What it means
Health insurance plans normally ask you to share costs through deductibles, coinsurance and co-payments. Without a cap, a serious illness could leave the patient paying a percentage of an enormous bill, which is exactly the situation insurance is meant to prevent.
The out-of-pocket limit puts a ceiling on that share for the year. The limit adds together the amounts you pay for covered services, including the deductible, co-payments and coinsurance.
When the total reaches the limit, the plan pays 100% of the allowed cost of covered care until the plan year ends. The count then restarts the next year.
Some things usually do not count towards the limit. Monthly premiums, charges for services the plan does not cover and, in many plans, extra charges from providers outside the network are not included.
This is why two people with the same limit can end up paying different totals. For employers, the limit is an important plan design choice.
A low limit protects staff from financial shock but raises the insurer's costs and so the premium. A higher limit keeps premiums down but exposes employees to larger bills, which may lead to staff avoiding care or asking for pay rises.
For individuals, the limit is the worst-case yearly cost for covered care, so it is worth keeping in a savings fund. Knowing the figure lets you budget sensibly and compare plans honestly, since a plan with low premiums but a high limit can be much more expensive in a bad year.
Limits are set for the plan year, which does not always match the calendar year. A person who has a procedure late in one plan year and follow-up care early in the next may pay up to two limits in a short time.
Timing elective treatment sensibly, where it is safe to do so, can therefore reduce the total.
In practice
Real-world examples.
Example
A teacher with a plan limit of $4,000 needs surgery costing $30,000. Her deductible and coinsurance would come to more than $4,000, so she pays exactly $4,000. The insurer pays the remaining $26,000.
Example
A company compares two plans for its staff. Plan A has lower premiums but a $9,000 limit, while Plan B has higher premiums and a $4,000 limit. The HR manager estimates the possible worst-case cost for staff, notes that the $5,000 difference in limits is larger than the extra premium most employees would pay, and chooses Plan B.
Example
A self-employed consultant plans her yearly budget and sets aside a savings pot equal to her plan's limit. In a year with no serious illness, the money remains her own, and in a bad year it covers her maximum exposure. She reviews the amount at each renewal because limits often change.
Formula
Calculation
Annual out-of-pocket cost = the smaller of (deductible + coinsurance share of costs) and the out-of-pocket limit
A plan has a $1,000 deductible, 20% coinsurance and a $5,000 out-of-pocket limit. A patient has covered medical bills of $50,000 in the year. Without the limit, the patient would pay 1,000 + 0.20 x (50,000 - 1,000) = 1,000 + 9,800 = $10,800. Because the limit is $5,000, the patient pays only $5,000, and the insurer pays 50,000 - 5,000 = $45,000.Case study
Seen in the real world.
Greystone Print is a fictional printing company with 80 employees, and this story is illustrative. When renewing its health plan, the finance director was offered a cheaper option with a limit raised from $4,000 to $8,000.
The saving in premiums was $600 per employee a year, or 80 x 600 = $48,000 for the company. However, an informal survey showed that many staff had under $2,000 in savings and would struggle to pay a large bill.
The director kept the original limit and used part of the saving to fund a small employee emergency fund instead. The illustrative lesson is that a cheaper plan transfers risk to employees, and that transfer has a cost even when it does not appear in the company's accounts.
Watch out
Common mistakes.
- Assuming premiums count towards the limit, when they usually do not.
- Forgetting that out-of-network costs may not count, leaving the patient exposed to charges above the limit.
- Believing the limit is a guarantee of a low bill, when it only caps the cost of covered services.
Questions
People also ask.
Does the limit reset each year?
Yes, the count generally restarts at the beginning of each plan year.
What happens after I reach the limit?
The plan pays 100% of the allowed cost for covered care for the rest of the plan year.
Is a family limit different from an individual limit?
Many plans have both, so check how each family member's costs are counted towards the total, and whether one person can reach the individual limit before the family limit is met.
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