What Is a High-Deductible Health Plan (HDHP)?
The term high-deductible health plan (HDHP) refers to a health insurance plan with a sizable deductible for medical expenses. An HDHP usually has a larger annual deductible (usually four figures) than a typical health plan but charges lower monthly premiums. Plans fully cover routine preventive care, which means that individuals aren't responsible for copays or coinsurance. The minimum deductible varies from year to year. For 2022, the IRS defines an HDHP as one with a deductible of at least $1,400 for individuals and $2,800 for families. For 2023, The 2023 minimum annual deductible rises to $1,500 for individuals and $3,000 for families.
Key Takeaways
- A high-deductible health plan is a health insurance plan with a sizable deductible and lower monthly premiums.
- Only HDHPs qualify for tax-advantaged health savings accounts.
- An HDHP is best for younger, healthier people who don’t expect to need health care coverage except in the face of a serious health emergency.
- Wealthy individuals and families who can afford to pay the high deductible out of pocket and want the benefits of an HSA may benefit from HDHPs.
- HDHPs are believed to lower overall health care costs by making people more aware of the cost of medical expenses.
Understanding a High-Deductible Health Plan (HDHP)
A deductible is the portion of an insurance claim that the insured must pay out of pocket before the policy coverage is activated. When an individual pays that portion of a claim, the insurance company covers the remaining portion, as specified in the contract.
HDHPs are thought to lower overall health care costs by making individuals more conscious of medical expenses. The higher deductible also lowers insurance premiums, leading to more affordable monthly costs. This arrangement benefits healthy people who need coverage for serious health emergencies. Wealthy families who can afford to meet the deductible also benefit because it offers access to a tax-advantaged Health Savings Account.
These plans fully cover routine preventive care without copays or coinsurance before the deductible kicks in for the following list (which is not exhaustive):
- Blood pressure screening
- Depression screening
- Diet and nutritional counseling
- HIV screening
- Immunizations for diseases, such as chickenpox, the flu, and the measles
HDHP coverage comes with an annual catastrophic limit on out-of-pocket expenses for covered services from in-network providers. For example, plans set a minimum deductible of $1,400 and $2,800 for individuals and families, respectively (rising to $1,500 and $3,000 respectively for 2023). The maximum deductible for 2022 is $7,050 for an individual and $14,100 for a family (rising to $7,500 and $15,000 for 2023)
When you reach this limit, your plan pays 100% of your expenses for in-network care. If you're interested in taking this route, it's important to understand how HDHPs work and how having one will change how you pay for health care.
Special Considerations
One of the perks of an HDHP is being able to
open a health savings account (HSA), which is a tax-advantaged savings account. In fact, HSAs are exclusively available to people covered by an HDHP. And you can't have any other type of health insurance to qualify for one.
Regular contributions to the account are made by the insured individual or their employer. These funds are not subject to federal income taxes at the time of the deposit or withdrawal. The idea is to use them for qualified medical expenses that HDHPs don’t cover, including:
- Acupuncture
- Deductibles
- Dental services
- Vision care
- Prescription drugs
- Copays
- Psychiatric treatments
- Other qualified expenses not covered by a health insurance plan
An HSA can cut costs if you face high deductibles. As long as withdrawals from an HSA are used to pay for qualified medical expenses that are not covered under the HDHP, the amount withdrawn will not be taxed.
Unlike a flexible spending account (FSA), contributions made to an HSA do not have to be spent or withdrawn during the tax year they were deposited. Any unused contributions can be rolled over—indefinitely. For wealthy families who can afford to self-insure, an HDHP allows access to HSA tax-advantaged savings that they can use in retirement when the early withdrawal penalty for nonqualified expenses no longer applies.
Withdrawals for nonqualified expenses are subject to income tax and a 20% early withdrawal penalty if you're under the age of 65.
Advantages and Disadvantages of an HDHP
The high cost associated with HDHPs comes with certain benefits and drawbacks. We've listed some of the most common ones below.
Advantages
As noted above, insured individuals with an HDHP end up paying lower monthly premiums. This can save you money if you know that you're only going to use the plan for preventive care rather than more complicated procedures. Make sure you stay within your network in order to reap the benefits, otherwise you'll incur extra costs.
Covered individuals are allowed to use an HSA in conjunction with an HDHP. Remember that HSAs are
tax-advantaged accounts, which can be used to pay for qualified medical expenses that your plan may not pay for, such as acupuncture and dental expenses. The money that you deposit into your HSA is tax-free and can help cut the cost of your high deductible.
Disadvantages
The main and obvious disadvantage is the high cost associated with these plans. Higher deductibles mean that you have to pay more out of your own pocket for your medical and health care before the plan actually starts to pay for you. This can put a dent in your pocket, especially if you have unexpected health issues with which you have to deal.
You have a high deductible with a plan like this, hence the name. The deductible is the portion of the plan that you're responsible for before your insurer steps in to cover your expenses. Keep in mind, though, that your preventive care is completely covered, which means that you'll have to pay for covered costs on your own.
Pros
Lower monthly premiums
Works with a health-savings account, which is tax-free and covers qualified medical expenses
Cons
Higher out-of-pocket costs
Higher deductibles
Example of an HDHP
As noted above, high-deductible health plans are suitable for people who are fairly healthy and don't need to pay for complicated medical procedures. They are suited for people who generally only require preventive care.
For instance, a 30-year-old without any underlying conditions and other health problems may be considered a good candidate for an HDHP. This person may only require certain preventive procedures such as flu shots, nutritional counseling, or health screenings. They would not be responsible for any copays or coinsurance either.
But they may need to save up, in case there is an unexpected medical emergency, as their plan wouldn't cover this expense until they reach their deductible.
What Qualifies as a High-Deductible Health Plan for an HSA?
You can combine your HDHP with an HSA, which is a tax-advantage health care plan. In order to qualify for an HSA, you must be enrolled in an HDHP and not have any other type of health insurance.
How Much Does a High-Deductible Health Plan Cost?
In order to qualify as such, an HDHP must have a minimum deductible in 2022 of $1,400 for individuals and $2,800 for family coverage (rising to $1,500 and $3,000 in 2023). The maximum amount of money insured individuals must spend is $7,050 per individual and $14,100 for families in 2022 (rising to $7,500 and $15,000 in 2023). Insured individuals are also responsible for monthly premiums, which vary based on the insurer.
What Does a High-Deductible Health Plan Cover?
Medical expenses covered under an HDHP include preventive care, such as blood pressure screening, depression screening, diet and nutritional counseling, HIV screening, and immunizations for diseases like chickenpox, the flu, and measles. Insured individuals are not responsible for copays or coinsurance associated with any of these procedures. Non-qualified medical expenses aren't covered, such as acupuncture, dental, and vision care. Keep in mind you're allowed to establish and use an HSA in conjunction with an HDHP, which can be used to pay for qualified medical and dental expenses to help you reach your deductible. The list of qualified expenses was expanded as part of the CARES Act enacted by Congress in response to the COVID-19 pandemic. Using HSA funds to pay for non-qualified medical expenses will incur income taxes and possibly a 20% penalty depending on your age.
Who Offers High-Deductible Health Plans?
You can get coverage under an HDHP through your employer. These plans are also available through government health care exchanges.
The Bottom Line
It's important to choose the right health care plan—one that fits your medical and financial needs. Some plans make you pay more out of pocket, including copays and coinsurance, but start kicking in after you reach a low deductible. But others come with higher deductibles which are offset by lower monthly
premiums. These high-deductible health plans are suited for those who are healthy. can afford to pay more out-of-pocket, and only need preventive care. Although the low upfront cost of these plans may be attractive, it's important to weigh out any other factors, like your medical history and the overall affordability before you sign up.