
- Expenses for covered medical equipment and supplies
What doesn’t count (premiums, out-of-network, non-covered services)
Not all healthcare-related expenses that you pay will contribute to your out-of-pocket maximum. This means that even if you have reached the maximum, you will still have to pay for the following:
- Your monthly premium to pay for the cost of your health coverage
- Out-of-network care
- Services that aren’t covered by your plan
Individual vs. family out-of-pocket maximums
If you have a family health plan, you will likely have two out-of-pocket maximums: an individual maximum and a family maximum. This is called an embedded plan. Any time an individual on the plan pays for a covered health expense, it contributes to both that individual’s maximum and the family’s maximum. Once the family maximum has been reached, the plan fully pays everyone’s covered medical expenses, even if they haven’t met their own individual maximum.
Here’s an example for a family of four with $4,000 individual out-of-pocket maximums and an $8,000 family out-of-pocket maximum:
- Mom has major surgery that costs $25,000. She pays $4,000 and reaches her individual out-of-pocket maximum with this one expense. She also contributes $4,000 toward the family out-of-pocket maximum. The plan covers 100% of her subsequent medical costs for the year.
- Dad has a hospital stay that costs $20,000. He also pays $4,000, reaching both his individual out-of-pocket maximum and the family out-of-pocket maximum.
Now, the health coverage provider pays 100% of covered medical expenses for the entire family for the rest of the year. Even though the dependents haven’t reached their individual out-of-pocket maximums, the family maximum covers them.