What's the difference between a deductible and an out-of-pocket limit?

Consumer Reports

The other day I was talking with a young self-employed makeup artist who was shopping for insurance on DC Health Link, the insurance marketplace for Washington, D.C. She was unhappy with her choices. “I was looking at a Gold plan and it had a deductible of $6,000,” she said. “I might as well not have insurance at all.”

Actually, no Gold plan could possibly have a $6,000 deductible, as I’ll explain in a minute, but the plan almost certainly had a $6,000 out-of-pocket limit. Like many if not most people shopping for insurance on their own, the makeup artist didn’t know the difference. But there is a difference, a big one, and you need to understand it in order to make an intelligent choice of insurance plan.

Here’s my FAQ on the subject:

What’s a deductible?

It’s the amount you have to pay out of your own pocket before your health plan’s benefits kick in. If, for instance, you buy a plan with a $2,500 deductible, you will pay for the first $2,500 of your medical expenses yourself. At that point, your plan will start paying some share of the expenses. If you go to the doctor, you might pay a flat $30 (this is called a copay) and the plan will pay the rest of the bill. If you have outpatient surgery, the plan might pay 80 percent and you’ll pay the other 20 percent (this is called coinsurance).

This being American health care and therefore needlessly complicated, some plans provide some services “outside” the deductible. For instance, they might pick up part of the cost of a few primary care doctor visits a year even before you’ve spent to the limit of your deductible. The only way to figure out how a particular plan handles deductibles is to look at the coverage details. And of course all plans cover preventive services like pap smears, immunizations, and colonoscopies with no deductible or out-of-pocket costs at all.

If I hardly use any health care in a year and my deductible is thousands of dollars, why have insurance at all?

Two reasons. First, even before you’ve met your deductible, you’ll be paying prices negotiated by your plan, not providers’ list prices, which can be many times higher. Second, the real value of health insurance is the protection it gives you against catastrophic medical expenses. Care for an unexpected accident or serious illness can hit six figures before you know it. From that perspective, a deductible of a few thousand dollars looks like a bargain.

What’s an out-of-pocket limit?

It is the most you will ever have to pay out of your pocket for health care during the year, not including premiums, but definitely including the deductible AND the copays and coinsurance you will continue to pay after you hit the deductible. If you hit your OOP for the year, your insurance will pick up 100 percent of costs thereafter.

In the pre-health-reform days, insurers sometimes played games with OOP limits. Your copays or prescription drug cost-sharing might not have counted towards the OOP, which could stick you with hundreds or thousands of dollars of extra expenses if you had a bad year.

The new health law put a stop to that. Now all individual plans must have a “hard” OOP of no more than $6,350 for an individual or $12,700 for a family. Very few people with ordinary medical expenses will ever hit that number, but it provides serious protection against catastrophic expenses. If you’re injured in a horrendous accident that costs $200,000 to treat, your insurance will pick up $193,650 of the bill. Here’s an illustration of how someone might hit an OOP in a year.

How do deductibles and OOPs relate to a plan’s metal level?

The new law says that all plans sold to individuals must fit into a “metal level” that reflects the plan’s overall generosity. A Bronze plan will pick up 60 percent of costs for the average member, Silver 70 percent, Gold 80 percent, and Platinum 90 percent. It’s important to note  that all plans, whatever their metal level, cover the same set of essential health benefits. The difference is how much of the cost of those services you’re expected to pay when you receive them.

With the help of their math-whiz actuaries, plans use a combination of deductibles, coinsurance, and copays to hit the target metal level. On the DC Health Link, for instance, deductibles on Gold plans range from $0 to $2,000, whereas on Bronze plans they range from $3,500 to $6,350 (the maximum allowed).

All the metal level plans likely have an OOP at or near the maximum allowed, which is $6,350. The difference is that if you have a Silver or Gold plan with a lower dedutible, you are much less likely to hit that OOP unless you rack up very large medical bills in the year because your plan will start paying a major part of your health care expenses sooner.

Needless to say, Bronze plans tend to have lower premiums than Gold plans. You can think of it this way: depending on the metal level you choose, you’ll be paying your health expenses either upfront in the form of higher premiums, or at the point of service in the form of higher out-of-pocket costs.

Don’t expect your personal experience with a plan to necessarily conform to those average percentages. If you never use up your $3,000 deductible, the plan is going to pay 0 percent of your costs, whereas if you have one of those $200,000 catastrophes, it’s going to pay more than 95 percent. But overall, the plan will pick up its designated percentage of costs for all its members combined.

What deductible is right for me?

It depends on your medical needs and your financial resources. If you take very costly drugs, you may come out ahead with a Silver or Gold plan that pays a greater share of your prescription costs.

If you are generally healthy and tend not to need much beyond an occasional doctor visit or medicine for a minor illness, plus appropriate annual preventive services, you may come out ahead with a higher deductible and lower premium. However, in that case you need to make sure that (a) you can lay your hands on enough cash to meet your deductible and (b) you are confident that you won't put off going to the doctor just because you don’t want to spend the money.

The only way I know to figure all this out is to study each plan’s details carefully and consider what you will likely spend to meet your own medical needs on top of the premium itself.

Got a question for our health insurance expert? Ask it here; be sure to include the state you live in. And if you can't get enough health insurance news here, follow me on Twitter @NancyMetcalf.

 

Health reform countdown: We are doing an article a day on the new health care law until Jan. 1, 2014, when it takes full effect. (Read the previous posts in the series.) To get health insurance advice tailored to your situation, use our Health Law Helper, below.

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