What is a High Deductible Health Plan?
High deductible health plans (HDHPs) are health plans with low premiums and high out-of-pocket expenses. HDHPs are best suited for individuals who don’t make frequent medical visits or wealthy people who can afford to pay the high expenses of such plans. When paired with a health savings account (HSA), HDHPs can function as retirement accounts in which deposited money grows in a tax-deferred manner.
Basics of High Deductible Health Plans
Introduced in 2003, HDHPs did not witness much uptake in the first decade of their existence. In the last ten years, however, HDHPs have become increasingly popular with employers looking to cut healthcare costs. The high deductible component of HDHPs enables them to shift a large portion of their healthcare costs to the employee. According to research, the introduction of HDHPs resulted in a “significant reduction” in preventive care and office visits.
How does a High Deductible Health Plan work?
HDHPs have high deductibles and low premiums, meaning you have to pay less money to maintain the plan and more for out-of-pocket healthcare expenses. The Internal Revenue Service (IRS) sets limits for a plan to qualify as a high deductible health plan.
In 2021, the limits were as follows:
- Minimum annual deductible of $1400 for individuals
- Minimum annual deductible of $2800 for families
Each HDHP has an out-of-pocket maximum associated with it. This is the maximum you can spend on out-of-pocket expenses before the coinsurance payments kick in. The 2021 limit for out-of-pocket expenses is $7,000 for individual coverage and $14,000 for family coverage. High deductible plans provide 100% coverage of preventive care from in-network providers. But the same kind of coverage does not extend to emergency visits or those for an illness.
Example of High Deductible Health Plan
Suppose that you have an HDHP with a premium of $200 and deductible for $2,000. A visit to the doctor results in a bill of $500: $350 for consultation and a $150 prescription bill. Including the premium payment, your total spending for the month will be $700.
Now suppose that you have a regular health insurance plan with a low deductible of $400 and high premium of $800. The same doctor bill will result in expenses of $880. Therefore, even though you have a low deductible payment, the high premium will result in more expenses.
Are High Deductible Plans Suitable for You?
High deductible plans work for individuals who do not make frequent medical visits. They are also good for those who have sufficient money to pay for emergencies and out-of-pocket expenses. When paired with Health Savings Accounts (HSAs), HDHPs can be an excellent deal for retirement accounts. They offer a triple tax-break. Money deposited is pre-tax and, therefore, reduces the overall taxable income. Money grows inside an account for tax-free. Withdrawals for medical expenses are also tax-free.
HDHPs are not suitable for those with low-income or individuals who make frequent medical visits or during emergency visits because higher deductibles means that you are paying more for out-of-pocket expenses. In the example above, if your medical costs increase by 20% during each visit, then you will end up paying more out of your pocket with a high deductible plan. A low deductible plan, however, will split your costs. Or, what if you had a serious medical condition that necessitated surgery? In both cases, with a higher deductible amount, you’d end up paying more out-of-pocket expenses.
Advantages and Disadvantages of HDHPs
The advantages of HDHPs are as follows:
- Lower premiums for high deductible plans means that you have more money to spend in hand.
- When they are paired with health savings accounts, high deductible plans provide tax benefits.
- High deductible plans can reduce overall healthcare costs for employers.
- High deductible plans are ideal for those who do not fall sick often or those who are interested in a retirement account with healthcare benefits.
The disadvantages of high deductible plans are as follows:
- High deductibles are unsuitable for low-income workers and can inflate overall healthcare costs.
- On their own, high deductible plans do not offer tax benefits to employees.
- High deductible plans can also be detrimental to healthcare because research has proved that high deductibles can lead to postponements or even a reduction in the number of medical visits.