Do Copays Count Toward the Out-of-Pocket Maximum?

Back in 2014, all in-network cost-sharing, including copays, started to count toward a policyholder’s out-of-pocket maximum, which marked a significant change for copay-based health plans. In order to help employees better understand their insurance, read on for information about out-of-pocket maximums and copay-based plans.

What is an Out-of-Pocket Maximum?

In the American healthcare system, an out-of-pocket maximum is the limit a person with health insurance will be required to pay for covered medical expenses each year. Typically, out-of-pocket maximum limits include money spent on:

1. Deductibles
2. Copayments
3. Coinsurance for in-network care and services

Once a person reaches their annual out-of-pocket maximum, their health insurance will pay 100% of the covered medical and prescription costs for the rest of the year. 

It’s important to note that the cost of the individual’s monthly premium payment does not count towards the out-of-pocket maximum. Individuals will be required to pay their monthly premium until they cancel or change their plan.

How Were Copay Plans Changed?

Prior to the reform, copays at the doctor or pharmacist did not count toward an individual’s deductible or out-of-pocket maximum. This wasn’t a huge deal for someone with low healthcare expenses because a handful of copays at $10 or $35 each didn’t represent a lot of healthcare dollars. 

However, this rule was a big deal for someone who was on multiple prescriptions and/or had numerous visits to the doctor. Why? Because this person was continually paying copays that didn’t ever get him or her any closer to meeting his or her deductible or out-of-pocket maximum. 

An Example of How Copay-Based Plans Changed

Let’s look at an example: 

Jake has a copay-based health plan with 80 percent coinsurance, a $2,000 deductible, and a $3,000 out-of-pocket maximum. After two doctor visits and three specialist visits, Jake is diagnosed with diabetes and told he needs to take two medications each month. 

Since Jake is on a copay-based health plan, he pays $25 for each visit to the doctor, and $40 for each specialist visit. The two medications will cost him $30 and $60 per month. 

Therefore, Jake’s copays look like the following:

• $50 (2 doctor visits) + $120 (3 specialist visits) + $360 ($30/month medication) + $720 ($60/month medication) = $1,250 

This $1,250 does not count towards Jake’s deductible or out-of-pocket maximum. Why does this matter? Well, let’s say Jake gets in a car accident and has to be rushed to the emergency room for surgery. The medical bills from the emergency room total $17,000. 

• Jake is responsible for paying his deductible ($2,000) plus 20 percent of $15,000 = $5,000 
• Jake’s out-of-pocket maximum is $3,000, so he’s responsible for paying $3,000 of the $5,000. 
• And this is all in addition to the cost of his copays, $1,250. 
• So Jake’s total medical bills for the year would be $1,250 (copays) + $3,000 (emergency room bills) = $4,250

Prior to reform, many people didn’t realize that copays were just empty payments that didn't count toward either the deductible or out-of-pocket maximum. Healthcare reform has changed this, and now copays must count toward the out-of-pocket maximum. 

Let’s look at Jake’s situation again, this time with post-reform rules in place: 

Jake calls his insurance company to check on his copays and deductible. He discovers that copays do not count toward his deductible. 

Therefore, Jake’s copays look like the following:

• $50 (2 doctor visits) + $120 (3 specialist visits) + $360 ($30/month medication) + $720 ($60/month medication) = $1,250 
• Now, Jake is rushed to the emergency room. The medical bills from the emergency room total $17,000. 
• Jake’s payout for emergency room bills: 
• $2,000 (to meet the deductible) + 20 percent ($15,000 leftover from the ER bill) = $5,000

With reform rules in place, Jake’s copays count toward his out-of-pocket maximum and therefore he would only be responsible for paying $3,000 total, but only $1,750 for this emergency room visit. 

So Jake’s medical bill for the emergency room in this scenario would be $1,750 versus $3,000.

What is the Difference Between a Deductible and an Out-of-Pocket Maximum?

A deductible is the amount a person pays each year for most eligible medical services or medications before their health insurance begins to contribute to the cost of covered services. Deductibles can be anywhere from $0 to $10,000. Typically, deductibles apply every calendar year. This means that between January and December, your healthcare bills would need to exceed your deductible before the insurance company would start paying, excluding copays, coinsurance, and noncovered expenses.  

Meanwhile, the out-of-pocket maximum is the total amount an insured person will spend on their healthcare costs in a calendar year. An out-of-pocket maximum is a health insurance term that is designed to be a stop loss for the policy holder. Once you hit the out-of-pocket maximum, your insurance company will pay the rest of your medical expenses in some cases, but not all.

For most people, this is never an issue because reaching an out-of-pocket limit takes significant medical expenses. In the case that the out-of-pocket maximum is reached, most medical costs are covered. However, out-of-pocket costs outside the out-of-pocket maximum can become an issue because not all medical expenses are covered.

When a medical expense isn't covered, this means the bill will be entirely up to the individual. So even if you've met your out-of-pocket maximum for the year, you'll still have to pay an arm and a leg for infertility treatment or long-term care.

What Else Should Employees Know?

Employee health insurance has seen significant changes in the past few years. Here are some key takeaways for employees who may have questions about copays and out-of-pocket maximums:

1. Copays count toward the out-of-pocket maximum for all new health plans. If you have really high healthcare expenses, this is a huge positive for you with regards to your overall healthcare expenses for the year. 
2. In most cases, copays do not count toward the deductible. When you have low to medium healthcare expenses, you’ll want to consider this because you could spend thousands of dollars on doctor visits and prescriptions and not be any closer to meeting your deductible. 
3. Better benefits for copay plans mean higher costs. You’ll want to factor in paying more in premiums for the benefit of copays counting toward the out-of-pocket maximum.

Likewise, here are some tips for employees on how to protect themselves from unnecessary healthcare costs:

1. Always check your networks before visiting a medical facility. Check to make sure your favorite providers are in-network before purchasing a new health plan. This includes the emergency room.

2. Check your health plans list of services that are not covered. On some, mental health won't be covered. Others, won't cover infertility treatment. Most won't cover acupuncture. If you are unsure about something you want to have done, check your insurance first so you can know the costs upfront.

3. Know whether or not you need pre-authorizations for services. If you have an HMO plan, it's likely that you need your preferred provider to sign off before you see a specialist or have any kind of scan or special test run. Some plans will require a doctor to declare that mental health treatment is a medical necessity before you can see a mental health professional or seek treatment. Every plan is different, so it's best to read all the details on your plan.