Out-of-Pocket: The Healthcare Number You Need to Know
Beyond premiums and deductibles, a bigger potential expense
You know what your household spends each month for your health insurance premium. And you likely know how much you need to kick in — your annual deductible — to cover medical bills before insurance starts actually covering things.
But what about your maximum annual out-of-pocket expense (OOP) if you run into a serious illness or injury that requires expensive treatment? The OOP tends to be a bit out of sight, out of mind because it only comes into play when there is a serious injury or illness.
But given the high cost of OOPs, they are a potential cost that should be part of your overall financial plan.
The snowballing cost of copays and coinsurance
Your premium is the cost to have insurance. Your OOP is the maximum cost to use that insurance in a calendar year. Your OOP includes your deductible and any additional copays and coinsurance once you’ve met the deductible requirement.
According to the Kaiser Family Foundation (KFF), a nonpartisan healthcare research organization, the average annual deductible last year for single coverage ranged from around $1,200 to $2,300, depending on the type of plan. For family coverage, the deductible ranged from $2,700 to $4,550.
That’s already a steep demand on household cash flow if someone needs ongoing care or a battery of expensive tests, let alone hospitalization. But your premium and the deductible is not all that you might owe in a given year.
Most plans also charge copays for each visit to a doctor. According to the KFF, the average copay to see your primary doc was $26 in 2020. For a specialist, it was $42. That’s for each visit, for each person covered by your plan. If you need to see a specialist once a month for a year, that’s another $500 in copays right there.
Then there’s the coinsurance to contend with. If you need tests or treatment, coinsurance is the percentage of the bill you are required to pay. The average coinsurance rate last year for employer-provided plans was nearly 20%. On a $2,500 MRI cost, that means you’d be expected to cough up $500. For that one test.
At the risk of pointing out the obvious: With many diseases and injuries, there are multiple tests required along the road to diagnosis, treatment and even in recovery, which means there are likely multiple coinsurance bills to contend with. And nearly two-thirds of people with insurance through their employer are also hit with coinsurance for hospitalization.
The somewhat silver lining is that your workplace plan puts a lid on the total costs you can be hit with in a given year: the maximum out-of-pocket.
According to KFF, the average annual maximum out-of-pocket for a single person with workplace coverage in 2020 was $4,000. That’s a lot more than the typical deductible for single coverage. And nearly one in five single insureds had an OOP of at least $6,000. Out-of-pocket costs for family coverage are typically higher; some plans set the costs for the entire family, others impose a separate OOP for each family member.
The out-of-pocket limit only applies if you stay in-network. There typically is no limit if you seek out care outside your plan’s approved list of doctors and facilities.
Moreover, if your illness/injury isn’t resolved by Dec. 31, the new year will bring a reset, and you will owe the deductible and be held to a fresh OOP limit for the new year. If you have a $4,000 annual OOP maximum, and you are diagnosed with a serious illness in November and treatment continues the following year, it’s likely you would have $8,000 in bills within just three or four months.
A government report found that 16% of people with full-fledged health insurance through work nonetheless had medical debt in 2017. Among those who landed in a hospital, more than 30% couldn’t pay their bills and incurred medical debt.
Protecting yourself from OOP shocks
Whenever the topic of emergency savings comes up, the typical examples for why it’s so important to have savings set aside tend to run toward the mundane: Your car is off warranty and needs some work. Or the HVAC went kerflooey and needs to be repaired/replaced.
Clearly, OOP costs are an even more important reason to build up your emergency fund. Before you talk yourself out of finding a way to save a little bit more, consider these straightforward steps to building a bigger emergency fund.