What Does Out-of-Pocket Mean if You Exclude Deductibles?

by Nancy Cross

    If you're trying to compare different medical or dental insurance plans for you or your family; deciding whether to choose original Medicare or a Medicare Advantage Plan or looking for a Medigap plan to pair with your Medicare coverage, chances are you've come across the term "out-of-pocket limit." For most plans, the out-of-pocket limit -- or the maximum amount of insured costs you're responsible for in a year -- includes your deductibles and copays or coinsurance, though some exclude the deductible, making the out-of-pocket maximum more difficult to reach. However, not all costs you end up paying over your deductible go toward your out-of-pocket maximum.

    Coinsurance refers to the cost sharing required by many insurance plans for charges that exceed the deductible. Commonly, the insurance company pays 80 percent of covered, approved charges, and the insured person pays 20 percent, though the percentages may vary based on the plan and type of service. Some insurers, instead, charge a copay in addition to, or in place of, a deductible. A copay is a flat amount you pay for a service and often varies by the type service. For example, if you have an HMO, you might pay $25 every time you go to the doctor for non-preventive care and $150 if you go to the emergency room.

    It's important to note that "out-of-pocket" only refers to covered charges. Charges for a TV during a hospital stay or the additional cost of a private room are generally not covered under most medical plans. Since these charges aren't covered under the plan, they would not count toward your out-of-pocket maximum even though you would be paying them yourself. This also applies to services the insurer deems unnecessary. For example, insurers often won't cover ambulance services for something like a sprained ankle where getting to the hospital some other way wouldn't have put you in danger. So even though ambulance service is a covered charge under your plan, it wouldn't be covered in those circumstances, and the amount you pay would not count toward your out-of-pocket limit.

    Most insurance plans apply "reasonable and customary" limits to medical charges. Based on various criteria, including the complexity of the procedure and the going rate where it was performed, this is the maximum fee the insurer considers reasonable for the service. If your medical provider accepts assignment of benefits from your insurer, you aren't responsible for charges that exceed the reasonable and customary limit. However, if your insurer doesn't accept assignment, you could be responsible for these charges, but only the amount you were responsible for up to the reasonable and customary limit would count toward your out-of-pocket maximum.

    Original Medicare requires a per-benefit period deductible under Part A for hospital stays, plus coinsurance after 60 days. An annual deductible applies to Part B outpatient services with a 20 percent copay for most services. There is no out-of-pocket maximum under Original Medicare, though many Medigap plans you purchase from private insurers to fill in the gaps in Medicare coverage -- like your Part A deductible -- do have out-of-pocket maximums. In these cases, out-of-pocket maximums would be based on Medicare-approved charges. Also, some Medicare C plans -- Medicare plans you purchase from private insurers that often provide broader coverage than Original Medicare -- have out-of-pocket maximums.

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    About the Author

    Nancy Cross is a certified paralegal who has worked as an employee benefits specialist and counseled employees on retirement preparation, including financial and estate planning. In addition to writing and editing, she runs a small business with her husband and is a certified personal trainer with the Aerobics and Fitness Association of America (AFAA).

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