All About High Deductible Health Plans
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 an HDHP?
- How to know if you have an HDHP now?
- What are the advantages and disadvantages of an HDHP?
- How do Health Savings Account fit in with HDHPs?
- How can one maximize the benefits of an HDHP?
What qualifies as a high deductible health plan?
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:
Available at https://www.irs.gov/pub/irs-drop/rp-18-30.pdf
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.
Available at https://www.irs.gov/pub/irs-drop/rp-18-30.pdf
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 an 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.
- Call your insurance company: If you’re still not sure whether 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.
What are the advantages and disadvantages of an HDHP?
As with any health insurance plan, an HDHP has both pros and cons. Below is a brief overview
of the benefits and drawbacks that people with HDHPs most often experience.
Benefits of a HDHP
- Lower premiums: Your cost of coverage could be substantially lower with a HDHP.
Mercer found that employees, on average, save more than 30% on premiums, paying $84
per month on average for individual coverage (compared to $132 for a PPO) and $321
per month on average for family coverage (compared to $467 for a PPO).
- Wider networks: Unlike with an HMO (a type of plan that generally has lower
deductibles and a very limited network of doctors and hospitals you can go to), HDHPs
generally offer a lot of choice when it comes to picking a doctor or hospital. This can be a
huge plus for people who want flexibility when choosing care.
- A Health Savings Account (HSA): You can only use an HSA if you have a HDHP. This
allows you to pay for healthcare expenses with pre-tax dollars, which can add up to huge
cost savings. More on HSAs below.
- Drawbacks of an 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
How do Health Savings Account fit in with HDHPs?
If you have a HDHP, you’re eligible to open a Health Savings Account, commonly known as an
HSA. An HSA is a tax-exempt savings account that can be used to pay for healthcare expenses,
and it’s only available to people who have a HDHP.
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.
Available at https://www.irs.gov/pub/irs-drop/rp-18-30.pdf
This is a limit on how much money you can contribute in a year—but the amount in your
account automatically roll over 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 funds, 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 can one maximize the benefits of an 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! 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.