All About High Deductible Health Plans
The Short(er) Version:
High-deductible health plans (HDHPs) are more common than ever. The reason is simple, the cost is a lot less expensive than traditional plans like PPOs and HMOs. But there’s a lot of confusion about what exactly they are and how they work. I’ll walk you through the basics in the 4 steps below:
In general, an HDHP has a higher deductible and lower premium than traditional plans—but this can mean practically anything. The deductible is how much money you have to pay in a year before your health insurance pays anything (except when it comes to preventive care). The so called ‘Out-of-Pocket’ cost includes the deductible amount but also includes co-payments and co-insurance. Each year, the IRS releases the limits for HDHPs. These amounts are the minimum deductible to be considered a HDHP. Here are the HDHP qualifying amounts:
For 2020: $1,400 (Individual Minimum Annual Deductible); $2,800 (Family Minimum Annual Deductible), more information is available here.
Another important detail is the maximum ‘Out-of-Pocket’ amount allowed. This is a limit on the total amount of money you have to pay in a year before your insurer pays 100% of your costs. Qualifying HDHPs can not exceed a maximum out-of-pocket limit set by the federal government. These are the maximum out-of-pocket limits for individual and family plans:
For 2020: $6,900 (Individuals); $13,800 (Family), more information is available here.
Not all health insurance plans with high deductibles are considered HDHPs—even a plan with a $1,000 deductible doesn’t qualify. If you’re not sure whether you have a HDHP, here are some tips to find out.
- Look at your Summary of Benefits and Coverage (SBC): An SBC is a document that explains exactly what your health insurance plan covers. Including what your deductible, co-pay, co- insurance, and out-of-pocket maximums are. You can find your SBC by logging into your health insurance account.
- Ask your employer or benefits manager: If you get health insurance through work, your employer will have more information.
- Call your insurance company: If you’re still not sure if your health insurance plan is a HDHP, you can call your insurance company directly and ask. You can usually find their phone number on the back of your health insurance ID card.
As with any health insurance plan, an HDHP has both pros and cons. Below is a short overview of the benefits and drawbacks that people with HDHPs most often experience:
The benefits of a HDHP
- Much lower premium payments per paycheck
- A Health Savings Account (HSA) allows you to save triple tax free, for future health expenses.
- Because the deductible comes out of your pocket, you have a lot more control over your care since you are paying with your own cash.
Drawbacks of an HDHP
- Possibility of higher out-of-pocket costs up to your Out-of-Pocket maximum.
- Some financial incentive to avoid care since you have a higher deductible.
If you have a HDHP, you can open a Health Savings Account (HSA). It’s a tax-exempt savings account that is triple tax free (no tax on money going into an HSA, no tax on HSA earnings and not tax on money taken out of an HSA) the only savings opportunity like that. You can use money from an HSA for out-of-pocket qualified healthcare expenses. An HSA offers big benefits for you and it’s your money:
1. Your contributions are tax-deductible
2. Any investment gains in your HSA account are tax- free
3. You don’t pay tax on any withdrawals you make for qualified medical expenses.
4. There are no time limits or withdrawal requirements.
5. The maximum HSA contribution for 2020 is:
- Single = $3,550/year
- Family = $7,100/year
- If you’re 55-plus, you can sock away an additional $1,000 a year.
For more information about HSAs, go here.
The Long Version:
High-deductible health plans (HDHPs) are common today and represent over 40% of employer sponsored health benefits in 2018. The reason is simple, the cost of HDHP coverage is significantly less expensive than traditional plans like PPOs and HMOs that have a low deductible amount. One study published by the National Bureau of Economic Research found that total healthcare spending at firms offering HSA-compatible plans declined 5 percent per year in the three years after the plans were introduced, compared to firms that did not offer them.
But there’s still a lot of confusion about what exactly they are and how they work. We’ll walk
you through these issues in 5 topics listed below. Jump to any one or read them all as needed.
What Qualifies As A HDHP?
In general, an HDHP has a higher deductible and lower premium than a traditional health insurance plan—but this can mean practically anything. Below is a deep dive into all the different features that define an HDHP.
A High deductible
The deductible is the amount of money you must pay in a year for healthcare services before your health insurance company pays a single dollar (except when it comes to preventive care—more on that below). The so called ‘Out-of-Pocket’ expense includes the deductible amount but also includes co-payments and co-insurance amounts, but not the premiums for the
HDHP (more on that below as well). For traditional health insurance plans like PPOs and HMOs, deductibles typically range from a few hundred dollars to about $1,000. But for HDHPs, your deductible will likely be much higher.
Each year, the IRS releases the cost-of-living adjusted limits for health savings accounts (HSAs) and high-deductible health plans (HDHPs). These thresholds that must be met by your deductible to be considered a HDHP. There’s a different threshold for individual plans and family plans. Here are the details:
More information is available here.
A Lower premium
A premium is the amount of money you must pay each month to maintain coverage. If you have health insurance through your employer, your premium is likely taken out of your paycheck each month or each pay period and your employer may pay part of it. Or, your employer may pay the entire premium since HDHPs are considerably less expense than traditional PPOs and HMOs. Because HDHPs come with a rather hefty deductible—meaning you’re liable for more costs up-front—they also come with lower premiums. The cost of your premium could be more than 30% less with a HDHP, according to a Mercer study, which found that employees contribute $84 per month on average for individual coverage under a HDHP, compared to $132 for PPO coverage (a type of plan that usually has lower deductibles).
Co-pay and co-insurance
As with most health insurance plans, an HDHP may (but not always) requires a co-pay and/or co-insurance that you must pay even after you’ve met your deductible. A co-pay is usually a fixed amount, whereas a co-insurance is a percentage of the total cost. Co-pays and co-insurance rates vary a fair amount, depending on your insurer and the structure of your specific plan.
Many insurance plans have what’s called an out-of-pocket maximum, which is a limit on the total amount of money you have to pay for covered healthcare services in a year before your insurer pays 100% of your costs. HDHPs must not exceed a maximum out-of-pocket limit set by the federal government. This is to make sure that patients’ cost liability is limited. Below are the maximum out-of-pocket limits for individual and family plans for this year and next year.
More information is available here. Your out-of-pocket maximum doesn’t include the money you pay towards premiums or healthcare services that aren’t covered by your plan. It does include the money that goes toward your deductible, as well as any co-pay and co-insurance costs after that.
Some HDHPs have what’s called an integrated deductible. If you have an integrated deductible, all of your out-of-pocket expenses for various healthcare policies can count toward the same deductible. This is often the case if you have a main medical insurance plan with a high deductible and a separate prescription drug policy. This makes it easier to meet just one
deductible, rather than two.
How To Know If You Have A HDHP
Not all health insurance plans with seemingly high deductibles are considered HDHPs—even a plan with a $1,000 deductible doesn’t qualify. If you’re not sure whether you have a HDHP, here are some tips to find out.
- Look at your Summary of Benefits and Coverage (SBC): An SBC is a document that explains exactly what your health insurance plan covers and outlines the payment structure—including what your deductible, co-pay, co- insurance, and out-of-pocket maximum are. You can find your SBC by logging into your health insurance account.
- Ask your employer: If you get health insurance through work, your employer will have more information about the details of your plan, plus other plans that you can choose from. Often, employers offer a choice between a HDHP and a PPO or HMO. Your benefits manager can direct you to information on whichever type of plan you choose.
Drawbacks Of A HDHP
- Possibility of higher out-of-pocket costs: With a HDHP, you’re responsible for paying a relatively large amount of money before your insurance will pay a single dollar. If you utilize healthcare services frequently, this means you could end up with higher out-of-pocket costs than if you had a traditional health insurance plan.
- A financial incentive to avoid care: Because you’re responsible for 100% of your healthcare costs until you meet your deductible, you may feel pressure to forgo or delay healthcare services with a HDHP. Research has shown that many people with HDHPs do postpone care.
How Do Health Saving Accounts Fit In With HDHPs?
This is how an HSA works
An HSA allows you and/or your employer to make pre-tax contributions to a savings account that can then be used to pay for healthcare costs. If you have a HDHP through your employer, they will likely help you set up an HSA and choose how much pre-tax income to contribute each pay period. They may also contribute money to your HSA. You can then use this money to pay for a wide range of healthcare-related services. HSAs are the only investment accounts that are triple tax advantaged. This means:
- Your contributions are tax-deductible
- Any interest earned is tax- free
- You don’t pay tax on any withdrawals you make for qualified medical expenses (more on those below).
What expenses can be paid with an HSA?
You can use the money in your HSA for anything that’s a “qualified medical expense,” for yourself as well as any tax dependents (like children) or your spouse. This includes:
- Doctor and laboratory fees
- Vision care, including eyeglasses and contact lenses
- Prescription drugs
- Various types of therapy such as Physical Therapy, Respiratory Therapy, etc.
- Vaccines and other preventive care
These are only a few of the things that you can use your HSA to pay for. You can see a more complete list of HSA eligible expenses here.
How do you qualify for an HSA?
If you have a HDHP (a deductible that’s at least $1,300 for an individual or $2,600 for a family in 2018 or 2019), then you qualify for an HSA. You can open an HSA directly with a multitude of financial institutions or through your employer.
If you’re married, you might need to coordinate with your spouse to make sure you don’t violate any regulations regarding HSAs. Married couples can’t have a joint HSA, even if they’re covered under the same HDHP. You and your spouse can open separate HSAs, or you can use one spouse’s HSA to cover medical expenses for the whole family, which is allowed.
Yearly limits on your HSA
The federal government sets limits on how much money you and your employer can contribute to an HSA each year. These are the individual and family limits for this year and next year.
More information is available here.
While there is a limit on how much money you can contribute in a year—the amount in your account automatically roll sover each year, and there’s no time limit on using that money.
Investing your HSA
You can also invest the money that’s in your HSA, allowing it to grow tax free. Many people choose to invest their HSA into conservative index funds, like S&P 500 ETFs, but you don’t have to. You can research HSA providers here.
Possible employer contribution
In addition to any pre-tax income you contribute to your HSA, your employer might also make a monthly contribution to help offset your healthcare costs. If you’re not sure whether this is included in your benefits, make sure to ask your benefits or HR manager.
How To Maximize The Benefits Of A HDHP
With any insurance plan, it’s important to be aware of healthcare costs. But if you have a HDHP, avoiding excess cost is essential, since your own wallet is on the line. Below are three tips to save money and still get the high-quality healthcare care you need.
- Take advantage of free preventive healthcare: Under the Affordable Care Act, there are certain preventive healthcare services that must be covered without cost-sharing. This means your insurance company is required to pick up 100% of the cost for these services, so they’re free for you to utilize. Some of the most common covered preventive services include:
a. An annual check-up with your primary care doctor
b. Screenings for blood pressure, cholesterol, and STIs
c. Screenings for certain cancers
d. Various vaccines, including all those recommended for children. You can see a
full list of 100% covered preventive services here.
2. Set aside the full amount of your deductible, if you can: If you can, setting aside some of each paycheck into an HSA will gradually accumulate enough cash to meet your deductible. You could even save the maximum amount each year and accumulate a large HSA which you could use in retirement. A recent study of retirement healthcare expenses showed that households who turned 70 in 1992 on average incurred $122,000 in medical spending. That was in 1992! That was enough money for you purchase a large boat or small yacht The current estimate is that the average 65+ retiree will spend about $5,000 per year out-of-pocket. So that would be an average total of about $100,000 during a retired lifetime. See a great article from Fidelity on this issue here. Saving this amount would require financial discipline but with conservative steady investing in your HSA, it is possible. Even if you can’t set aside that much money ahead of time, try to save as much as possible. That way, you’ll have some savings to fall back on in case of a healthcare emergency.3. Shop for low cost, high quality care: Healthcare costs vary a lot, so it’s important to shop and look for the highest quality cost effective care in your area. This is where uMedMarket can really help by providing an easy way to shop for local primary care on your phone by transparent pricing, by location, by provider and by quality rating. You can then book your service right then on your phone knowing the price before you go in and pay directly from you HSA. If you have a HDHP and need to see a specialist or have a big medical procedure, you could end up paying the full cost out-of-pocket. uMedMarket can negotiate discounted rates for specialty care and elective specialty procedures done in a hospital at other locations in the US. These types of services are negotiated on a case-by-case basis and could require travel but can save 50% or more compared to local services. Ask us about Specialty Referral if you are interested in that type of service.
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