# “Out of Pocket Maximum” and health insurance plan terminology & calculation?

I'm trying to understand the terminology on my health plan. I've read numerous websites, which have only confused me more, as they fail to use examples (more than one should be required) for people trying to understand this tricky terminology.

I have a plan similar to this one (High Deductible): http://provider.healthcare.cigna.com/PDFs/Prudential/2011_813842cHSAFund.pdf, except that the In-Network Coverage Year Deductible is \$3,000 per family, Out-of-Pocket Maximum (includes deductibles, excludes copays) is \$10,000 per family, and Office Visits, Inpatient Hospitalization/Surgery, Outpatient Surgery In-Network are 80% after deductible (confused: 80% covered? Not covered? It doesn't specify, nor does it list examples for me to grasp how this works).

For anyone who understands this terminology, let me try to understand this by using one example (I may use another one if I'm still confused, but for now, this should work):

We had a hospitalization cost of \$150,000, including the emergency room, ICU and general hospital cost after the ICU for 5 days. After that, we had to do inpatient care for 21 days at a cost of \$1000 per day. So, at this point, the total out of pocket cost if we had no insurance would be \$171,000. On top of that, we'll be doing outpatient rehab at a cost of \$400 per day for 3 days a week for a total of 16 weeks (total cost of the outpatient rehab is \$19,200; total cost overall is \$190,200). Using the insurance plan listed above this, what would we owe?

My assumption is that we would owe \$10,000 since that is the maximum out of pocket; but I begin getting confused by the 80% deductibles (which, seem to contradict the very nature of a High Deductible plan - the idea is that once you are over a maximum, they pay everything; or at least, they used to).

Thanks for your question. Unfortunately, you're correct that these types of benefits often are not well explained. Let me apologize in advance for a long answer, but I'd like to provide the most comprehensive explanation I can.

Additionally, there are a number of factors involved that weren't mentioned in your example, but that could substantially affect how benefits are determined. For example, it is possible that:

1. The different types of care received could be covered at different rates, based on network status or the type of service provided (e.g. my plan covers rehab at a different coinsurance rate than a hospital stay.)

2. Some of the services provided to you in all of these settings may have been out-of-network as well as in-network (e.g. it is very common for an in-network hospital to assign you doctors that are out-of-network) which could be paid at different levels based on network status.

3. If these services were all for one patient, it's very possible that your plan may have an individual deductible and/or out-of-pocket maximum that is different from the family deductible and/or out-of-pocket maximum, and this could also affect how benefits are determined.

If you have an HSA similar to what is listed in the link you provided, this is likely not a factor. This is primarily a savings account that allows you and your employer to contribute so that you don't have to come up with the full deductible when care is needed. Also, the 80% you are seeing is probably an 80% coinsurance. That would mean that once you've met your deductible, 80% of the allowable costs would be covered by insurance, 20% would be paid by you, and the remainder of the costs would either be written off (if in-network) or billed to you (if out-of-network).

I'll speak more to each of these concepts later in my answer.

Assumptions and New Example

Because of the factors I mentioned above, I'm going to use a simplified example to explain the out-of-pocket maximum concept, and then explain how some of the additional factors you mentioned (or that weren't specified) might also affect this. Let's assume the following:

1. One individual with insurance
2. \$3,000.00 individual in-network deductible
3. \$10,000.00 individual in-network out-of-pocket maximum
4. No part of the deductible has been met yet
5. \$190,000.00 of allowable in-network charges
6. All of the charges listed in (5) are covered at 80% coinsurance (no co-pay)

You're probably familiar with these terms, but for those who may not be:

Deductible is the amount you must pay before your insurance "kicks in" and begins to pay benefits. People often elect a higher deductible to lower their premium if they don't expect to need care frequently. Please note that in all plans which I'm aware of, the deductible and copays do not apply to your out-of-pocket maximum. The out-of-pocket maximum only reflects the coinsurance paid toward services which your plan specifies as pertaining to the out-of-pocket maximum (some services do not apply).

Copay is when you pay a fixed dollar cost regardless of the amount of services you receive. Common examples for this include a doctor's office visit or prescription drugs.

Coinsurance is when you share the cost with your insurer on a percentage basis. So in this example, for \$1,000.00 of allowable in-network charges, you would pay \$200.00 and your insurer would pay \$800.00, assuming that you had already met your deductible.

Out-of-Pocket Maximum (OOP max) The amount after which your insurance pays for 100% of covered care, and your share of applicable charges falls to 0%. Please note that this amount typically excludes the deductible, copays, and some services which may be specified by your plan (for example, I have coverage on a coinsurance basis for chiropractic care, but the coinsurance I pay does not add to the total paid toward my out-of-pocket maximum.) This amount is based on the amount of coinsurance you've paid, not the total charges.

Application

I find it useful to think of how insurance works in terms of several buckets (the industry term is "accumulators" or "accums"). When you've filled bucket #1, you start filling bucket #2, and so on. In this case, the first accum is the deductible, the second is the out-of-pocket max, and after that, certain care is paid at 100%. Typically, we speak of the deductible and the out-of-pocket-maximum amounts as having been "met" or "not met".

So in this example, the individual would first pay the \$3,000.00 deductible, reducing the remaining charges to \$187,000.00. At this point, the deductible accum (or bucket) has been "met", so insurance benefits will begin to be paid, but nothing has yet been applied to the out-of-pocket-max accum. For the next \$50,000.00 of services, your share (coinsurance) is 20%, or \$10,000.00, and the remaining \$40,000.00 is paid by your insurer. So now the remaining balance has been reduced to \$137,000.00, you have "met" your out-of-pocket maximum, and the total you've paid is \$13,000.00. Since you have met your out-of-pocket maximum, the remaining balance is paid at 100% by your insurer (you pay 0%). So you've paid a total of \$13,000.00 in this example.

Real-World Differences

In real life, there are a number of potential differences that could substantially change the amount you'd need to pay. For example:

1. If some of the services were billed out-of-network, they may not apply to your in-network accums (deductible or OOP max). If you have out-of-network coverage, you may have separate accums that need to be met before benefits will be paid on services provided out of network. Additionally, even if you meet your deductible, you may be subject to balance billing by out-of-network providers, meaning that you'd pay any amount over what your insurer deems to be a reasonable charge for the services you received, in addition to your deductible and coinsurance, as the out-of-network services providers are not contractually obligated to write off any billed amount over the amount that your insurer deems to be reasonable. If you have no out-of-network coverage, you may be responsible for all charges.

2. Some of the services may not apply to the out-of-pocket-max accum at all, depending on the specifics of your plan. You will need to refer to your benefit booklet here to determine what services may or may not be included. If this is the case, you would continue to pay your coinsurance (20%, assuming they are in-network) on these services indefinitely and without limit.

3. Your plan year or accums may differ from the calendar year. In some cases, you may be on a different calendar for your benefits than your accums. For instance, I know of some instances where the benefits change mid-year, but the accums balances are reset on a calendar year (Jan-Dec) basis in terms of when they reset. This can cause unexpected surprises if you think you've met your deductible or OOP max, but aren't aware of the difference.

4. If all services are billed as in-network, the insurer will often pay their coinsurance amount (80%) and assign yours (20%) based on the contracted rates your service provider has agreed to accept, regardless of what was billed. In a PPO setting, for example, the service provider would then write off the remainder of the charges. I bring this up so that you'll be aware of this when you see the bills and EOBs, so that you know that your coinsurance won't always be 20% of the total charges.

5. If you have family coverage, you may have separate family and individual accums for your in-network and/or out-of-network coverages. For example, I have a family plan covering myself and two other family members with a \$2,000.00 in-network family deductible, but we also have a \$1,000.00 in-network individual deductible. So if I pay \$1,000.00 toward my deductible, my insurance will kick in for any other services I incur, but not for my other two family members. They would need to meet their deductibles first. Then, when the total deductible (for any/all 3 of us) exceeds \$2,000.00, the family deductible is met and then no one needs to pay anything more toward deductible, even if they haven't yet exceeded \$1,000.00 in deductible individually. We also have separate family and individual out-of-pocket maximum limits that work the same way.

I bring this up simply to say that if this is also the case for you, please be aware that simply because you've met the OOP max for one person in your family, you may still have to pay deductible or coinsurance (and always copays) for other members of your family who haven't yet met their deductible or OOP max. Even though the charges for the one individual may be greater than the family OOP max, once that person's individual OOP max has been reached, further charges are paid at 100% and no additional coinsurance is paid, so no additional amount is applied to the family's OOP max (this also works the same way for individual/family deductibles).

All that being said, make sure you are aware of all the "buckets" that need to be filled (individual, family, in-network, out-of-network) before benefits are paid, and before your OOP max is met.

Also, please be aware that insurance will often pay bills and assign amounts to deductible, OOP max, etc. in the order the bills are received by them, not the order in which the services are provided to you. This can make it very frustrating to find out how charges were handled if you aren't working through the bills in the order which your insurer did. Again, you should see general pattern of (a) applied to deductible (you pay 100%), then (b) cost sharing (you pay 20%) then (c) OOP max reached (you pay 0%) for a given individual/family.

I hope this is helpful. I wish I knew of a way to make this more simple, but I wanted you to have all the information I'm aware of. Isn't it fun to deal with insurance companies?

To figure out what you will really need to pay, you will need to refer to your specific plan benefits. I would also recommend calling customer service to have someone walk through this specific example once they've received all the claims from your service provider. Best of luck!

• Actually, the long answer was much more useful! I appreciate your time and answer; it gives me an idea of what I'll owe. For tax purposes, do these costs that I owe qualify for reporting for our household taxes as medical expenses? I'm assuming the actual costs of the plan, for instance if it's COBRA, don't qualify, but the out of pocket costs, I would assume so. – Question3CPO Mar 26 '13 at 18:48
• Take a look at irs.gov/taxtopics/tc502.html and irs.gov/publications/p502/index.html. Tax deductions for medical expenses are subject to a lot of stipulations based on your income, what the services were for, and how you may have already received reimbursement and/or tax advantages. It's very different for different people. – JAGAnalyst Mar 26 '13 at 19:57
• Simply put - Out of pocket medical (including dental, eye care, etc) is an itemized deduction to the extent it exceeds 7.5% of AGI. In 2013 this rises to 10%. So you must have high out of pocket and itemize already to benefit. – JTP - Apologise to Monica Mar 27 '13 at 15:29
• As an FYI, this response was written pre-ACA. As it currently stands, many types of out of pocket expenses will now count toward the Out of Pocket Maximum. – JAGAnalyst Nov 19 '13 at 0:18
• Regarding max out-of-pocket, "Please note that this amount typically excludes the deductible, copays". Pretty sure this is incorrect. – 8protons Dec 10 '17 at 18:40

Actually, every insurance plan I ever had includes the deductible in the out of pocket max. Example: my current plan has a \$500 deductible and a \$3000 out of pocket max. I have to pay the first \$500, then insurance starts kicking in the 80/20 thing until I've paid (or owe) \$3000, (not \$500+\$3000) then thy pay 100% of everything. I do not have to pay a penny for anything once that is met. Not even office visit co pays. I have some chronic medical conditions and I've met my out of pocket max early in the year for at least the last 5 years.

If I go out of network, it's a whole different set of rules. But, last year, I had a colonoscopy and the doctor sent my tissue sample to an out of network lab. I got a bill from the lab and called my insurance company. They agreed that since the doctor was in network and I didn't have choice in what lab was used, they reprocessed the claim and paid for the out of network lab as if it were in network.