High Deductible Health Plan

Last Updated :

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Blog Author :

Gabriel Machado Pureza

Edited by :

Alfina L.

Reviewed by :

Dheeraj Vaidya, CFA, FRM

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What is a High Deductible Health Plan (HDHP)?

A High deductible health plan is a health insurance plan which has a cheaper option for people who don’t want to pay a high monthly fee. However, they maintain their profitability by having much higher out-of-pocket costs for each procedure. So even though the monthly premiums are lower, the deductible associated with HDHP is large.

  • HDHP is a way to save on monthly fees, but they have higher deductibles than average health plans.
  • The IRS defines them as health plans with a high deductible, above a threshold that changes every year to keep up with the inflation.
  • Sometimes high deductible health plans are coupled with a health savings account (HSA) to diminish the out-of-pocket costs significantly.
  • The choice between HDHP and PPO plans comes down to whether you foresee several medical expenses in the year or not.

This plan is often beneficial for people who want to save on monthly fees related to their health plans. Therefore, it is most sought after by people who do not have big families or visit the doctor often. They would get coverage during the rare occasions they need to visit a doctor.

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High Deductible Health Plan

How Does HDHP Work?

High deductible health plans are a form of health insurance rising in the United States. They were introduced when the healthcare costs were unaffordable for common people. The HDHP started getting available to people in 2004. Since then they are being adopted more and more by people who do not have recurrent medical expenses. They are also widely utilized by people who are trying to get protection in case of an accident or a sudden major disease. At the time, HDHPs were attractive options for businesses looking to cut their costs in health insurance plans.

According to the Employer Health Benefits research, made by the Kaiser Family Foundation and the Health Research & Educational Trust, almost a third of the Americans using health plans had decided to use the HDHP by 2016.

Essentially, these plans offer a cheaper option for people who do not get health insurance from their employers. They are also ideal for companies looking to save money when offering health insurance.

The Internal Revenue Service (IRS) defines an HDHP as one in which the deductible cost is over $1,400 for a single person or $2,800 for a family for a single procedure. The maximum yearly out-of-pocket expenses are $7,050 for an individual or $14,100 for a family in 2022. If a person spends this much on medical costs, they get coverage.

The specific contract defines the specific services offered on an HDHP that one has signed. Also, these plans include free usage of preventive tests for common diseases, including the ones related to blood pressure, cholesterol, diabetes, etc.

Even though one has to stay inside their networks to avail the benefits of HDHP, the network is not nearly narrowed as in the case of HMOs. But just like the perks, there are also obvious disadvantages to an HDHP. For example, the plan is unsuitable for people suffering from chronic illnesses and often discourages people from seeking medical attention in fear of huge expenses. Also, the monthly expenses can be hefty if a person has not coupled the plan with HSA.

Examples

Let’s simulate a situation to see whether an HDHP is a good idea or not. Jack and Mark are looking for a new health plan in our example. Jack is a healthy 30-year-old man who lives by himself. On the other hand, Mark is a healthy 35-year-old who lives with his wife and two children. He doesn’t visit the doctor often, but his kids do, as one has a chronic disease.

They are both trying to decide between an HDHP and a normal plan. In the average health insurance plan, they have to pay $400 monthly (or $1,000, in Mark’s case, because he wants to cover his whole family). The high deductible health plan would only pay $150 per month (or $400 for a family).

With the HDHP, each one would only need to pay $150, but the deductibles were much higher. This is because they would not be able to get coverage unless the procedure cost over $1,500.

In this case, it’s obvious to Jack that a standard plan is a bad idea for him. He barely goes to the doctor and never has a severe or chronic disease. So, he decides to pick the high deductible health plan because even if he gets sick, it’s still probably a better idea in the long term.

However, Mark doesn’t have the luxury to hope for the best. So, he picks the average plan. It is because it would be more expensive to try a plan with a higher deductible in the long-term scenario.

High Deductible Health Plan with HSA

Another way to get benefits while using an HDHP is to couple it with a health savings account (HSA). This way, a person can spend the money from the HSA to pay the deductibles instead of paying them out of their pocket.

An HSA is an account that one can use to set aside tax-free money to use in qualified health costs. After one enrolls in the program, one can deposit a certain amount of cash into the account. These funds won’t be subject to federal income taxes, and one can use unspent funds in the following years without issues. The people covered by HDHP are automatically eligible for availing of HSA.

Using it with an HDHP, a person can take that money from the savings account (which is generating tax-free interest). And they won’t have any sudden extra costs. An HSA can thus help one save money on medical expenses which are not covered in a health insurance plan like eye care, copays, dental care, acupuncture, etc.

Sometimes, companies can offer high deductible health plans already linked to an HSA, which makes the process easier. However, it’s essential to note that they have to pay a fine if they ever spend money on expenses that are not directly related to medical costs.

High Deductible Health Plan vs PPO

When considering a health plan, a person can choose between an HDHP or a Preferred Provider Organization (PPO). A PPO is also known as the average plan in the industry. The PPO has existed for more time than its counterpart, and it’s still more widely used in the United States. So how can a person decide the perfect plan for them?

As you can see, the answer depends on several factors, including a person’s lifestyle. People who live alone and do not expend money on medical exams and routine visits can save money with HDHP. However, in cases where the family is big or anticipates high costs, PPO tends to be a better option. In addition, people with chronic illnesses and those who need constant medical attention can benefit from PPO.

Also, PPO tends to be a more fitting option for the elderly, while HDHPs can be useful for young and healthy people.

Frequently Ask Questions (FAQs)

What do high deductible health plans mean?

An HDHP is a health insurance plan with a high deductible but lower monthly premiums. An individual covered by an HDHP does not have to pay a large monthly expense but has higher out-of-pocket costs when met with a medical emergency. It is introduced as an alternate plan for medical insurance for people who wanted cheaper options.

Are high deductible health plans good?

High deductible health plans are highly beneficial for people who do not need constant medical assistance and are looking for cheaper health coverage. Typically, they are considered suitable for younger and healthier individuals who live alone.

When to choose a high deductible health plan?

A person can choose an HDHP against a normal plan when they need to save up cash on monthly expenses, only need medical care on rare occasions, are not a part of a big family, and are generally young and healthy.