How do deductibles and out-of-pocket maximums affect your healthcare costs?

Overview

Insurance deductibles and out-of-pocket maximums are two of the clearest levers you have over how much health care will cost you in a policy year. The deductible is a threshold you meet first; the out-of-pocket maximum is the safety net that limits your total annual exposure. Together they determine the timing and scale of your outlays for medical care and how soon your insurer shoulders the bulk of expenses.

This article explains how each component works, how they interact, who should prioritize low deductibles versus low premiums, and practical steps you can take today to avoid surprises. In my 15 years advising clients on budgeting for medical costs, I’ve found that a simple, scenario-based calculation often beats intuition when choosing a plan.

How the two pieces work, step by step

  • Deductible: The deductible is the amount you pay for covered services before your insurer begins to pay its share. For example, if your plan has a $1,000 deductible, you generally pay the first $1,000 of covered costs (subject to your plan’s rules about what counts toward the deductible).
  • Cost sharing after deductible: Once the deductible is met, most plans use copays (fixed dollar amounts for visits or drugs) and/or coinsurance (a percentage of the allowed charge) for remaining costs. For example, you might pay 20% coinsurance for hospital care after the deductible is met.
  • Out-of-pocket maximum: This is the annual cap on what you’ll pay out-of-pocket for covered services. It typically includes deductible payments, copays, and coinsurance. After you reach this cap, your plan pays 100% of covered services for the rest of the plan year (check your plan for any exceptions).

Authoritative guidance from Healthcare.gov explains that out-of-pocket maximums protect consumers from catastrophic costs and that preventive services are often covered before the deductible (Healthcare.gov). For details about which medical expenses may be treated differently for tax or reimbursement purposes, consult IRS Publication 502 (IRS.gov).

What counts toward the deductible and out-of-pocket maximum?

Not every health-related charge necessarily counts. Typical items that count:

  • Deductible amounts for covered services
  • Copays and coinsurance for covered services
  • Prescription drug costs (if they’re part of your plan’s pharmacy benefits)

Common exceptions or variations:

  • Premium payments do not count toward your deductible or out-of-pocket maximum.
  • Some plans exclude certain out-of-network costs from the out-of-pocket maximum or apply a separate out-of-network maximum.
  • Preventive services are often covered without applying the deductible, per federal rules for most marketplace and employer-sponsored plans (Healthcare.gov).
    Always read your plan’s Summary of Benefits and Coverage (SBC) to confirm what counts; I tell clients to highlight “Count toward OOP max” and “Does not count” items when reviewing an SBC.

Real-world scenario (practical example)

Consider a plan year in which you have: a $1,500 deductible and a $5,000 out-of-pocket maximum. Suppose you incur $15,000 in covered medical bills for a hospitalization.

  • You pay the first $1,500 to meet the deductible.
  • Depending on copays/coinsurance, you then pay your share (for example, 20% coinsurance) until your total out-of-pocket spending reaches $5,000.
  • After hitting $5,000, the insurer pays the remaining allowed charges for covered services that year.
    This example illustrates why the out-of-pocket maximum is the critical protection against catastrophic financial loss.

Who should prioritize which feature?

  • Low deductible (and typically higher premium): Best for people who expect frequent doctor visits, regular prescriptions, chronic conditions, or scheduled surgeries. You trade higher monthly cost for lower per-episode cost.
  • High deductible (and typically lower premium): Often chosen by healthier, younger people who rarely use medical services and prefer lower monthly premiums. If paired with a tax-advantaged Health Savings Account (HSA), a high-deductible plan can provide long-term savings for future medical expenses.

If you’re weighing choices, run a simple annual-cost comparison: (monthly premium × 12) + expected out-of-pocket medical costs. Compare that across plans rather than judging by premium or deductible alone. For calculators and more detailed comparisons, our guide on Choosing the Right Deductible explains tradeoffs and helps quantify the decision (Choosing the Right Deductible: How It Affects Premiums and Risk).

Health Savings Accounts (HSAs) and HDHPs

High-deductible health plans (HDHPs) that meet IRS rules make you eligible to contribute to an HSA. HSAs provide three tax advantages: pre-tax contributions, tax-free growth, and tax-free distributions for qualified medical expenses. For people who can afford some risk and want long-term tax-advantaged health savings, an HSA often pairs well with an HDHP. See our primer on HSAs and when deductibles make an HSA worth it (When Health Insurance Deductibles Make an HSA Worth It).

Note: Contribution limits, HDHP thresholds, and other IRS rules change year to year. Consult the current IRS guidance before planning contributions (see IRS rules or a tax advisor).

Common planning mistakes I see

  • Choosing only on premium. Many clients pick the cheapest monthly premium without estimating likely annual medical costs, then discover they pay more in the year of unexpected care.
  • Ignoring the difference between in-network and out-of-network rules. Out-of-network care can incur extra costs that may not count toward your in-network out-of-pocket maximum.
  • Assuming all out-of-pocket costs count. Pharmacy tiers, prior-authorization denials, and non-covered services can change what you actually pay.

Smart steps to protect your budget

  1. Estimate your expected use: Count regular prescriptions, planned procedures, specialist visits, and typical emergency visits. 2. Run an annual cost comparison: Add premiums to your expected out-of-pocket and compare plans. 3. Confirm preventive care rules: Make sure routine screenings and immunizations are covered without counting toward your deductible (Healthcare.gov). 4. Use HSAs if eligible: Build a small HSA buffer during healthy years for unexpected expenses. 5. Check provider networks and prior-authorization rules: Confirm your doctors and hospitals are in-network to avoid surprise bills.

Questions people ask most often

  • Will copays apply to the deductible? Sometimes. Many plans count copays and coinsurance toward the out-of-pocket maximum but not toward the deductible. Check your SBC. – Do premiums count toward out-of-pocket maximums? No. Premiums are separate. – What happens when I reach the out-of-pocket maximum mid-year? Your insurer pays 100% of covered services for the remainder of the plan year.

Professional disclaimer

This article is educational and does not replace personalized financial, tax, or insurance advice. Plan rules vary—always read your Summary of Benefits and Coverage and consult a licensed insurance agent or a tax professional for guidance tailored to your situation.

Sources and further reading

Internal resources

In practice, small calculations and a quick review of your plan’s SBC prevent the biggest surprises. If you’d like, gather your plan documents and recent medical bills, and you can run a side-by-side comparison to see which design saves you the most over a year.