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Understanding Out-of-Pocket Medicare Expenses

William Echols by William Echols | Licensed since 2011
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This article was updated on: 11/16/2016

When you hear people talking about your Medicare costs, you may hear the phrase “out-of-pocket” used frequently. “Out-of-pocket” medical expenses refer to any costs you have to pay yourself. With Medicare, these expenses may include copayments, premiums, deductibles, and coinsurance amounts, and your costs may depend on the type of Medicare coverage you have, the specific health-care services you use, and how often you need them. While many Medicare plans may offer similar types of coverage, the difference in how much you have to pay out of pocket can be quite large between plans.

When considering potential out-of-pocket medical expenses, here’s an overview of things to keep in mind.

What does “out-of-pocket” mean?

As mentioned, the term “out-of-pocket” refers to the expenses that you must pay yourself, including both costs for Medicare-covered services and services that Medicare doesn’t cover. Whether you’re covered through Original Medicare or a Medicare Advantage plan, Medicare doesn’t pay for all of your health-care expenses; you’re still responsible for certain costs that Medicare doesn’t cover. This may include:

  • Monthly premiums
  • Copayments and/or coinsurance
  • Deductibles
  • Limiting charge (no more than 15% above the Medicare-approved amount for the service) if you use a provider that doesn’t accept Medicare assignment, meaning the provider doesn’t accept the cost set by the Medicare program as full payment for the service.
  • Pharmacy dispensing fee (if you’re enrolled in a Medicare Prescription Drug Plan)

Any of the above costs may be expenses you must pay “out of pocket,” after Medicare has paid its share for covered services.

In addition, you’re also responsible for paying for services that Medicare doesn’t cover, such as long-term nursing care, acupuncture, cosmetic surgery, or health-care services when you’re outside of the country. If Medicare doesn’t cover a certain service or item, you may need to pay the entire cost out of pocket, unless you have other coverage.

Medicare Supplement (Medigap) plans may help cover certain costs that Original Medicare doesn’t cover, including out-of-pocket expenses like deductibles, copayments, and/or coinsurance.

Not all Medicare plans are created equal

Medicare Advantage plans may possibly offer greater benefits at a lower overall cost than Original Medicare, Part A and Part B. Some Medicare Advantage plans offer lower monthly premiums, others offer routine vision and dental coverage, and some could have very low out-of-pocket maximum spending limits (please note that Original Medicare doesn’t have a yearly spending limit).

Depending on where you live, your service area may offer Medicare Advantage plans with premiums as low as $0 or a Medicare Prescription Drug Plan with a $0 deductible. However, keep in mind that even if a plan’s premium or deductible costs may be low, this may be offset by other out-of-pocket expenses being higher (such as copayments or coinsurance). In other words, make sure you look at all of the costs associated with a plan to get a better sense of what your overall costs may be.

It’s a good idea to shop around when looking for a Medicare Advantage plan or Medicare Prescription Drug Plan so you can find one that offers the coverage you need and at a price that you’re comfortable with.

A higher monthly Medicare premium could mean less spending overall

If you have no diagnosed diseases, no chronic conditions, and rarely get sick, a plan with a high deductible and low monthly premium may be of interest. However, if you have a disease or condition which requires frequent medical treatments or extensive doctor visits, your out-of-pocket expenses could quickly add up, and it may be in your best financial interest to choose a plan with a high monthly premium if the plan also offers a low annual deductible and inexpensive Medicare copayment or coinsurance requirements.

For example, say you have diabetes, need frequent blood sugar screenings, and require numerous visits to the doctor. If your plan requires you meet a $1,500 yearly deductible before the plan will cover any of your medical expenses, you may find yourself spending a lot of money out of pocket every year. This would be the case regardless of how inexpensive your Medicare premium is each month.

In other words, as mentioned earlier, minimizing your out-of-pocket medical expenses may depend on your specific situation and the types of health services that you use most often.

A copayment is not the same as coinsurance

Copayments and coinsurance are both examples of cost sharing, or the expenses you’re responsible for after Medicare has paid its share. A copayment refers to a flat amount that you are required to pay for a particular medical service (such as a visit to the doctor) or prescription drug. Some plans require different copayments depending on the services received, which means you pay different flat amounts for different medical services and/or prescription drugs. For example, a Medicare Advantage plan may charge a $20 copayment for a primary care doctor and a $50 copayment for a specialist.

If you’re enrolled in a Medicare plan that includes prescription drug coverage, it’s important to understand that Medicare plans may cover prescription drugs at different cost levels. Medicare Prescription Drug Plans and Medicare Advantage Prescription Drug plans place covered prescription drugs into different “cost tiers,” and your out-of-pocket expenses will vary depending on which tier your medication fall under. For example, a tiered prescription copayment system may charge $10 for generic drugs, $25 for brand-name drugs, and $35 for specialty drugs.

Unlike copayments, coinsurance is a percentage of a service, item, or medication that you must pay. This amount may vary depending on your specific plan. With this form of payment, each time you seek medical care, you would pay a percentage of your medical expenses out-of-pocket, either at the time of service/purchase or once the bill arrives. For example, if your bill is $100 and your coinsurance states that you must pay 10%, you would be responsible for paying $10.

Many plans have different coinsurance amounts for in-network versus out-of-network providers. Some Medicare plans will feature both copayments and coinsurance as part of your out-of-pocket expenses, and this may vary depending on the type of service. Knowing the difference can help you save money choosing a plan that offers the most benefits at an affordable price.

Maximum Out-Of-Pocket (MOOP)

One key difference between Original Medicare and Medicare Part C is that all Medicare Advantage plans have a maximum out-of-pocket (MOOP) spending limit, which is a yearly cap on your Medicare expenses. Original Medicare doesn’t have an annual out-of-pocket maximum, meaning there’s no limit to how much you could spend on your health care in a given year.

Here’s how it works. Once your total out-of-pocket costs for Medicare-covered services have reached the annual spending limit for your Medicare Advantage plan, your plan will cover 100% of covered costs for the rest of the year. The out-of-pocket maximum varies from plan to plan and may change from year to year.

If you’re concerned about lowering your out-of-pocket expenses, it may be a good idea to enroll in a Medicare Advantage plan with a low maximum out-of-pocket limit. Pay attention to what the plan requires when it comes to copayments, coinsurance, and deductibles as well, since these are all costs that contribute towards reaching your yearly spending cap.

How provider networks may affect your out-of-pocket expenses

If you’re enrolled in a Medicare Advantage plan, make sure you understand the plan’s rules when it comes to the providers you can use. This can affect your out-of-pocket expenses, and, in some cases, your plan may not cover you if you don’t follow the rules. Depending on the type of plan, Medicare Advantage plans may provide coverage for doctors, hospitals, and other health-care providers in their established networks or give you the flexibility to use non-network providers. If you get services from providers outside of the network, you could face more expensive medical bills and out-of-pocket expenses. Some plans may require you to pay a higher level of coinsurance or a greater copayment if you choose to go out-of-network for services. For example, you may be required to pay 20% of your medical expenses inside of the plan’s network, but 30% for services obtained outside of the plan’s network.

HMO (Health Maintenance Organization) plans are one of the most popular types of Medicare Advantage plans. By following a managed-care model and requiring you to get most of your care through a provider network of doctors and hospitals, HMOs tend to have lower out-of-pocket expenses than other types of Medicare Advantage plans. If you’re enrolled in an HMO, the plan may refuse to cover any medical expenses associated with care received by an out-of-network provider (with the exception of emergencies). In other words, if you use a non-network provider for non-emergency services, you could wind up having to pay the entire cost for the care.

PPO (Preferred Provider Organization) plans are another popular option. These plans give you the flexibility to use non-network providers, but your out-of-pocket expenses are lower if you use doctors and hospitals in the plan’s preferred provider network.*

Then there are HMO-POS plans (Health Maintenance Organization Point-of-Service) plans, which follow a hybrid model. Like traditional HMOs, you’ll need to get most of your care through network providers. However, HMO-POS plans also give you the flexibility to use non-network providers for certain services (although your out-of-pocket medical expenses will be higher).

As you can see, it’s very important that you understand how your plan’s provider rules affect your out-of-pocket costs under Medicare. If continuing to see a particular doctor is important to you, it’s essential that you check the provider list of any Medicare Advantage plan you’re considering before enrollment to confirm that your doctors participate in the plan’s network. Medicare Advantage plans may change provider networks at any time, but you’ll be notified by the plan if necessary.

Take advantage of your plan’s yearly Annual Election Period

The Annual Election Period is an ideal time of year to review any upcoming changes to your Medicare plan and compare costs and benefits against other available plan options in your service area. Compare the copayments and coinsurance structures, premiums, annual deductibles, and annual out-of-pocket maximum spending limits of all plans to see if a more beneficial option is available to you.

Every fall, your Medicare Advantage or Medicare Prescription Drug Plan will send you two important documents called the Evidence of Coverage Notice (EOC) and Annual Notice of Change (ANOC). The EOC summarizes your plan coverage and costs for the coming year, while the ANOC lists out important changes to your benefits, costs, provider networks, and more that will go into effect next year. It’s a good idea to review these documents carefully so you have a good understanding of how your coverage and out-of-pocket expenses may be changing for the coming year — and whether you may want to use the Annual Election to switch to a different plan. If you haven’t received these documents in the mail by the end of September, contact your plan to request this information.

I hope you understand your Medicare out-of-pocket costs a little better now. If I can answer any other questions for you, please reach out to me. Learn more about me by using the “View profile” link below. Or use one of the links below to set up a phone appointment or get an email with personalized information for you. If you want to compare Medicare plans yourself right now, click on the Compare Plans button on this page. As you narrow down the plans you might be interested in, feel free to call the number below to reach me or another licensed insurance agent; we’d be happy to assist you with your Medicare needs.

Call Medicare.com’s licensed insurance agents at 1-844-847-2660, TTY users 711; Monday through Friday, 8AM to 8PM ET.

*Out-of-network/non-contracted providers are under no obligation to treat Preferred Provider Organization (PPO) plan members, except in emergency situations. For a decision about whether we will cover an out-of-network service, we encourage you or your provider to ask us for a pre-service organization determination before you receive the service. Please call our customer service number or see your Evidence of Coverage for more information, including the cost-sharing that applies to out-of-network services.

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William Echols |
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Licensed Insurance Agent since 2011
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