Home / What Is Out-of-Pocket Maximum? Meaning, How It Works, Medicare, Medicaid, & More

What Is Out-of-Pocket Maximum? Meaning, How It Works, Medicare, Medicaid, & More

By: Jasmin Espinas
June 11, 2025

In 2025, the Affordable Care Act (ACA) set the allowable out-of-pocket maximum limits at $9,200 for individual coverage and $18,400 for family coverage, a slight decrease from the previous year.

This figure suggests a continued federal effort to reduce the strain of healthcare costs, though the limits still represent a high threshold for many households.

So, if you’re considering an out-of-pocket maximum policy for your health insurance plan, this guide will explain everything, from its definition and functions to its pros, cons, and application in Medicare and Medicaid.

What Is an Out-of-Pocket Maximum?

An out-of-pocket maximum is the total amount you may spend in a year on eligible medical services before your health insurance company starts paying the costs.

How Does an Out-of-Pocket Maximum Work?

Once you begin using your health insurance, every eligible dollar you pay counts toward your out-of-pocket maximum. This limit sets a ceiling on your spending for the plan year.

The federal government places an annual cap on how high this limit can go.

For instance, in 2024, the maximum out-of-pocket limit under Marketplace plans is $9,450 for individuals and $18,900 for families.

What Happens If I Reach My Out-of-Pocket Maximum?

Once your spending on covered in-network services reaches the out-of-pocket maximum, your health plan pays the full cost of those services for the rest of the plan year.

This includes hospital care, office visits, prescription drugs, and any other eligible charges outlined in your policy.

You will not pay anything further for these approved services, even if the billed amount continues to increase. However, this applies only to services included in your plan and performed by in-network providers.

What Counts Toward Out-of-Pocket Maximum?

Deductibles, copayments, and coinsurance directly contribute to your out-of-pocket maximum in the following ways.

Deductible

The deductible is the initial amount you must pay for covered medical services before your insurance plan begins to contribute.

For example, if your deductible is $2,000, you must pay that full amount out of pocket before any cost-sharing begins.

Only expenses tied to covered benefits count toward meeting this requirement. Once you reach the deductible, your plan typically shifts into a shared-cost model, applying either copays or coinsurance depending on the service.

Copay

A copay is a flat fee for specific services, such as primary care visits, urgent care, or prescriptions. The amount is outlined in your insurance plan and usually remains fixed per service type.

You may continue to pay copays even after you meet the deductible, and they still count toward the out-of-pocket maximum.

For example, if your plan lists a $30 copay for a primary care visit, that $30 goes toward your annual cap each time you pay it.

Coinsurance

Coinsurance is the percentage of costs you share with your insurer after meeting your deductible.

For instance, if your plan includes a 20% coinsurance rate, you pay 20% of each eligible bill, and the insurer covers the remaining 80%. The specific amount you pay varies with the total cost of services.

This continues until your cumulative payments reach the out-of-pocket maximum, at which point your insurer assumes full cost coverage for the rest of the year.

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How Do Out-of-Pocket Maximums Apply in Medicare?

Medicare handles out-of-pocket limits differently depending on the part of coverage.

While Original Medicare doesn’t have a hard annual cap on out-of-pocket expenses, certain Medicare plans do apply annual spending limits that protect enrollees from escalating medical costs.

Medicare Part A (Hospital Insurance)

Medicare Part A covers inpatient care, including hospital stays, skilled nursing facilities, and some home health services.

Most people do not pay a monthly premium because they have worked at least 10 years and paid Medicare taxes.

For those who don’t qualify, the monthly premium can reach $518 in 2025. Part A expenses are not subject to a formal out-of-pocket maximum. Instead, each benefit period begins with a $1,676 deductible.

If your stay extends beyond 60 days or you are hospitalized multiple times in one year, you could face multiple deductibles and additional daily coinsurance charges without a spending cap.

Medicare Part B (Medical Insurance)

Medicare Part B covers outpatient care, preventive services, lab work, and durable medical equipment.

In 2025, most beneficiaries will pay a $185 monthly premium and a $257 annual deductible.

After meeting the deductible, you are responsible for 20% of the Medicare-approved amount for most services.

Unlike private plans, Part B does not impose a yearly out-of-pocket maximum, which means ongoing treatment, such as chemotherapy or dialysis, can lead to substantial annual costs without a spending limit.

Medicare Advantage (Part C)

Private insurers offer Medicare Advantage plans and include all Part A and B benefits, often with additional services like dental and vision.

Each plan sets its own monthly premium, averaging around $17 in 2025, though some are $0 and others exceed $200.

Most plans replace the 20% coinsurance model with fixed copayments. Unlike Original Medicare, Medicare Advantage plans are required to set an annual out-of-pocket maximum.

This cap applies to covered in-network services and provides financial protection. Once you hit the maximum, the plan pays for all further covered services for the rest of the year.

Medicare Part D (Prescription Drug Coverage)

Part D plans help cover the cost of prescription medications. The average monthly premium in 2025 is expected to be around $46.50.

Deductibles can go up to $590, depending on the plan. In 2025, a new annual cap of $2,000 will apply to all standard plans.

Once your spending hits that amount, you pay nothing more for covered drugs through the end of the year.

Also, beneficiaries who qualify for the low-income subsidy may see lower premiums and additional reductions in cost-sharing.

Medigap (Supplemental Insurance)

Medigap plans, sold by private insurers, help cover out-of-pocket expenses tied to Medicare Parts A and B. These policies are standard, but premiums vary based on how each insurer sets rates.

While Medigap does not replace Original Medicare or add an out-of-pocket maximum, it can dramatically reduce your out-of-pocket costs by covering coinsurance, deductibles, or excess charges.

The result is lower cost variability, though you’ll still pay a monthly premium for the policy itself. At the same time, the total you spend depends on your usage and your plan’s benefit level.

How Do Out-of-Pocket Maximums Apply in Medicaid?

Medicaid services set federal limits on out-of-pocket costs, but individual states determine how those limits are applied within their programs.

Unlike private insurance and Medicare Advantage plans, Medicaid does not follow a single national out-of-pocket maximum.

Instead, it uses a combination of cost-sharing rules, income thresholds, and exemptions to limit how much enrollees must pay.

States can apply cost-sharing through premiums, copayments, coinsurance, or deductibles. These out-of-pocket charges are capped based on income.

For most enrollees, total spending cannot exceed 5% of household income in a calendar quarter.

However, states may apply higher limits to specific groups whose income exceeds 150% of the federal poverty level.

For example, certain disabled working individuals and medically needy adults may face increased cost-sharing.

Some groups are protected from nearly all out-of-pocket charges. These include children and individuals receiving hospice care.

States are also barred from charging copayments or coinsurance for select services, such as emergency care and preventive screenings, regardless of income.

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What Isn’t Covered by Out-of-Pocket Maximums?

Some expenses fall outside the out-of-pocket maximum threshold because they maintain your coverage or involve service exclusions in your plan’s benefits.

Premiums

Premiums are the monthly payments you make to keep your health insurance policy active. These are required whether or not you receive medical care.

Since premiums are a condition of maintaining coverage, not a form of cost-sharing for services, they’re not part of your out-of-pocket maximum.

Out-of-Network Care

Care received from providers who are not contracted with your insurance plan is usually excluded from your plan’s spending cap.

These services may have higher fees or your insurer may not reimburse them at all, depending on your policy.

Because insurers don’t control these charges, the expenses typically do not apply toward your maximum.

Non-Covered Services

Insurers maintain lists of services they will not pay for, such as cosmetic surgery, specific alternative treatments, or experimental procedures. These are considered outside the plan’s benefit structure.

Since they are not covered to begin with, any cost you incur for them falls entirely outside the out-of-pocket calculation.

Preventive Care

Compliant health plans fully cover most preventive services without requiring you to pay anything out of pocket. These include annual checkups, screenings, and vaccines.

Because they are not subject to cost-sharing, they are excluded from the tally of your maximum.

Costs Above the Allowed Amount

Some providers charge more than what your insurance plan agrees to reimburse.

When this happens, you may receive a bill for the difference, which is a practice known as balance billing.

Because these overages exceed the insurer’s approved rate, they do not count toward your plan’s out-of-pocket ceiling.

What Are the Benefits of Out-of-Pocket Maximum?

The out-of-pocket maximum structure provides the following advantages for health-related expenses:

Helps Prevent Severe Healthcare Costs

Out-of-pocket maximums limit how much you pay in medical emergencies or during extended treatment. Without that ceiling, bills from a single incident could grow into six figures.

If you’re hospitalized after a car accident and rack up $130,000 in eligible medical charges, you might only be responsible for $9,200 if that’s your plan’s cap. After that, your insurer pays the rest. Without that limit, the cost would keep rising.

Limits Your Annual Healthcare Spending

With an annual cap, you always know the upper limit of what your medical bills can reach, no matter how many appointments, tests, or treatments you go through.

For instance, if you’re managing diabetes, and your medication, labs, and specialist visits keep piling up, hitting your cap means you stop paying once you reach the limit, even if you still need care every month.

Encourages You to Seek Necessary Care

When you know there’s a limit on what you’ll pay, you’re less likely to delay care due to cost concerns. This can lead to better follow-through and fewer complications later.

Suppose you’re recovering from surgery and debating a follow-up MRI. Knowing you’ve already met your out-of-pocket max means you can proceed with that scan without worrying about another bill.

Provides a Predictable Budget

Out-of-pocket limits give you a fixed target for your maximum healthcare costs, which helps when you’re tracking expenses across the year.

If you’re preparing a yearly household budget and already expect ongoing care for a chronic issue, you can plan around your insurer’s maximum. This benefit lets you set aside a specific amount and avoid surprise costs.

Offers a Sense of Security and Peace of Mind

Having a spending cap provides a clear boundary, especially when unexpected events happen. This limit can ease the stress of medical decisions.

Say you have a condition that requires sudden and aggressive treatment, you don’t have to worry about what happens if costs keep rising. Once you reach the out-of-pocket max, your plan picks up the rest, letting you focus on your health.

What Are the Disadvantages of Out-of-Pocket Maximum?

While out-of-pocket maximums protect against high medical bills, they also come with the following drawbacks.

You Might Face Additional Costs

Since out-of-pocket maximums only apply to approved, in-network services, other expenses are untouched.

If you receive care from an out-of-network provider or undergo a procedure your plan doesn’t cover, you may incur surprise charges, even if you’ve already hit the max.

For example, if you schedule a surgery and the anesthesiologist isn’t in your plan’s network, you could receive a separate bill that doesn’t count toward your maximum. You’d have to pay that bill separately, on top of what you already spent.

Costs Excluded from the Maximum

Premiums, balance billing, and denied claims don’t count toward the limit, which can create a false sense of security.

You may believe all medical spending stops at your plan’s cap, only to get hit with costs outside the maximum.

If your doctor charges more than the insurer’s allowed rate, and you receive a balance bill, that amount falls outside your plan’s protection. You’ll be responsible for it no matter how much you’ve paid that year.

Higher Premiums

Plans with lower out-of-pocket limits usually charge more each month. If you rarely use your benefits, you might spend more on premiums than what you save by having a lower cap.

If you’re healthy and only visit the doctor once a year, for example, you may pay hundreds more annually just to have a lower max you never reach. This makes the plan less cost-effective for your actual needs.

May Not Fully Address Severe Healthcare Spending

Out-of-pocket maximums don’t apply to every category of care. Long-term care, dental, and vision generally require separate coverage or come with their own limits.

These gaps can add up, especially during complex or chronic health situations.

Let’s say you need extended rehabilitation or home-based care. These services may be outside the scope of your plan.

Even after meeting your out-of-pocket max, you could still owe thousands for services not included in the policy.

How to Choose an Out-of-Pocket Maximum Policy

Choosing the right out-of-pocket maximum requires understanding how different plan features interact with your spending habits, health needs, and income stability.

Each decision should account for how healthcare costs fit into your overall financial strategy.

Evaluate Your Financial Situation

Start with how much you could reasonably absorb in a medical emergency without jeopardizing other financial priorities.

This includes reviewing your emergency savings, sinking funds, and how much flexibility your current budget allows.

Let’s say you’re already allocating toward retirement contributions and covering rent or lease, student loans, and car insurance.

If a $6,000 bill would wipe out your emergency fund and disrupt other obligations, a lower out-of-pocket max could help preserve your financial stability, especially during a recession or when tariffs and inflation drive up other living costs.

Assess Your Health Needs

Review your health history, medication needs, and frequency of medical visits. This will give you a clearer idea of the types of expenses you’ll likely face.

For people who frequently access care, a lower cap provides cost control over time.

Someone who manages autoimmune treatments, for example, pays for regular therapy sessions and visits multiple specialists, might find that a lower out-of-pocket maximum reduces overall stress and healthcare-related debt, even if the plan’s monthly premium is higher.

Check Your Employer Contributions

Employer-sponsored plans sometimes include added support like premium subsidies or health savings account (HSA) funding.

You should factor these perks into your decision about the level of financial risk you’re comfortable with.

If your employer offers $1,500 annually through an HSA, this amount offsets a significant portion of a higher out-of-pocket maximum.

For someone budgeting on a low income or dealing with inconsistent income, this support can stabilize your coverage and offer protection without sacrificing other essentials like short-term investments or utility payments.

Compare Multiple Options

Look beyond the out-of-pocket maximum by comparing other plan features, such as deductibles, coinsurance, and provider networks. Also, factor in how each plan’s structure could affect your month-to-month cash flow.

A plan with a higher max but lower monthly premium might initially sound appealing. But if you have unpredictable health costs, the risk of higher sudden charges can strain your budget.

Especially if your spending habits already include irregular bills, you may find it harder to keep up without clear cost boundaries.

Consider Out-of-Pocket Maximums as Safety Nets

An out-of-pocket maximum doesn’t guarantee you’ll spend all of it, but it sets a ceiling for the worst-case scenario.

When matched with your income patterns and types of budgeting, such as zero-based budgeting or envelope systems, it can help you make informed choices.

Let’s say you recently cut unnecessary expenses and impulse buys to control lifestyle inflation.

You’re now following a structured budget and have limited flexibility to absorb large, one-time costs. In that case, a lower out-of-pocket maximum offers predictability.

It can support sudden medical bills that could derail the progress you’ve made with long-term investments or saving goals.

Comparing Out-of-Pocket Maximum to Other Policies

Term	What It Covers or Defines	How It Works
Out-of-Pocket Maximum	The maximum you pay for covered services in a plan year	Once met, the insurer pays 100% of the covered in-network care
Deductible	The amount you pay before insurance starts covering services	You pay 100% of eligible costs until this is met
Copay	Fixed amount for specific services (e.g., $25 for a visit)	Paid at time of service; varies by service or medication
Coinsurance	Percentage of costs you pay after meeting the deductible	You share costs (e.g., 20%) until your max is reached
Agreed Value	Pre-negotiated reimbursement value for insured property	Used in property or auto insurance; not subject to depreciation
Actual Cash Value	Replacement cost minus depreciation	Used in property claims; payout reflects wear and tear
Market Value	What an item or property would sell for in the open market	Used in real estate and property insurance estimates
Stated Value	Value declared by the policyholder and accepted by the insurer	Common in classic car or collectible policies
Guaranteed Asset Protection	Pays off the remaining loan balance on a totaled vehicle	Covers the gap between the car value and the remaining loan
Reinsurance	Insurance companies buy insurance to reduce risk	Protects the insurer; not seen or used by policyholders directly

Conclusion

Out-of-pocket maximums are among the predictable parts of your health plan. These caps help you plan around worst-case costs and give you a ceiling when care becomes expensive.

However, they don’t include everything, and hitting the limit doesn’t mean you stop paying entirely. Still, they’re helpful when you match them with your budget, usage, and risk tolerance.

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