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What are Out-of-Pocket Costs

Edward Neeman Published: June 14, 2018 Updated: October 10, 2017

Money back pocket

While the health insurance industry may not have specifically set out to create an array of confusing and obscure terms, they did a pretty good job nonetheless. From premiums to out-of-pocket expenses to health insurance deductible and beyond, it’s not always easy to understand exactly what those words on the final bill actually mean.

The bottom line is that the search for affordable health insurance starts with understanding exactly what you already have. Let’s break it down.

Health Insurance Premiums

The first thing you’re going to run into when it comes to health insurance is the monthly cost or premium, you pay just for the privilege of having any insurance at all. Even in the aftermath of the Affordable Care Act (ACA) world implemented by former President Obama, premiums can run from a few hundred dollars monthly to a thousand or more. In general, the less you choose to pay in premiums, the higher your other expenses like health insurance deductible and out of pocket expenses will be.

Health Insurance Deductible

One would like to assume that once the bills from your health care provider start rolling in each year that at least some of every procedure or doctor’s visit will be covered by insurance. Unfortunately, that’s not usually the case. First, you must meet the deductible, which is an amount set by the insurance company that you must pay entirely out of your own pocket before coverage kicks in. Just as an example, let’s say your health insurance deductible is set at $1,300. That means the first $1,300 dollars of medical expenses each year are entirely your responsibility before your health insurance begins to kick in.

Co-Insurance

After the health insurance deductible is met, you’re in the clear, right? Now the ACA and affordable health insurance will combine to make your life easy-peasy. Not so fast. Now you need to think about co-insurance. Most plans define a certain percentage of medical procedures that they will pay for. You heard right. Even after the premiums and deductible, you’re still not going to have everything paid for. Common co-insurance rates run from 10% to 30%. The number signifies the percentage of any expense for which you will be responsible. $50 doctor’s visit? At 10% responsibility, you owe the health care provider $5. $50,000 heart procedure? You owe the health care provider $5,000.

Out-of-Pocket Maximum

By now, you’re probably getting nervous at the idea of coming up with the co-insurance amount in the event of a major surgery. You should be exempt, fortunately, there is still the concept of a maximum amount over which you don’t have to pay. Let’s say your health insurance sets that number at $5,500. This means that anything you pay in deductibles and co-insurance gets credited towards this amount. If your medical expenses exceed that number within the calendar year, you won’t pay a penny more, other than the continuing monthly premiums, which you’ll never get out of.

Putting it All Together

Let’s run through a quick example so you can see how all these ideas work together and the actual bottom line effect they have on how much you actually pay for your medical care. As an example, let’s assume you just had a bi-lateral knee replacement on January 1st and now have a tidy $50,000 bill in an envelope winging its way towards your mailbox.

The question is how much will you pay off that total, based on the terms we’ve discussed, and how much will your insurance company pay?

Assuming you have a $1,300 deductible that’s all yours to pay, the bill is reduced to $48,700. Now co-insurance calculations kick in. If your co-insurance percentage is 30%, you will be responsible for $14,610 and your insurer will pay $34,090. Except, lucky for you, that maximum amount kicks in at $5,500. Subtract the deductible from the max amount and you will only have to pay $4,200 additionally rather than that much larger amount a few sentences back. The bottom line is that good insurance will have a maximum amount of money you will ever have to pay in any single year, and that’s a good thing.

Lastly, the Copay 

We haven’t mentioned the idea of a co-pay yet. It functions independently from the rest of this. A co-pay is the amount you pay your doctor anytime you visit. The amount ranges generally from $10-25 for a family doctor up to $75-100 for a specialist. The thing to remember about co-pays is that they do not count towards your deductible or annual maximum.