High Deductible Health Plans (HDHPs): How to Choose Between Health Insurance Options
When it comes time to pick a health insurance plan, you've probably come across a high deductible health plan (HDHP) as an option.
Understandably, health insurance is vital and you want to make sure that you've selected the best coverage for you.
HDHPs can be the most cost-effective coverage for many people but, you'd still want to know how it stacks up against other options.
Learn how these high deductible health plans work, especially in conjunction with health savings accounts.
What is a High Deductible Health Plan?
A high deductible health plan is a specific type of health insurance plan that has a high minimum deductible alongside lower monthly premiums.
More specifically, an HDHP must meet certain deductible and out-of-pocket maximum expense amounts to qualify as an HDHP, according to the IRS.
For 2022, the deductible limits are as follows:
- $1,400 or higher for individual plans
- $2,800 or higher for family plans
These limits remain the same for 2022.
For 2022, the out-of-pocket expenses limit cannot be higher than:
- $7,050 for individual plans
- $14,100 for family plans
The out-of-pocket expense limits do not apply to out-of-network visits.
Works much like other insurance plans
The main differences between an HDHP and a traditional health plan are:
- the deductible is higher
- the out-of-pocket limit for expenses cannot exceed the defined cap
You may also get access to a health savings account (HSA) which is covered in detail below.
Like all health plans, you generally have to meet your deductible before the health insurance plan starts paying part of your medical bills.
Of course, certain exceptions exist.
Health care costs for preventative care are often paid by insurance companies before you reach your deductible.
These plans also limit the out-of-pocket costs you have to pay.
Once you’ve paid the specified amount for the year, the health care plan covers all qualified medical expenses.
However, out-of-network providers do not usually apply to this limit.
That means you’ll have to continue paying these health care costs even after reaching the limit.
High Deductible Health Plans May Allow Health Savings Accounts
High deductible plans may allow you to pair them with a health savings account.
These accounts should not be confused with flexible spending accounts (FSAs) or health reimbursement arrangements (HRAs).
These are different products for different circumstances.
HSAs also work differently because you don’t have to use the funds in the year you contribute them.
Instead, you can let the balance in the account accumulate for years or decades. Some people may not have medical expenses in a year and let the account grow out of necessity.
Others may consciously decide not to use money in an HSA due to the tax benefits.
Speaking of tax benefits, HSAs have powerful income tax advantages but can only be accessed when paired with an HDHP.
HSAs allow you to contribute money pre-tax (your employer may also contribute to it). This means contributions to an HSA don’t require you don’t pay taxes on them.
This is a great benefit on its own, but these accounts get better.
Many HSAs pay interest or allow you to invest the funds in the account. Earnings from funds or investments within the account grow tax-free.
HSAs offer a rare triple tax advantage in some circumstances. If you withdraw funds from your HSA to pay for qualified medical expenses, you can withdraw the money tax-free.
You literally never pay federal income tax on the money used to pay those expenses.
This is extremely rare in the U.S. tax code.
Contributions and non-qualifying withdrawals
HSAs do have annual contribution limits. For 2022:
- Self-only coverage: $3,650
- Family coverage: $7,300
HSA funds withdrawn for non-qualified expenses require you to pay income taxes and a 20% penalty on the amount.
If you don’t use the funds for medical expenses by the time you’re 65, there’s good news.
You can withdraw funds for non-medical expenses without paying the penalty. You do still have to pay income taxes on the funds withdrawn, though.
HSAs may have account maintenance fees or high expense ratios on the investments offered within the plans.
Make sure you understand all of the costs involved before signing up for an HDHP that offers an HSA.
You should also check with your plan to verify they support HSAs before signing up as they can be a significant benefit.
Without an HSA, an HDHP may not make sense for your family.
Benefits of High Deductible Health Plans
So why would you want to choose a high deductible health plan?
They offer two key benefits that could make choosing one worthwhile.
Access to a health savings account
The first significant benefit of an HDHP is access to an HSA.
The tax benefits HSAs offer for medical expenses are unparalleled. You never have to pay income taxes as long as you use the money properly.
You can combine this with the ability to invest the money. If you don’t use the funds during your working years, the investments can grow enormously due to compounding returns.
Once you reach age 65 and retire, you’re likely to start incurring more medical expenses as you age.
You can then use these funds tax-free to pay for those expenses.
The other major benefit of an HDHP is they usually have lower premiums.
This makes sense when you think about it. Due to the higher deductible, you have to pay more costs upfront before the health insurance kicks in.
Over the course of a year, the money may even out.
However, HDHPs make people think more critically about whether they need expensive medical services.
Someone that doesn’t have an HDHP may go to the emergency room for a visit that only requires an urgent care visit. This may be the case because they don’t have to pay a high deductible upfront. Instead, they only have to pay a copay.
If these plans reduce the costs of health insurance companies, they can pass some of those savings on to you in the form of lower premiums.
Drawbacks of High Deductible Health Plans
These health plans do have a couple of significant downsides.
As mentioned above, these plans do have a higher deductible.
You need to be ready to pay this deductible at the start of a new year.
That way, you can still access the services you need. Without savings to pay for the deductible, you may have to go into debt to pay medical bills.
May discourage you from using services
The other downside to an HDHP is it may discourage you from using medical services early in the year.
The holiday season can be a budget buster. When the calendar turns to January 1, your deductible resets.
If you have an HDHP, you may put off visiting the doctor until you’ve saved funds to pay for the deductible.
This could lead to missed diagnoses or delayed treatments that could seriously harm your health.
Who These Health Insurance Plans Make Sense For
HDHP insurance makes sense for people:
- who don’t use medical services often (typically, younger people without any ongoing medical conditions)
- who can cover the high deductible in case medical services are needed
These plans can be very helpful if you’re trying to maximize your money from a tax perspective, too.
If you need more tax-advantaged places to save, an HDHP with an HSA may be a good choice if the plan works for your situation.
Who Should Avoid These Health Insurance Plans?
HDHPs aren’t a good fit for everyone.
People who use medical services often may have to pay their entire deductible early in the year.
If you don’t have the funds saved up to do this, this type of health plan may not make sense.
Additionally, HDHPs and the HSA accounts offered with them aren’t always a good deal.
If other health plans offer overall lower costs based on your planned usage, the plan may not be a good fit for your situation.
Consult an Expert
Before you decide on a high deductible health plan and HSA combination, it’s crucial to fully understand the decision.
If you’re not sure exactly how your health benefits would work, you may want to consult an expert.
The health insurance company can likely answer questions about their plans. A local human resources representative may be able to answer basic questions, too.
Some people feel better when an outside party analyzes their financial situation with a health plan. If you work with a fiduciary financial advisor, they may be able to provide some insight, as well.
Ultimately, you decide whether to use a high deductible health plan and HSA.
For some, it could save money. For others, it may not be the right move.
When can I switch health insurance plans?
Once per year, open enrollment comes around.
During this time, you can change or sign up for a health insurance plan.
Typically, open enrollment happens toward the end of the year, such as November or December, to make updates for the coming year.
In certain instances, you can make changes to your plan during the year if you qualify for a special enrollment period.
How do HDHPs compare to HMOs, PPOs, and EPOs?
These plans differ from HDHPs mostly due to the deductible and limit of out-of-pocket expenses. Other factors to consider when choosing a plan include the network and coinsurance/copays.