"Out-of-pocket maximum" and "deductible" are terms routinely used regarding health insurance, although deductibles are common with many types of insurance. A deductible is the amount you must pay after a covered event, such as an emergency room visit or surgery, before your insurance benefits kick in and cover the rest of the bill. An out-of-pocket maximum is the limit on how much you have to pay yourself for treatment or services in a given year or over the life of your policy coverage.
Out-of-Pocket Maximum Basics
An out-of-pocket maximum is intended to serve as a protection for you as the insured against devastating medical costs. If your policy has a plan year limit of $2,000 per individual and $5,000 per family, for example, the most you would pay out of your own pocket during the year is $2,000 for one covered person's claims, or $5,000 for your family. Once this maximum threshold is reached, your insurance company pays the remaining amount of all covered events throughout the rest of the plan year. Lifetime maximums are often $1 million, or more, and are intended to serve as a very basic protector against catastrophic or chronic events that have high costs.
Co-payments, co-insurance and deductibles are your common out-of-pocket expenses with health insurance. Co-payments are for regular office visits, and co-insurance and deductibles are amounts you are responsible for in cases of surgeries or hospital trips. Each time you pay these costs, it counts toward your out-of-pocket maximum. Bear and mind that uncovered expenses, such as procedures done for cosmetic reasons, don't count toward your maximum. Only events eligible for benefits do.
Deductibles have a couple of common purposes. One is to help offset the expenses of the insurance company when a covered event occurs. Another is to ensure that people use treatment and services only as necessary. Someone with a $250 hospital deductible is less likely to visit the emergency room in a non-emergency if he knows it costs $250. He may opt for a less costly urgent care visit or wait to see his doctor in a non-urgent situation.
Your deductible level affects your insurance premiums. Generally, a higher deductible means lower premiums. A lower deductible costs you less out of pocket on a covered event, but your monthly premiums are usually higher. If you use medical care less routinely, choosing an insurance plan with a higher deductible and lower premiums makes sense. If you believe there is a high likelihood that you will pay enough through the plan year to more than cover the deductible, selecting a plan with a lower deductible might make more sense. However, this is not always the case; you must compare premium savings to the deductible amount. Some employee groups negotiate specific types of deductibles to lower premiums -- for instance, a hospital-only deductible in which you pay if you are admitted to the hospital. These can save money often but only affect a few people.
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