High Deductible Health Plans Explained
Like everything else, it seems, the cost of health insurance premiums keeps going up, and as insurance has gotten more expensive, High Deductible Health Plans (HDHP) have become much more popular. According to Bank of America, just 3% of employees were enrolled in an HDHP in 2006. By 2020, that number had eclipsed 40%.
And that has given many more people access to a Health Savings Account (HSA), which is a way of saving for medical expenses -- with a triple tax advantage. To be eligible for an HSA, you must first be enrolled in a qualified High Deductible Health Plan. (More on what that means later.)
What’s an HDHP?
An HDHP is a type of health insurance plan that has lower monthly premiums but a higher deductible than a typical health plan. (A deductible is the amount you pay for covered health care services before your insurance plan starts to pay.) Read more in our Health Insurance Glossary.
An HDHP covers 100% of routine preventive care, which means that you’re not responsible for copays or coinsurance for this type of care before meeting the deductible. Preventive care includes check-ups, immunizations and certain screenings. To be clear, you are not responsible for preventive care costs even after you’ve met your deductible. Once the deductible is met, insurance will still cover preventive care costs, but it will also start to pay for non-preventive care, depending on your coverage.
A list of qualifying preventive services and screenings is available at Healthcare.gov.
Be aware that if you change to a plan that is not an HDHP, you can no longer contribute to the HSA bank account, but you can still use funds for HSA-eligible expenses. The money is linked to a debit card (or old-fashioned checks).
Who's a good candidate for an HDHP?
An HDHP can make sense in a variety of situations.
In many cases, a high deductible plan is a wise choice for people who are healthy and generally only require preventive care. So, if you’re a 30-year-old with no underlying conditions, you may be a good candidate for an HDHP.
But consider another scenario: If you’re having a knee replacement and you have to spend $3,000 for the procedure, you may be better off than with a plan with a lower deductible that also has copays for the hospital stay, lab work, scans and physical therapy you’ll also need.
“So, it depends. It’s all relative,” says Stephanie Rosenberger, Director of Client Services at KIG. “If you have two plan options, the HSA for a major surgery may be better than the other plan option. If it’s a dual option, by understanding how to read the benefit grid or Summary of Benefits and comparing those, we can determine who would be most appropriate for the HSA.
“If you’re having major back surgery, a $2,100 deductible plan compared to a $1,500 deductible plan may be a better fit if everything is paid at 100% after deductible. Whereas with the $1,500 plan, you’d pay $1,500 for the surgery, in addition to copays for services leading up to and after surgery. And you’re paying with post-tax money, whereas on an HRA (with an HDHP), you’re able to front-load everything pre-tax.” (Remember, HSAs have a triple tax advantage.)
Additionally, a high deductible plan can also be advantageous for someone who has the ability to save for future health care expenses after retirement.
What makes a qualified HDHP “qualified”?
An HDHP could simply be considered a policy with a high deductible, which, of course, is subjective. But the term “qualified HDHP” is specific to health plans that also conform to certain IRS guidelines:
- For 2022, it must have a deductible of at least $1,400 for individuals or $2,800 for a family. The IRS may change these figures from year to year. That means you’ll have to pay at least $1,400 in medical costs before your plan kicks in and starts paying for your care.
- You pay 100% of your expenses until you reach the deductible. After the deductible is met, insurance picks up the tab for the premium. So, if you go to the doctor for something other than preventive care and have not yet met the deductible, you’ll have to pay the full amount for the visit, not just a copay or coinsurance. However, with some plan designs, there are still copays for visits to a physician or a specialist.
“All points of service have to go toward the deductible first, including prescriptions,” Stephanie explains. “If you go to the doctor or a specialist or get a prescription, you pay first dollar.”
- There’s a maximum on out-of-pocket costs.
Your individual out-of-pocket (OOP) costs, including deductibles, copayments and coinsurance, cannot be more than $8,700 (in 2022) and $9,100 (2023). For a family, the maximum is $17,400 (2022) and $18,200 (2023). This limit does not apply to out-of-network services. So, as long as you get care from in-network medical providers, you won’t pay more than those amounts during the year because your plan will pay 100% of your expenses once you reach the limit.
It’s important to know what your plan’s OOP maximum is. Although the caps on OOP max are high, some HDHPs have much lower amounts. “That’s another reason why, with a high-cost procedure, if the out of pocket is, say, $4,000, you may be better off depending on what you’re spending in copays, deductibles and coinsurance,” says Stephanie. “That can really add up, especially if your OOP max is near the top end of the limit.”
Keep in mind, though, that the cost of your insurance premium and procedures that are not covered by insurance are generally not calculated as part of the OOP max.
There are a lot of nuances to determining if an HDHP is the right fit for your situation. If you want to talk through the pros and cons of a high deductible plan, let us know!