What it means
In business, out-of-pocket expenses are costs that an employee or contractor pays personally while doing their job, such as a taxi to a client meeting or a hotel booking. The person then submits a claim and is reimbursed.
Companies keep track of these claims to make sure that only genuine business costs are repaid. In insurance, particularly health insurance, out-of-pocket costs are what the patient pays after the insurer has contributed its share.
They include the deductible, the amount you pay before cover starts, and coinsurance, your percentage share of the bill after that. Co-payments, which are fixed fees for particular services, are also included.
The distinction matters because the headline price of a service is rarely what the person ends up paying. A $10,000 procedure may cost the patient $2,800 after the insurer pays its share, or far more if the provider is outside the insurer's network.
Anyone budgeting for health costs, either personally or as an employer designing a benefits plan, needs to know the likely out-of-pocket amount. Finance teams also look at out-of-pocket cost when cash is tight.
A small business owner may pay a supplier from a personal card to keep operations going, which creates a debt that the company owes the owner and must be recorded. Documenting such payments properly avoids confusion between personal and business money.
Clear policies help. A good expense policy states what is claimable, what receipts are needed and how fast reimbursement will be made.
Delays in repayment are a common source of frustration for staff who are effectively lending the company money. For employers, out-of-pocket exposure is an input to benefits design.
A plan with a large deductible keeps premiums lower but pushes more cost onto staff, who may delay treatment or ask for higher pay. Finance teams therefore weigh the savings in premiums against the wider cost of an unhappy or unwell workforce.
In practice
Real-world examples.
Example
A sales manager pays $640 for flights and a hotel while visiting a client and submits an expense claim. The finance team checks the receipts against the travel policy and reimburses her within a week. The company records the cost as travel expense.
Example
A freelance designer buys $250 of software needed for a client project and includes it as a reimbursable cost on her invoice. The client agrees because the contract allows out-of-pocket expenses at cost. Both sides keep the receipt as support, and the invoice shows the expense on a separate line from the fee.
Example
A family faces a $10,000 hospital bill and works out they will pay $2,800 after their insurer's share. They set aside the amount in a savings account in advance, so the bill does not strain their budget.
Formula
Calculation
Out-of-pocket cost = deductible + coinsurance rate x (total bill - deductible)
A patient has a medical bill of $10,000, a deductible of $1,000 and 20% coinsurance. After the deductible, the remaining bill is 10,000 - 1,000 = $9,000. The coinsurance is 0.20 x 9,000 = $1,800, so the out-of-pocket cost is 1,000 + 1,800 = $2,800. The insurer pays 10,000 - 2,800 = $7,200.Case study
Seen in the real world.
Marlow Engineering is a fictional consultancy, and this story is illustrative. Its staff regularly paid for client travel on personal cards, and some waited up to two months for repayment.
The finance manager reviewed 12 months of claims and found that staff had been out of pocket by an average of $1,800 each at any time. Late repayment was causing complaints and even causing some consultants to avoid client visits.
The firm introduced company cards and a rule that claims be reimbursed within ten days. Repayment times fell from an average of 40 days to 8, and complaints stopped within a quarter. The illustrative lesson is that making employees fund business costs from their own pockets is an unrecorded loan that damages morale.
Watch out
Common mistakes.
- Assuming that insured medical costs are fully covered, when deductibles and coinsurance leave the patient paying a share.
- Paying business costs personally without keeping receipts, which makes reimbursement difficult and can cause tax problems.
- Overlooking out-of-network charges, which can be far higher than in-network costs.
Questions
People also ask.
Does out-of-pocket include insurance premiums?
Usually not, because premiums are the regular price of having cover, while out-of-pocket costs are what you pay when you use it.
Can out-of-pocket business expenses be reimbursed tax-free?
In many places, genuine business expenses repaid at cost are not treated as income, but the rules vary and records are needed.
What is an out-of-pocket expense on a client invoice?
It is a cost the supplier paid on the client's behalf, such as travel, which is passed on at cost.
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