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  • What Are Out-of-Pocket Costs?

    Apr 29, 2025 8:15 pm by Elisabeth Duka, edited by Andrea PellegriniNewsProtect
    What Are Out-Of-Pocket [Healthcare] Costs?

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    Introduction

    When a medical bill arrives despite being covered by health insurance, it's a gut punch that many Americans know all too well. In fact, 1 in 4 Americans struggle with medical debt, often due to jumbles of large insurance terms and those unexpected out-of-pocket costs (KFF, 2023).

    Money is not the only factor — it's about access to care. Complex insurance terms can get confusing, leading to hefty medical bills and causing people to delay or forgo necessary care (KFF, 2023). This guide will help you break down these terms so you can take control of your healthcare spending with confidence.

    Defining Out-of-Pocket Costs

    Out-of-pocket costs refer to the expenses you pay directly for covered healthcare services in a given plan year, excluding your monthly premiums (Csa & Glover, 2022). These typically include:

    • Deductibles
    • Copayments (Copays)
    • Coinsurance

    You are responsible for these costs at the time of service, and they accumulate towards your plan's out-of-pocket maximum — the point at which your insurance covers 100% of eligible services (Healthcare.gov, n.d.).

    Premiums and Deductibles: The Key Differences

    A premium is a fixed monthly payment you make to keep your insurance coverage active. Similar to a subscription, it's paid whether you use it or not. Some plans allow quarterly or annual payments, but missing payments could put you at risk of losing coverage (Csa & Glover, 2022).

    It can be challenging to plan for healthcare costs since coverage years may differ from the calendar year. For example, Illinois state employees have a fiscal year running from July 1 – June 30 so that is what their health insurance plan year is based on (Illinois Department of CMS, Rates and Calculators).

    A deductible is the amount you must pay for covered services before your insurance begins covering a larger portion of the costs. For example, with a $1,000 deductible, you're responsible for the first $1,000 of eligible healthcare expenses.

    High-Deductible Health Plans (HDHPs) typically have lower premiums and fully cover prescription drugs once the deductible is met. Deductibles reset annually, and unpaid amounts don't roll over (HealthCare.gov, n.d.). Therefore, strategically scheduling medical procedures within the same coverage year can help you optimize benefits (Rakshit et al., 2025).

    Copays and Coinsurance Explained

    Copayments and coinsurance are two common ways your health insurance plan shares costs with you, but they differ in how they work (Csa & Glover, 2022).

    A copayment (copay) is a fixed fee you pay for specific services. Average copays include:

    Coinsurance is a percentage of medical costs you're responsible for after meeting your deductible. For example, with a 20% coinsurance rate, you pay $200 on a $1,000 procedure, and your insurer covers the remaining $800 (Csa & Glover, 2022).

    Quick Comparison

    Comparing Copay vs. Coinsurance Features
    FeaturesCopayCoinsurance
    Payment amountFixed (e.g., $26/visit)Percentage (e.g., 20%)
    Payment timingEach visit or Rx fillPaid after deductible is met
    Deductible impactUsually doesn't countApplies after deductible is met
    Cost predictabilityEasy to predictVaries by service cost

    These cost sharing methods don't just apply to doctor visits—they play a big role in prescription drug coverage, which often uses a tiered system to determine what you pay. The following data shows how copayments and coinsurance vary across different prescription drug plans, depending on the number of tiers your plan uses:

    Prescription Drug Coverage Copayments and Coinsurance (KFF, 2023)

     Plans with Three or More Tiers 
    TierAverage CopaymentAverage Coinsurance
    First Tier$1120%
    Second Tier$3626%
    Third Tier$6638%
    Fourth Tier$12528%
     Plans with Two Tiers 
    TierAverage CopaymentAverage Coinsurance
    First Tier$15NSD
    Second Tier$3630%
     Plans with the Same Cost Sharing for All Covered Drugs 
    TierAverage CopaymentAverage Coinsurance
    First Tier$1722%

    Out-of-Pocket Max: What Counts and What Doesn't (and Why It Matters)

    Your out-of-pocket maximum is the most you'll pay for in-network care during your plan year. After reaching it, insurance covers 100% of eligible costs (Csa & Glover, 2022). However, not all expenses count toward this maximum, so it's important to know what does.

    Deductibles, Coinsurance, and eligible copayments—after the deductible is met— are examples of what typically counts towards your out-of-pocket maximum. Examples of expenses that do not count towards your out-of-pocket maximum includes monthly premiums, out-of-network services, services not that are not covered, and charges that exceed your plans approved limits (HealthCare.gov, n.d.)

     What Applies to Your Out-of-Pocket Maximum 
    What Counts:Does Not Count:
    DeductiblesMonthly premiums
    Coinsurance (after deductible)Out-of-network services
    Eligible copayments (depending on your plan)Non-covered services, amounts above plan limits

    Understanding the distinction between expenses that count towards your maximum and those that don't is important because assuming all payments apply to your maximum can lead to underestimating your potential out-of-pocket costs. Understanding these rules can help you avoid unexpected healthcare bills.

    For 2025, Affordable Care Act (ACA) caps out-of-pocket maximums at $9,200 for individuals and $18,400 for families (HealthCare.gov, n.d.). After reaching these limits, your insurance covers 100% of all additional in-network covered costs.

    In-Network vs. Out-of-Network: Impacts on Your Costs

    A major reason some costs might not count towards your out-of-pocket maximum is receiving care from out-of-network providers. Knowing the difference between in-network vs out-of-network care can help you avoid unexpected charges and better use of your insurance benefits.

    Out-of-network care includes services from providers (doctors, hospitals, or clinics) without a contract with your insurance (Csa & Glover, 2022). Because your insurer has not negotiated lower rates with them, costs are usually much higher, and your insurance may cover very little or none of the bill.

    By choosing In-network care you'll benefit from pre-negotiated rates, lower out-of-pocket costs, and greater protection against surprise medical bills. Staying in-network not only helps your payments count towards your out-of-pocket maximum, but also ensures your insurance covers a larger share of your healthcare expenses.

    How Out-of-Pocket Costs Work: Two Examples

    Scenario #1: Thomas' Visit

    Thomas gets health insurance through his employer that includes a $25 copayment for primary care visits.

    Thomas' doctor is in-network for his employer-sponsored insurance plan, so, when Thomas gets sick, he only has to pay the $25 copay while his insurance covers the rest.

    Thomas' doctor prescribes him with antibiotics to pick up at his local pharmacy. His plan has a $15 prescription copay. The full price of the prescription is $65, but he only has to pay $15 at the counter.

    → Total out-of-pocket cost: $40

    Scenario #2: Jim's Emergency Room Visit

    Jim slips on some ice while shoveling his driveway and breaks his arm. He heads to the emergency room, where the total cost of treatment—including an X-ray, a cast, and follow-up care—adds up to $3,400.

    Jim's health insurance plan includes:

    • Copay for Emergency Care of $300
    • A deductible of $1,100 (already met)
    • 20% coinsurance after meeting deductible

    Since Jim has already met his deductible earlier in the year, his insurance begins to cover a larger share of the costs. His plan covers 80% of the ER bill, leaving Jim responsible for the remaining 20% in addition to his $300 copay.

    That means Jim pays $300 for the copay plus 20% of $3,100 which comes to $620, while his insurance covers the remaining $2,480.

    → Total out-of-pocket cost: $920

    Do Costs Roll Over Annually?

    No—deductibles and out-of-pocket maximums reset each plan year. The amount you've already paid towards deductibles or maximums does not carry over if you haven't met your plan's limit by the end of the plan year.

    Tools to Help Cover Healthcare Costs

    Health Savings Accounts (HSAs) & Flexible Spending Accounts (FSAs)

    Both accounts are funded with pre-tax dollars and can be used tax-free for qualifying medical expenses.

    Flexible Spending Accounts (FSAs) are employer-sponsored accounts that are generally subjected to a 'use-it-or-lose-it' rule (About publication 969, IRS). Unless your employer offers a short grace period or limited rollover, unused FSA funds typically expire at the plan year's end.

    Health Savings Accounts (HSAs) offer the added advantage of funds rolling over from year to year. They remain with you even if you change jobs or health plans, making them a flexible, long-term tool to cover healthcare costs.

    You can read more about HSAs & FSAs on the IRS website, but as a reminder:

    • HSAs: Funds roll over and stay with you.
    • FSAs: Use-it-or-lose-it rule with limited exceptions.

    Maximize Coverage

    Use in-network providers to avoid paying full price for services, and review your plan details to understand deductibles, copays, and coinsurance.

    Know Your Plan Type

    There are many different types of plans. Two common plan types include Preferred Provider Organization (PPO) and Health Maintenance Organization (HMO):

    • PPO: flexibility and partial coverage for out-of-network care.
    • HMO: cost-effective, but coverage is limited to in-network.

    There are other types of plans like Open Access Plans (OAP) or Exclusive Provider Organization (EPO) among many others.

    Accessing Affordable Care

    Check your eligibility for Medicaid to gain access to low-cost or no-cost healthcare.

    Check for premium tax credits on the ACA (Affordable Care Act) Marketplace, which can lower your monthly insurance costs.

    Generic Drugs: Discuss generic medication alternatives with your doctor to save money on prescriptions.

    Marketplace Options: Use HealthCare.gov (and GetCoveredIllinois.gov if you live in Illinois) to compare plans, check eligibility, and find the best coverage for your needs.

    Enrollment Opportunities: Take advantage of special enrollment periods (60 days) following a qualifying life event like job loss, moving, changes in marital status, or the birth of a child (HealthCare.gov, n.d.).

    Avoid Short-Term Plans (STLDs)

    Short-Term Limited Duration plans have limited benefits, exclude pre-existing conditions, and risk high out-of-pocket costs.

    Take Control of Your Health Costs

    We hope this article has equipped you with essential knowledge about out-of-pocket healthcare costs, from deductibles, copayments, coinsurance, and other key terms.

    Understanding these concepts is the first step to taking control of your healthcare journey, allowing you to confidently manage your healthcare spending and choose the right coverage that fits your needs—ultimately leading you to greater financial security and peace of mind through practical cost-saving strategies.

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