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Everything You Need to Know About Out-of-Pocket Expenses

If you are like many Americans, you may not fully understand how your health insurance policy works.  You probably know that you need to make monthly premium payments to maintain your health coverage, and you probably understand that when you see a doctor or stay in a hospital, your insurance will pay a portion of your bills.  However, you may not understand how or why you must pay a portion of those expenses yourself.

When you visit a physician, you will likely be asked to pay a co-payment or co-insurance. These relatively small amounts are commonly known as out-of-pocket expenses, because you are expected to pay them out of your personal funds.  In most cases, health insurers won’t cover any of your medical expenses until you make your out-of-pocket payments first.

Out-of-Pocket Expenses

There are three types of out-of-pocket expenses:

  1. Co-payments: These small fees typically range from $15 to $50 and are expected when you obtain certain medical services and products including an examination, lab tests or prescription medications. Although the fee for a product may vary according to what you get, the amount of the copay doesn’t usually change if the price fluctuates. You are expected to pay these at the time you obtain these products. This fee is a way of sharing costs between you and your insurer; in other words, it helps you and your insurer share the responsibility of paying medical bills.
  2. Coinsurance: Although similar to co-payments, co-insurance is not usually a set amount, but is a percentage of the total bill, so the amount you pay does depend on the price of the service. A co-insurance is applied only after you have paid your annual deductible and before you reach your annual out-of-pocket maximum. Many insurers use a co-insurance when you see an out-of-network health care provider as an incentive to remain in network.
  3. Deductible: This out-of-pocket expense is a set annual amount that must be paid before your insurer will begin paying their share of your medical expenses. In 2015, the average annual deductible for individual health plans found on the Affordable Care Act-sponsored health insurance exchanges was $4,120 and $7,760 for family health plans. This may seem like a lot, but every medical bill you incur and pay off yourself goes towards this annual deductible. Typically, you can find plans with lower deductibles if you are willing to make higher monthly premium payments.

You should also be familiar with the concept of an out-of-pocket maximum.  This is the total amount you are responsible for in any given year and usually includes payments toward your annual deductible, co-payments and co-insurance.  Once you reach your annual out-of-pocket limit, you are no longer required to pay co-payments or co-insurance. In 2016, a part of the Affordable Care Act went into effect that capped the individual out-of-pocket maximum at $6,850; this rose to $7,150 in 2017. However, your monthly premium payments are not considered an out-of-pocket expense so do not go towards your out-of-pocket annual maximum.

Affordable Care Act
Michail Petrov/

You may also be happy to know that the ACA eliminated lifetime and annual limits on coverage—at least for essential health benefits like hospitalization, emergency services, prescription drugs and maternity care.  However, certain products and services that are not considered essential may still be capped annually or over the life of the policy.

Shop For Health Insurance Wisely

This may still be confusing, so an example may help clarify the situation.  Our friend Bob has a health plan with a $1,000 annual deductible and a $5,000 annual out-of-pocket maximum.  Bob breaks his leg and has to have a $50,000 surgery.  When he gets the bill, he must pay the first $1,000 himself, but then his insurer starts paying their share of the remaining $49,000. If they are responsible for 70 percent of the expenses, then Bob must pay a 30 percent co-insurance.  However, he soon pays an additional $4,000 in co-insurance, and reaches his out-of-pocket maximum.  At this point, his health insurer starts paying 100 percent of all his medical bills (but Bob must continue to make his monthly premium payments).

It may be somewhat difficult to understand all of the terms regarding out-of-pocket expenses, but there is a concept that is relatively simple that you should keep in mind while shopping for a health insurance policy.  If you want a plan with a lower up-front cost, then you will likely pay more on the back-end, and vice versa.  In other words, if you are willing to pay more each month, then you will likely pay less in out-of-pocket expenses.

You should know that if you get a plan off of the Obamacare exchanges, you may pay more for a plan with lower deductibles and a lower out-of-pocket maximum.  If you rarely see a doctor and are healthy, you may want to get a higher deductible plan; you will pay a larger portion of medical bills, but you will pay less each month in premiums.  On the other hand, if you are chronically ill, it may make more financial sense to get a higher premium plan that requires less out-of-pocket payments for frequent doctor visits.  The good news is that if you meet income eligibility requirements for an Obamacare plana, you will probably receive thousands of dollars in assistance that should lower your monthly premium to a relatively small amount.

How to Learn More About Your Health Insurance

If you are unsure about your responsibilities under your health insurance policy, you should carefully read the Summary of Benefits and Coverage portion of your policy.  The Summary should detail how much in premiums and out-of-pocket expenses you are expected to pay. If you are still unsure what your financial responsibilities are after reading your policy, you may find assistance from the health insurance experts at Boost Health Insurance. Not only can Boost Health Insurance help you understand your existing policy, but if you are dissatisfied with it in any way, we can help you find a policy that better meets your needs. Visit us today!

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