What Is a High-Deductible Health Plan (HDHP)?
A high-deductible health plan (HDHP) is a type of health insurance plan with a higher-than-average deductible. The term high-deductible can vary depending on the insurer.
It is generally defined as a deductible of at least $1,400 for an individual and $2,800 for a family in 2022. For 2023, these numbers increased to $1,500 for an individual and $3,000 for a family.
HDHPs typically have lower monthly premiums than other health insurance plans. The trade-off is that you will have to pay more out-of-pocket expenses when you need medical care.
It’s important to note that you can still have an HDHP even if you receive health insurance through your employer.
HDHPs are often paired with a Health Savings Account (HSA). An HSA is a tax-advantaged savings account that can be used to pay for qualified medical expenses.
You can contribute money to your HSA on a pre-tax or post-tax basis, and the money in the account grows tax-free.
HDHPs are sometimes called consumer-driven health plans because they allow you to take more control over your healthcare spending.
With an HDHP, you have the incentive to shop around for the best medical care prices and be more mindful of your use of health care services.
HDHPs can be a good option for healthy people who don’t use much in the way of medical services and who are comfortable with managing their healthcare spending.
They can also be a good choice for people who have trouble qualifying for traditional health insurance because of a pre-existing condition.
HDHPs are not the right choice for everyone, however. If you have a chronic illness or need regular medical care, an HDHP will likely cost you more in the long run.
And, if you don’t have enough money to cover your deductible, an HDHP can leave you vulnerable to high out-of-pocket costs if you need medical care.
How Do HDHPs Work?
With an HDHP, you are responsible for paying your medical expenses up to the deductible. Once you reach your deductible, the insurance company starts to pay a portion of your remaining medical expenses.
For example, let’s say you have an HDHP with a $2,000 deductible. You go to the doctor for a routine visit, and the bill comes to $100. You are responsible for the entire $100 since it is below your deductible.
Let’s say you go to the hospital for an emergency appendectomy, and the bill comes to $10,000. Once you have paid your $2,000 deductible, the insurance company will start to pay a portion of the remaining $8,000.
The amount that the insurance company pays will depend on your particular plan.
Some plans have a copayment (a fixed amount you pay for a service) after you reach your deductible, while others have coinsurance (a percentage of the cost you pay).
For example, let’s say your plan has an 80/20 co-insurance policy. The insurance company will pay 80% of the remaining costs, and you will be responsible for 20%.
In our example, this would mean that the insurance company would pay $6,400 (80% of $8,000), and you would be responsible for $1,600 (20% of $8,000).
You will still be responsible for paying your deductible, co-insurance, and other out-of-pocket costs, even if you have met your maximum out-of-pocket limit.
The maximum out-of-pocket limit is the most you will have to pay for covered medical expenses in a year. Once you reach this limit, the insurance company will pay 100% of the remaining costs.
For example, let’s say your plan has a $2,000 deductible and a $5,000 maximum out-of-pocket limit. You have a heart attack, and the bill comes to $50,000.
You will be responsible for the first $2,000 (your deductible) plus 20% of the remaining $48,000 (your coinsurance).
This comes to a total of $14,600. The insurance company will pay the remaining $35,400.
It’s important to note that not all medical expenses count towards your maximum out-of-pocket limit. For example, most plans do not count the cost of preventive care toward your limit.
Preventive care is medical care used to prevent illnesses and injuries before they occur. Examples of preventive care include immunizations, screenings, and check-ups.
Some plans also exclude the cost of specific treatments, such as rehab or mental health care, from the maximum out-of-pocket limit.
It’s essential to read your plan’s documents carefully to know what is and is not included in the maximum out-of-pocket limit.
Pros of an HDHP
Below are some advantages of HDHP:
Save Money on Premiums
HDHPs can save you money on premiums. Since you are taking on more responsibility for your medical care, the insurance company can charge you a lower premium.
Encourage to be Mindful of Health
HDHPs can encourage you to be more mindful of your health. Since you are responsible for paying more of the costs, you may be more likely to take steps to prevent illnesses and injuries.
Save Money on Taxes
HDHPs can help you save money on taxes. If you enroll in an HDHP through your employer, you can contribute to a Health Savings Account (HSA).
The money you contribute to your HSA is tax-deductible. The money in your HSA can be used tax-free to pay for qualified medical expenses.
Cons of an HDHP
Below are some disadvantages of HDHP:
Financial Burden
HDHPs can leave you with a large financial burden if you have an accident or get sick. If you don’t have enough money to cover your deductible, you may have to borrow or put off paying other bills.
Does Not Cover Certain Types of Care
HDHPs may not cover the cost of certain types of care, such as mental health care or rehab.
Confusing
HDHPs can be confusing. The paperwork can be complicated, and it can be hard to understand what your plan covers.
How HDHP Works With an HSA
If you enroll in an HDHP, you may be eligible to contribute to a Health Savings Account (HSA). An HSA is a savings account used to pay for qualified medical expenses.
The money you contribute to your HSA is tax-deductible. The money in your HSA grows tax-free. And the money you withdraw from your HSA to pay for qualified medical expenses is tax-free.
To be eligible to contribute to an HSA, you must:
- Enroll in an HDHP
- Not be covered by another health insurance plan
- Not be enrolled in Medicare
- Not be claimed as a dependent on someone else’s tax return
If you are eligible to contribute to an HSA, you can contribute up to $3,650 for an individual or $7,300 for a family in 2022. For 2023, you can contribute up to $3,850 for an individual or $7,750 for a family.
The money you contribute to your HSA can be used to pay for qualified medical expenses, such as:
- Doctor’s visits
- Prescription drugs
- Dental care
- Vision care
- Some types of insurance premiums
You can use the money in your HSA to pay for qualified medical expenses for yourself, your spouse, and your dependent children.
If you use the money in your HSA to pay for non-qualified medical expenses, you will have to pay taxes on the withdrawal. You will also have to pay a 20% penalty.
HDHP vs Traditional Health Plan
An HDHP has a higher deductible than a traditional health plan. This means you will have to pay more out-of-pocket costs before your insurance company starts paying for your care.
With an HDHP, you will also have to pay for some types of care typically covered by a traditional health plan, such as office visits, prescription drugs, and lab tests.
An HDHP may have a lower premium than a traditional health plan. This means that you will pay less each month for your health insurance.
You can use your HSA to pay for qualified medical expenses, such as doctor’s visits, prescription drugs, and dental care. You can also use your HSA to pay for some insurance premiums.
If you use the money in your HSA to pay for non-qualified medical expenses, you will have to pay taxes on the withdrawal. You will also have to pay a 20% penalty.
HDHPs are not for everyone. If you have a chronic condition or are likely to need a lot of medical care, an HDHP may not be the best choice.
Before enrolling in an HDHP, ensure you understand how the plan works and what it covers. You should also ensure you have enough money to cover your deductible.
The Bottom Line
An HDHP can save you money on your monthly premiums. But you will have to pay more out-of-pocket costs for your care.
If you enroll in an HDHP, you may be eligible to contribute to a Health Savings Account (HSA). The money you contribute to your HSA is tax-deductible. The money in your HSA grows tax-free. And the money you withdraw from your HSA to pay for qualified medical expenses is tax-free.
Before enrolling in an HDHP, ensure you understand how the plan works and what it covers. You should also ensure you have enough money to cover your deductible.
FAQs
1. What is an HDHP?
An HDHP is a type of health insurance plan with a high deductible. You will have to pay more out-of-pocket costs for your care.
2. What are the benefits of an HDHP?
An HDHP may have a lower premium than a traditional health plan. This means that you will pay less each month for your health insurance.
If you enroll in an HDHP, you may be eligible to contribute to a Health Savings Account (HSA). The money you contribute to your HSA is tax-deductible. The money in your HSA grows tax-free. And the money you withdraw from your HSA to pay for qualified medical expenses is tax-free.
3. What are the drawbacks of an HDHP?
HDHPs are not for everyone. If you have a chronic condition or are likely to need a lot of medical care, an HDHP may not be the best choice.
4. I’m thinking about enrolling in an HDHP. What should I do?
Before enrolling in an HDHP, ensure you understand how the plan works and what it covers. You should also ensure you have enough money to cover your deductible.
To enroll in an HDHP, you will need to find a health insurance company that offers this type of plan. You can do this by shopping online or talking to a broker.
Once you have found an HDHP you are interested in, you will need to fill out an application. Be sure to read the fine print before you enroll. This way, you will know what you are responsible for and what your plan covers.
5. I’m already enrolled in an HDHP. How can I make the most of my plan?
If you are already enrolled in an HDHP, there are a few things you can do to make the most of your plan. First, make sure you understand how your plan works. Know what your deductible is and what benefits are included in your plan.
Second, contribute to a Health Savings Account (HSA). The money you contribute to your HSA is tax-deductible. The money in your HSA grows tax-free. And the money you withdraw from your HSA to pay for qualified medical expenses is tax-free. Finally, be sure to shop around for your care. Compare prices and look for discounts. This way, you can save money on your out-of-pocket costs.
