Insurance

What Is a High Deductible Health Plan?

Whether you get health insurance through your job, directly from an insurance company or through the Healthcare.gov marketplace, you may have the option to choose a high deductible health plan (HDHP). A deductible is the amount you must pay out of pocket for health care before your insurance coverage kicks in—an HDHP sets this number higher than typical health plans (and meets other criteria set by the IRS).

An HDHP could reduce your health care costs thanks to lower premiums, but there are factors to consider.

How Does a High Deductible Health Plan Work?

You pay a monthly premium for health insurance whether you use the plan or not. When you receive health care and file an insurance claim, insurance pays part or all of the bill if the care is covered under your plan. Most plans also have an annual deductible amount you'll have to cover on your own before insurance begins to cover your costs.

Even if your plan's deductible seems high to you, it must meet standards set by the IRS to qualify as a true HDHP. In 2021, an HDHP is one with a deductible of $1,400 or more for an individual and $2,800 or more for a family, and an out-of-pocket maximum (the amount you must pay out of pocket for care, including the annual deductible) of $7,000 for an individual and $14,000 for a family. The plan must also pay for non-preventive care only after you've met your deductible.

Most health insurance plans cover preventive care without requiring you meet your deductible first. If you have an HDHP with a $1,400 deductible, you'll pay for any non-preventive care until you've paid $1,400. After that, your insurance pays for care, although you may still have a copay (a flat fee for visiting a provider or filling a prescription) or coinsurance (a percentage of medical costs you pay after meeting your deductible).

The rules for HDHPs are complex. If you're not sure a plan meets the definition, go over your insurance information, contact your insurer or see if it qualifies you for a health savings account (HSA)—only HDHPs qualify for these accounts.

Pros and Cons of a High Deductible Health Plan

High deductible health plans have some key benefits:

  • Potentially lower premiums: HDHPs typically have lower premiums than non-HDHPs. The tradeoff: potentially higher out-of-pocket costs when you do file an insurance claim.
  • Tax-free spending account: Only HDHP participants qualify for HSAs to save money tax-free for qualified health care costs. HSAs offer many tax advantages and can even help you save for retirement.

HDHPs also have downsides:

  • Higher deductible: You must pay your full deductible before any non-preventive care is covered.
  • Potentially high out-of-pocket expenses: HDHPs have high out-of-pocket maximums, so you'll shoulder more of your medical costs than if your plan had lower maximums.

However, some plans have lower premiums or higher out-of-pocket maximums than HDHPs. The out-of-pocket maximums for non-HDHP plans that conform to Affordable Care Act regulations are $8,550 for individuals and $17,100 for families—higher than the HDHP maximum. Since higher maximum limits generally mean lower premiums, you may find non-HDHP plans with lower premiums than HDHPs.

How to Decide if a High Deductible Health Plan Is Right for You

HDHPs can make sense for people on either end of the health care need spectrum.

If you're young and healthy, you might only use preventive care, which HDHPs cover before you've met your deductible. Non-HDHPs do this too, but the list of services qualifying as "preventive care" for HDHPs is longer, so an HDHP may cover care you'd have to pay for with a non-HDHP. In addition, non-HDHPs often require copays for preventive care before you meet your deductible, but HDHPs cannot charge copays until your deductible is met—so preventive medical care and prescriptions preventive are 100% covered.

Conversely, if you expect high medical expenses in a certain year, an HDHP might make sense. HDHPs may have lower maximum out-of-pocket costs than some non-HDHPs. And once you've met your deductible, many HDHPs cover 100% of your care. With non-HDHPs, you'll typically still have copays or coinsurance. Open an HSA for your HDHP and pay qualified expenses with pretax money to save even more.

When buying health insurance, there are four types of plans to choose from: health maintenance organization plans (HMO), exclusive provider organization plans (EPO); point-of-service (POS) plans and preferred provider organization plans (PPO). Each type of plan has a network of preferred health care providers. Use doctors within the network and pay less for care; use providers outside the network and receive lower or no benefits.

To select the best insurance plan, consider premiums; out-of-pocket costs including the deductible, coinsurance and copays; and out-of-pocket maximums. See if your doctors are in the insurance plan's network and if your current prescriptions are covered.

How to Save Money on Health Insurance

There are several strategies you can employ to reduce your health insurance costs. Here are a few:

  • Use an employer's health insurance plan if offered. Getting insurance through your employer or your spouse's employer is generally cheaper than buying your own.
  • Stay in network for your medical care. You'll typically pay more for using an out-of-network provider; some plans won't pay for them at all. In addition, an HDHP's out-of-pocket maximum limit only applies to in-network care.
  • Know how your plan works. For example, you may need preapproval for certain procedures or a referral to see a specialist. Fail to follow the rules, and your plan may not pay.
  • Set up an HSA and set aside pretax income you can then use for qualified health care costs, including copayments, coinsurance, prescriptions and medical procedures. Some employers offer HSAs, or you can open one yourself.
  • Ask about tax-advantaged employer plans. Some employers offer health reimbursement arrangements (HRAs) or flexible spending accounts (FSAs), which are tax-advantaged ways to pay qualifying medical costs. They work slightly differently: An FSA is funded by pretax contributions you make, while your employer funds an HRA for you (you cannot contribute) and you withdraw money tax-free. Both types of accounts are owned by your employer, so if you leave your job, you'll lose the funds.

Choose the Right Health Insurance

Although health insurance can be costly, it protects against potentially catastrophic medical expenses. Without insurance, health issues could mean medical debt that can make it harder to manage your financial obligations and potentially hurt your credit score. Your deductible is just one aspect of the big picture, but it's an important consideration in choosing the right plan for you.