As its name suggests, high deductible health plans (HDHP) have higher deductibles than traditional insurance plans, but also typically lower monthly premiums too. These plans typically feature an expanded list of preventative services that can help defray total costs as well for those unlikely to need emergency medical care.
Here’s a look at how high deductible health plans work, what they cover, what they cost, and some common HDHP advantages and disadvantages.
What Is a High Deductible Health Plan and How Does It Work?
An HDHP is a health insurance plan that has a higher deductible than standard plan types in exchange for lower monthly premiums. In 2022, a high deductible health plan is any plan with a deductible of $1,400 or more for an individual or $2,800 for a family. This will increase to $1,500 or more for an individual or $3,000 or more for a family in 2023. This deductible is the amount you pay out of pocket before your insurance plan begins covering health services.
While a high deductible plan is not the best choice for everyone, there are circumstances where they make sense. Healthy individuals who use their coverage primarily for preventative services and rarely need to seek physician care would not need necessarily need for their health insurance plans to help cover care costs. In this case, the higher deductible of an HDHP provides the dual benefit of reduced overall costs because of lower monthly premiums with the security of care in the event a medical emergency does arise.
HDHPs are also commonly called HSA-eligible plans because you must have an HDHP to open a Health Savings Account (HSA). Pairing an HSA with an HDHP is another way to help lower the total cost of care.
What Is a Health Savings Account (HSA)?
Money in a Health Savings Account (HSA) can be used to pay for medical expenses, including deductibles, copayments, and coinsurance. HSAs let you contribute untaxed dollars at any time, up to a maximum of $3,650 for individual coverage and $7,300 for family coverage in 2022. In 2023, this will increase to $3,850 for individual coverage and $7,750 for family coverage.
In some respects, HSAs are similar to flexible spending accounts (FSAs). In both cases, you can contribute money to help offset the cost of medical expenses. However, unlike HSAs, FSAs can only be opened through your employer. This means that if you leave your job, you forfeit the funds in your FSA. You may also lose the funds in your FSA if they’re not spent by the end of the year. In contrast, funds in an HSA do not expire.
But while you may open an FSA with any health plan through your employer, you must be enrolled in a HDHP plan to open a private HSA. In some cases, insurance companies offer HSAs in combination with HDHP plans. If not, you may be able to apply for an HSA through your bank or another financial institution. It’s also worth noting that HSA funds typically cannot be used to cover monthly premiums.
What Does a High Deductible Health Plan Cover?
All high deductible health plans cover the 10 essential benefits listed under the Affordable Care Act (ACA). These are:
- Outpatient services
- Emergency services
- Pregnancy care
- Mental health care
- Prescription drugs
- Rehabilitative services
- Laboratory services
- Pediatric services
- Preventative services
Of these 10 care types, preventative services can be accessed without having to reach your deductible first. Preventative services include cholesterol screening, diet counseling, HIV screening, immunization, lung cancer screening, and statin preventative medicine.
The IRS also recently expanded the list of preventative services covered by HDHPs to include anti-resorptive therapy for osteoporosis, beta-blockers for congestive heart failure, blood pressure monitors for hypertension, and glucometers for diabetes.
HDHPs vs. Other Health Plan Types
The biggest differences between HDPHs and other plan types are their higher deductibles and their usage of HSAs. While these plans typically cover the same services as traditional Marketplace plans, they also feature lower monthly premiums and larger deductibles, meaning while you pay less each month to keep your policy active, you also pay more each year before your coverage activates.
Consider a more traditional plan with a deductible of $500 versus an HDHP plan with a $1,500 deductible. In the case of preventative services, no deductible payment is required for either plan, although copayments and coinsurance may still apply. However, in the case of a non-preventative service such as a hospital stay, coverage under the traditional plan starts after you pay $500 out of pocket. But for the HDHP plan, coverage starts after you pay $1,500 out of pocket.
Costs of an HDHP
When it comes to an HDHP, there are 5 costs worth considering: deductibles, premiums, copayments, coinsurance, and out-of-pocket maximums.
The deductible is what you pay out of pocket before your insurance begins to cover healthcare services, and deductibles are what set HDHP plans apart from other health insurance types. To be considered an HDHP, plans must have deductibles of at least $1,400 for individuals and $2,800 for families ($1,500 or more for an individual or $3,000 or more for a family in 2023). Depending on your insurance company and the extent of coverage purchased, however, these deductibles can be much higher.
For example, if you choose to add extra coverage such as dental and vision care onto your HDHP plan, your deductible may increase.
Premiums are the amount you pay each month for coverage. As a trade-off for high deductibles, HDHP plans typically have lower monthly premiums than their traditional Marketplace counterparts. However, Bronze-tier and Silver-tier Marketplace plans with cost-sharing reductions may have lower monthly premiums than HDHP plans.
Copayments are fixed amounts that you pay for healthcare services. While they typically do not count toward payments of your deductible, they do count toward your yearly out-of-pocket maximum. Consider an HDHP plan with a $40 copayment for specialist medical services. Each time you access these services, you pay $40 in addition to your coinsurance or your out-of-pocket payment if you have not yet paid your deductible in full.
Coinsurance refers to the amount you pay for healthcare services after your deductible is paid and the amount your insurance company pays, expressed as a percentage. For example, if your coinsurance is 80/20, this means your insurance plan pays for 80% of the cost for covered services and you pay the remaining 20% of the bill.
The out-of-pocket maximum is the upper limit of what you pay for services each year. In 2022, the out-of-pocket maximum is $8,700 for a traditional Marketplace plan and $7,050 for an HDHP. This will increase to $9,100 for an individual traditional Marketplace plan and $7,500 for an HDHP in 2023.
Money spent on deductibles, copayments, and coinsurance for in-network care all contribute to this amount. Once you reach your out-of-pocket maximum, your insurance pays for 100% of your covered benefits. However, monthly premiums, services that your plan do not cover, and any out-of-network services do not count towards your annual out-of-pocket maximum.
Advantages of High Deductible Health Insurance
While having an HDHP plan means you pay more out of pocket to meet your deductible than comparable Marketplace plans, these plans also offer some advantages over other plan types.
- Lower premiums: To offset the significantly higher deductible of HDHP plans, monthly premiums tend to be lower. This can help reduce overall costs if you’re using coverage largely for preventative services and are unlikely to need your plan to help cover large medical expenses.
- Tax-free HSAs: Money deposited into an HSA is tax-free, which can lead to larger overall savings for health spending. In addition, other family members and your employer can contribute to your HSA.
- Expanded preventative services: HDHPs come with an expanded list of preventative services, which make it possible to access more care options without paying your deductible.
Disadvantages of High Deductible Health Insurance
If you opt for a high deductible health plan, there are several disadvantages to consider.
- Higher deductibles: The hallmark of an HDHP, your deductible is higher than comparable Marketplace plans, meaning you pay more out of pocket before your coverage takes over. This makes an HDHP a poor choice for those with recurring health needs who would better benefit from a plan without a high barrier to sharing health costs.
- Potential tax penalties: If you spend HSA funds on services that are not covered by your plan, you pay income tax on the money spent plus a 20% penalty. However, once you’re 65 years old or older, you pay the taxes but not the penalty.
- Record-keeping requirements: You are responsible for proving that HSA funds were spent on covered services, which means you need to keep receipts to show the IRS in case of an audit.
Who Should Consider High Deductible Health Insurance?
High deductible health insurance plans may be a good choice for those who are currently healthy and rarely need medical care beyond covered preventative services.
If you’re considering an HDHP plan, it’s worth considering how much care you typically use each year, how much you’re prepared to pay for a deductible in exchange for lower premiums, and how much you can afford to contribute to your HSA. It’s also worth talking to your employer — some businesses offer HDHP plans to employees and may also contribute to their HSAs.