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. 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. 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 2024, the limits were as follows: 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 2024 limit for out-of-pocket expenses is $8,050 for individual coverage and $16,100 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. 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. 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. The advantages of HDHPs are as follows: The disadvantages of high deductible plans are as follows: Basics of High Deductible Health Plans
How Does a High Deductible Health Plan Work?
Example of High Deductible Health Plan
Are High Deductible Plans Suitable for You?
Advantages and Disadvantages of HDHPs
High Deductible Health Plans FAQs
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 an HSA account, a high deductible plan can help money grow in a tax-deferred manner. The disadvantage of high deductible plans is that it can inflate healthcare costs for individuals who make frequent medical visits.
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.
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.
True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.
True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.
To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.
