Workplace Benefits
What Is a High-Deductible Health Plan (HDHP) and How Does It Work?
It’s becoming more common for Americans to have high-deductible health plans (HDHPs). For eight consecutive years, the rate of workers enrolled in HDHPs has been on the rise.1
Why? You might ask. HDHPs offer benefits that can make them more appealing than other health insurance options. They tend to have lower premiums in comparison and you can use them with health savings accounts (HSAs) to help save money on eligible expenses.
What exactly is a high-deductible health plan? Let’s explore the basics of HDHPs, including how they work, their pros and cons, and when to consider choosing one.
HDHP deductible and out-of-pocket maximum
HDHPs generally have lower premiums — the price you pay for insurance coverage — than other health insurance plans. But they come with higher annual deductibles.
For 2023, the Internal Revenue Service (IRS) defines a high-deductible health plan as any plan with an annual deductible of at least $1,500 for an individual or $3,000 for a family.2 The maximum out-of-pocket expenses for an HDHP are $7,500 for an individual or $15,000 for a family.
How does a high-deductible health plan work?
Like many health insurance plans, once you’ve met your deductible, insurance pays a portion of a bill. What’s left over, coinsurance, is what you're responsible for covering. You pay coinsurance until you’ve met your out-of-pocket maximum. Typically, you won't be responsible for any copays with an HDHP. After that, your insurance pays for all eligible expenses in full.
An HDHP covers many of the same medical expenses as a plan with a lower deductible, such as doctor and hospital visits, emergency services, mental health services and more. Certain preventive services are fully covered before meeting your deductible with no cost.
Some examples of preventive care services include:3
- Annual physicals
- Immunizations
- Mammograms
- Obesity weight-loss programs
- Screenings for blood pressure, cancer, depression, cholesterol, and HIV
- Tobacco cessation programs
You can enroll in an HDHP through your employer if it’s offered or you can purchase one yourself in the healthcare marketplace.
High-deductible health plans and HSAs
Enrolling in an HDHP might make you eligible for an HSA. An HSA is a tax-advantaged account that lets you set aside pre-tax money to use toward eligible medical expenses. But not all HDHPs are HSA-qualified.
According to the IRS, an HSA-qualified HDHP must meet all the following requirements:2
- Have a higher annual deductible than other typical health insurance plans.
- Have a maximum limit on the annual deductible and out-of-pocket costs incurred by the taxpayer, including copayments and other amounts but excluding premiums.
If you’re unsure if your HDHP is HSA-qualified, contact your plan provider to find out.
HDHP: Benefits and limitations
You’ll want to carefully weigh the advantages and potential disadvantages of an HDHP before enrolling in one.
Consider the following benefits and limitations of an HDHP:
Benefits
- Typically has lower monthly premiums: HDHPs tend to have lower monthly premiums compared to other plans with lower deductibles. A lower premium could help you save money if you expect to use the plan mostly for preventive care or you don’t foresee needing ongoing health care services during the year.
- Can be used in conjunction with an HSA: The money you contribute to an HSA has tax advantages that can help you save on eligible medical expenses and help offset the cost of the high deductible. You can also invest and carry over HSA funds.
Limitations
- Potential for higher out-of-pocket costs: If you face an unexpected medical emergency or you need frequent non-preventative care services, you could spend more than you anticipated on out-of-pocket expenses.
An HDHP may not be the right choice for everyone. When choosing between an HDHP and other health care plans, consider your medical needs and financial situation.
For those who are generally healthy, an HDHP may be beneficial, especially if you predict you won’t need many health care services throughout the year. This can help save you money since the premiums are lower. An HDHP may also be a good idea for those with the financial means to cover high deductibles and make significant contributions to an HSA. Some employers will also contribute to an employee's HSA, which can help offset the cost of the deductible.
For those with chronic health conditions, an HDHP may be more costly. Frequent doctor visits or treatments could result in high out-of-pocket costs. You would need to weigh if the lower monthly premiums are enough to counter these expenses or if it'll be more cost-effective to opt for a plan with lower deductibles.
If you're looking for additional options to help cover the costs of medical care along with a primary health insurance plan, you may also want to consider supplemental health insurance. This type of insurance can provide extra financial protection against major illnesses, accidents, and treatments.
Enhance your health coverage
This article is intended to provide general information about insurance. It does not describe any Metropolitan Life Insurance company product or feature.
1“Rate of Workers Enrolled in High-Deductible Health Plans Jumps for 8th Year in Row to Record 55.7%” ValuePenguin, 2023
2“Publication 969 (2022), Health Savings Accounts and Other Tax-Favored Health Plans” IRS, 2023
3Health benefits & coverage” HealthCare.gov