Updated December 14, 2022
Reading time: 7 minutes
Even with the best health insurance plan, you’ll likely incur some out-of-pocket costs for covered routine and acute medical services. These costs can fall into one of two categories: your deductible or your annual out-of-pocket maximum.
Though similar at first glance, a deductible and an out-of-pocket maximum are different. Your deductible is the amount you must pay before your insurance kicks in, while the out-of-pocket limit is the most you’ll have to pay for covered care in a single year.
Here’s a rundown of how these each work and what to expect along the way.
A deductible is a minimum spending threshold that you must meet on eligible care each year before your health insurance benefits begin paying.[1] You’ll need to cover the first portion of eligible healthcare services, up to your deductible, before your plan’s coverage will step in to contribute its portion.
These minimum spending thresholds apply not just to employer-sponsored policies but also to government-sponsored plans, such as Medicare.[2]
Deductibles reset annually, so you only need to meet this limit once per year. If you have a plan that only covers you, you’ll have one deductible.
But family plans, which cover your spouse and children, often have both individual and family deductibles. You’ll have to meet each of them before your plan will step in to cover its portion. The expenses for each person on the policy will go toward the family deductible, so you could technically meet your overall threshold before any one person meets their individual threshold.[1]
Say you have an individual deductible of $300 and a family deductible of $1,000, with five family members on the plan. You could meet the family deductible if:
Person A pays $200 toward care.
Person B pays $250 toward care.
Person C pays $250 toward care.
Person D pays $200 toward care
Person E pays $100 toward care.
Even though no one met their individual deductible, those expenses funneled toward the overall family deductible, so everyone’s threshold is considered met. All remaining eligible care for the year for the whole family would be covered according to the policy’s copay percentage, up to the annual maximum.[3]
Check Out: How to Compare Medicare Advantage & Get the Best Plan
Health insurance deductibles can vary pretty widely, depending on the plan you choose. Some plans have $0 deductibles, while others can have family deductibles that top $10,000.
For example, Medicare health insurance plans have a deductible of just $233 in 2022. On the other hand, high-deductible health plans (HDHPs) are defined by the IRS as any plan with an individual deductible of $1,400 or higher or a family deductible of $2,800 or higher.[4]
Most healthcare plans sold on the Health Insurance Marketplace have a deductible of less than $3,000, according to HealthCare.gov.
If you opt for an HDHP, you’re eligible to also have a health savings account, or HSA. These accounts allow you to set aside pre-tax funds throughout the year that can be used toward eligible health-related costs. The table below shows the HSA contribution limits for 2022 and 2023.
| Coverage Type | 2022 Contribution Limits | 2023 Contribution Limits |
|---|---|---|
| Self (single) | $3,650 | $3,850 |
| Family | $7,300 | $7,750 |
You can use HSA funds to pay for qualified medical expenses like:
Select health insurance premiums (long-term care plans, COBRA coverage, etc.)
Prescriptions
Fertility and family planning services, procedures, and medications
First aid supplies
Eye care, such as exams, glasses/contacts, and vision correction surgery
Therapies
Nursing supplies, such as breast pumps and lactation services
Weight-loss programs
Special medical equipment[5]
You can only contribute toward an HSA while enrolled in an HDHP. But the funds in an HSA will roll over from one year to the next if you don’t use them up. Your HSA may also earn interest on the balance held, which is not taxable as long as you only use withdrawals for qualified medical expenses.
Once you’ve fulfilled your deductible for the year, you’ll only be responsible for the copay and co-insurance portions of your eligible coverage, up to your annual out-of-pocket maximum.
Say your plan pays 60% for covered in-network services, and you receive medical care totaling $2,500. If your plan has an individual deductible of $500, you’ll be responsible for:
The first $500
Plus 40% of the remaining $2,000 (or $800)
In total, this visit will cost you $1,300. But the next time you need care, you’ll only be responsible for that 40% cost-share since you’ve already met your deductible for the year.
An out-of-pocket maximum is the absolute most you’ll pay in total for the year for covered services. Depending on your plan, this may include in-network and out-of-network providers and services or only in-network. It also includes your paid deductible for the year.
Your plan may include a family maximum as well as the individual maximum if others are on the policy. Any deductibles, cost-shares, and copays you pay will go toward this annual out-of-pocket maximum. Once you reach that threshold, your insurer will cover 100% of any eligible care expenses.[6]
For example, say you have a single-person policy with a $10,000 annual maximum and a $1,000 deductible, as well as a 40% cost-share (your portion). You break your ankle and require surgery, which costs $35,000. You’ll be responsible for:
The first $1,000 (your deductible)
40% of the remaining $34,000 (but only up to $9,000)
Since 40% of the remaining $34,000 balance is $13,600, you’ll actually only be responsible for paying the first $9,000. This brings you to a total out-of-pocket expense of $10,000. Your health insurance company will cover the remaining $25,000, as well as all eligible expenses for the rest of the year.
Some health expenses you pay don’t count toward your out-of-pocket maximum. These typically include:
Your share of monthly premiums
Any expenses your plan doesn’t cover
Out-of-network care
Costs that exceed the amount a provider is allowed to charge for a certain service
Depending on the type of plan you choose, your out-of-pocket maximum can range from a few hundred dollars to multiple thousands, or you may have no limit at all. Policies can also have individual maximums and family maximums on the same plan, as they do with deductibles.
The following table shows possible out-of-pocket limits for different types of health insurance plans.
| Type of Insurance | Out-of-Pocket Limit |
|---|---|
| Original Medicare | None |
| Medicare Advantage (Part C) | $8,300 or less |
| Medigap Plan K | $6,940 |
| Medigap Plan L | $3,470 |
| Health Insurance Marketplace Plan (Individual) | $8,700 or less (2022) $9,100 or less (2023) |
| Health Insurance Marketplace Plan (Family) | $17,400 or less (2022) $18,200 or less (2023) |
| Employer-sponsored plans | Varies |
Once you’ve hit your out-of-pocket maximum threshold for the year, your plan will cover 100% of your eligible healthcare expenses. Depending on the plan, this could include only in-network care, or it might also extend to out-of-network providers.[6]
Your out-of-pocket maximum will reset on Jan. 1 each year, or when you change plans.
Read On: Medigap vs. Medicare Advantage: Which Plan Is Best for You?
Both health insurance deductibles and out-of-pocket maximums are important amounts that you’ll need to consider when choosing a healthcare plan. But they differ in significant ways. The table below compares deductibles and out-of-pocket maximums.
| Comparison Point | Deductible | Out-of-Pocket Maximum |
|---|---|---|
| When you pay it | Before cost-share or plan coverage kicks in | Throughout the plan year |
| Includes copays? | Maybe | Yes |
| Outcome after you meet it | Plan coverage begins | 100% of eligible expenses covered for rest of plan year |
If you’re looking to decrease your overall cost for health insurance coverage, here are some ideas to consider:
Opt for a high-deductible health plan (HDHP). If you choose a plan with a high deductible (greater than $1,500 for individuals or $3,000 for families in 2023), you’ll likely save on monthly premiums. You’ll also be eligible to contribute to a health savings plan. Just be prepared to cover this higher deductible if you require medical care.
Take the medical expense deduction. If your medical expenses in a given year exceed 7.5% of your adjusted gross income (AGI), and you itemize your deductions instead of taking the standard deduction, you may be able to take the medical expense deduction.
Choose generic medications. Generic drugs can be significantly cheaper than their brand-name counterparts, according to FDA research. In fact, the FDA found that the more generic options available, the greater the cost savings. By choosing generic meds, you can find significant savings throughout the year.
Opt for outpatient care when possible. Outpatient services, such as urgent care clinics, are typically much less expensive than inpatient services, like an emergency room.[7] If an outpatient provider can safely meet your medical needs, you could save a substantial amount of money.
Choose in-network providers. When a doctor or facility is in network, that means it has contracted with your insurance company to provide services at an agreed rate. Because of this, you’ll only be responsible for your cost-share of these services, and your insurance provider will cover the rest. If you seek out-of-network care, you may be responsible for a larger portion (or in some cases, all) of the bill.
Read More: What Is a PPO and How Does It Work?
Here are some of the most frequently asked questions regarding health insurance, deductibles, and out-of-pocket maximums.
People who participate in a high-deductible health plan (HDHP) are eligible to contribute toward a health savings account (HSA) during the year. Any unused funds will roll over, even if you change plans the following year.
Choosing between a high deductible and a high out-of-pocket maximum depends on your budget and expected care needs. If you can afford a sudden medical bill, purchasing high-deductible coverage could save you money on premiums and give you access to an HSA. However, if paying a hefty deductible would present a financial hardship, you may want to opt for a lower up-front cost.
Additionally, if you expect a lot of healthcare needs throughout the year, factor this into your decision-making when looking at out-of-pocket maximum costs. In some cases, choosing a plan with a lower annual maximum could save you money in the long run, especially if you expect a lot of medical care needs.
A copay is an up-front dollar amount of eligible healthcare services that you’re responsible for covering. Once you’ve met your annual deductible, you’ll be asked to cover only the copay on any eligible treatments and services you receive, up to your annual out-of-pocket maximum.
Co-insurance is the percentage of your eligible medical care that you’re responsible for paying. This percentage may vary based on the type of care you receive (such as outpatient versus inpatient, out-of-network versus in-network, surgical versus routine care) and counts toward your annual out-of-pocket maximum. Once you’ve met that annual maximum, your insurer will cover 100% of eligible costs for the rest of the year.
