Why is your health plan's out-of-pocket expense such a big deal?

It protects you from financial catastrophe

Published: October 17, 2013 06:15 PM

Q. I'm looking at insurance plans and they have deductibles and copays and coinsurance and I don't understand any of it. Help!

A. Join the club. Researchers who've looked at consumer "insurance literacy" find that even people who got As in math have trouble understanding deductibles, coinsurance, and out-of-pocket limits.

But we are stuck with them, so let's try, shall we?

While most people focus on the deductible when shopping for insurance, an even more important feature of any health plan is its out-of-pocket maximum, or OOP. That is the most you will ever have to pay in a year out of your own pocket for health care and it's the key to understanding everything else.

You can think of your OOP as a bucket that you fill up over the course of a year with the money you spend on health care. Once it's full, the insurance company will pick up 100 percent of your medical costs for the rest of the year. How you fill that bucket constitutes the major difference among plans. Some use a big deductible that will fill the bucket fast. Some fill it slowly with smaller deductibles and coinsurance, and even with copays for services not subject to the deductible at all.

I'll illustrate with a Silver plan sold on Covered California, the California Health Insurance Marketplace. Here's its benefit design:

Medical deductible: $2,000

Brand-name drug deductible: $250

Out-of-pocket maximum: $6,400

Medical service	Member pays	Deductible applies
Primary care doctor visit	$45	no
Specialist visit	$65	no
Lab test	$45	no
Advanced imaging (CT, MRI, PET, etc.)	20%	yes
Generic drug	$25	no
Preferred brand-name drug	$50	yes
Hospital facility fee (room, operating room, other hospital services)	20%	yes
Hospital physician/surgeon fee	20%	no
Rehabilitation visits	$45	no

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.

Here's how the plan might work for a patient we'll call Mr. California.

January: He wakes up with a fever and a terrible sore throat. He goes to his internist ($45, not subject to deductible), who orders a lab test ($45, not subject to deductible) that shows he has strep throat for which he is prescribed a generic antibiotic ($25, not subject to deductible).

$0 towards the medical and drug deductibles
$115 into the OOP bucket, $6,285 left

March: He starts to wheeze during his morning run. He goes to an allergist ($65, not subject to deductible), who diagnoses seasonal allergies and prescribes a brand-name inhaler ($100, subject to separate drug deductible).

$100 towards the brand-name drug deductible, $150 left.
$0 towards the medical deductible
$165 into the OOP bucket, $6,120 left

June: During a game of beach volleyball, he lands awkwardly on his knee and it blows up. He goes to an orthopedist ($65, not subject to deductible) who sends him to have an MRI of his knee ($1,500, subject to deductible). He goes back to the orthopedist ($65) who informs him he has torn his ACL and needs a surgical repair.

$1,500 towards the medical deductible for the MRI, $500 left
$1,630 into the OOP bucket, $4,490 left

July: His bill for the surgery is $25,000 from the hospital and $7,000 from the doctors who treated him there. He pays 20 percent ($1,400) of the doctors' fees (not subject to deductible)

$1,400 into the OOP bucket, $3,090 left

He pays the last $500 of his medical deductible towards the hospital bill, leaving a balance of $24,500.

$500 into the OOP bucket, $2,590 left

His 20 percent coinsurance for the $24,500 balance on hospital bill comes to $4,900. But he pays only the first $2,590 of that, at which point the OOP bucket is full. The insurance company pays the rest of the bill.

July-August: Six rehab sessions for his knee. The insurance company pays the entire bill.

October: His seasonal allergies return. The insurance company pays 100 percent of the cost for another allergist visit and a new inhaler.

As you can see, the only reason Mr. California hit his out-of-pocket maximum was that whopping bill for his ACL repair. If you are reasonably healthy with only minor complaints, you won't use it up in a year. But it's critically important for protecting you from crushing cost-sharing if your luck runs out and you do need expensive care.

It's also important to know that if your income is on the low side, you may qualify to buy special Silver plans with much lower out-of-pocket costs.

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—Nancy Metcalf