What Does “Out-of-Pocket Maximum” Mean?

Out-of-pocket maximum (OOPM) is the most you have to pay for covered services in a single year, aside from premiums. Once you reach your out-of-pocket max, your plan pays 100 percent of the allowed amount for covered services.

For instance, if you rack up $25,000 in medical bills and your OOPM is $7,000, that’s the maximum you have to pay, while your insurance company has to pay the balance of $18,000.

You’ve no doubt heard about “surprise” medical bills in the hundreds of thousands of dollars, but when you drill into it, that’s almost always because the policyholder used out-of-network doctors and hospitals. If your policy covers out-of-network costs at all, your OOPM is always substantially higher than the OOPM for in-network services, and some medical expenses may not be covered at all. I’ll explain why after I cover the basics of in-network OOPMs.

In-Network OOPM

When the year starts, you’re likely going to have to pay copays (fixed amounts) or coinsurance (a percentage of the bill) when you use routine services such as seeing your primary care provider (PCP). Many policies also include a deductible, usually between $500 and $4,000 that you have to pay before the plan pays anything for certain services, such as outpatient and inpatient hospitalizations. [More jargon: When your plan says that your cost is a $40 copay “before deductible,” that means that your cost is $40 even if you haven’t reached your deductible yet.]

As the year goes on and you rack up bills, you pay your portion in the form of copays, coinsurance or deductibles, until you hit the ceiling – your OOPM. After that, your insurance company is responsible for 100% of the cost of anything and everything your policy covers for the rest of the year.

This example ⬆️ covers a single individual. If there’s two or more people covered under the same policy, the OOPM is usually double the individual OOPM, using the same basic arithmetic as above. Let’s hope you never find yourself worrying about that, ok? 🙏🏼

Here’s where staying in-network becomes crucial. If you use in-network providers, your insurance company and the provider have a contract stating the price of each covered medical service, with an agreement that after you pay your part and insurance pays its part, the medical provider considers themselves paid in full – and they can’t send you any surprise bills. This does not apply to out-of-network situations!

Out-of-Network OOPM

If you choose a medical provider that doesn’t have a contract with your insurance company, they are “out-of-network.” And here’s where the problems start.

The essential reason for in-network contracts is to give the insurance company price certainty for each covered medical service, so its actuaries can plug those prices into their spreadsheets and figure out how much money will be needed to cover all anticipated in-network medical costs. Knowing that tells the insurance company how much to charge in premiums.*

So if they don’t have a contract, they have no price certainty, and that’s not good.

Let’s say someone has a rare condition and they want the world-famous Mayo Clinic to treat it. But the Mayo Clinic is out-of-network, so the price is the full price they charge – not an agreed-upon, lower contract price. If the insurance company were to pay most or all of that cost, it could rack up hundreds of thousands of dollars in medical costs that were not anticipated in the model that determined premiums. And that’s not a sustainable business model.

To limit their exposure, the insurance company does two things:

  1. Raise the bar by doubling the deductible and OOPM for out-of-network compared to in-network. That either drives policyholders back to in-network providers or it penalizes them by making them cover more of the costs.
  2. It further limits its exposure by paying the provider only the in-network contract rate it would have paid. But the provider wants its whole bill paid, so in addition to any copay or coinsurance paid, the policyholder is also responsible for the “balance” of the bill (hence the term “balance billing”). Furthermore, that extra balance paid is not applied to your extra-high out-of-network OOPM, which usually makes that OOPM all but unattainable. Surprise!

Even though a medical bill of $7,000 is no small matter, the OOPM is a great feature of health insurance plans. It was mandated for almost all plans sold after the Affordable Care Act went into effect. Before that, some policies had no OOPM, or they had lifetime limits on what the policy would pay.

I like to say that the OOPM is the “real insurance” of a health insurance policy because it is a total stop-loss. All the other benefits covered before you hit your OOPM are basically a prepaid discount plan that gives you some reassurance you won’t get socked with an unexpected bill. And then if you do, you’re protected from ruin by your OOPM. At least if you stay in-network.

Got more questions? We’ve got answers, so feel free to contact us.

* By law, four of every five dollars collected in health insurance premiums must be spent on medical bills.

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