What Does Out of Pocket Limit Mean in Health Insurance?

Identification

The out-of-pocket limit is the maximum amount of money you are required to pay toward your health care costs before your insurance policy pays in full. The limit will typically apply on an annual basis to coverage for items such as hospitalization, doctor visits and prescription drugs. With many types of health care policies, you will have some flexibility and control over the limits. Generally, the more you are required to pay out of your pocket, the lower your health insurance premiums will be.

One common type of out-of-pocket expense is a deductible, which is an annual figure you must reach before your plan's coverage will begin. Once you have met your deductible, you may be required to pay coinsurance, which is a form of cost-sharing between you and your insurer. Coinsurance will continue until a certain threshold is reached. At that point, the policy will pay in full up to its maximum limit, which is often 100 percent of any remaining costs.

Suppose your policy features a $500 deductible and a 20/80 coinsurance provision up to $10,000. If you underwent a surgical procedure that costs $25,000, you would need to pay the $500 deductible as well as 20 percent of the next $10,000 which equals $2,000. Your total out-of-pocket cost for the procedure would be $2,500, while your insurance policy would cover the remaining amount. If you had chosen to carry a $1,000 deductible and 50/50 coinsurance instead, your out-of-pocket expenses would have been greater, but you would also have likely been required to pay a much lower premium.

Your health insurance plan may also provide out-of-pocket limits in the form of a copayment, which is a predetermined maximum amount you pay for some types of health care services. Copayments often apply to routine doctor visits, such as when you are required to pay a maximum of $50 for each visit. Copayments also are used for prescription drugs, as you may be only required to pay $25 toward a prescription for a brand name drug or $10 for a generic drug.