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Exploring high deductible health plans: What they are and how they work
Are you choosing a health insurance plan? A high deductible health plan, or HDHP, may be one of your options. Many employers now offer them. They’ve become increasingly popular because the monthly premiums can potentially cost much less than those of a traditional plan. And they have potential tax advantages. But before you sign up for an HDHP, you’ll want to make sure it meets your budget and your health care needs. In this article, we’ll help you:
- Understand what an HDHP is and how it works
- Weigh the pros and cons
- Decide if an HDHP makes sense for you
What is a high deductible health plan and how does it work?
True to its name, a high-deductible health insurance plan is a health plan with a high annual deductible. It can be very high when compared to the deductible for a preferred provider organization (PPO) plan or a health maintenance organization (HMO) plan. What’s an annual deductible? It’s the amount of money you pay each year for covered medical services before your insurance pays anything.
Even after you’ve paid the annual deductible and your HDHP insurance starts paying for your care, you'll still have to pay copays or coinsurance. A copay is a flat fee your plan charges for visiting a doctor or filling a prescription. Coinsurance is a percentage of the cost of care. For example, if the full cost of a procedure is $100 and your coinsurance is 20%, then you’ll owe $20.
High deductible health plans also come with an annual out-of-pocket maximum. Once you’ve paid this amount, your insurance will pay 100% of the cost for care inside the plan network.
Your employer or health plan can give you a copy of the plan documents that list the annual deductible and out-of-pocket maximum.
Each year, the federal government sets a minimum amount for an HDHP annual deductible and a maximum amount for HDHP out-of-pocket costs. If the plan meets these guidelines, it allows you to open a health savings account (HSA).
What is a health savings account?
An HSA lets you save money pretax to pay for qualified medical expenses. You can use it to pay for dental, vision, and prescription drug costs as well as copays and coinsurance. You can't use it to pay your HDHP premiums. Other benefits of an HSA include:
- Money added to your HSA isn’t considered part of your wages, so you’re not taxed on it
- Sometimes your employer will contribute to your HSA
- If you leave your job, you take your HSA with you
- Money in your HSA account at the end of the year stays there
- An HSA can allow you to save to pay for health care later in life
The federal government sets a yearly contribution limit for HSAs.
How much will I pay with an HDHP?
You’ll pay your premium each month. If you need care, you’ll pay out of pocket for it until you reach your deductible. For most care after that, you’ll probably pay coinsurance or copays until you reach your plan’s out-of-pocket maximum.
For example:
- If your monthly health insurance premium is $100, you’ll pay $1,200 for the year. This amount doesn’t count toward your deductible or out-of-pocket maximum.
- If your annual deductible is $3,000, you’ll pay for most of the care you receive until you’ve reached this amount. Generally, costs for medically unnecessary care don’t count toward your deductible.
- Say your out-of-pocket maximum is $6,000. Your annual deductible counts toward this amount. So, if you pay an additional $3,000 in coinsurance and copays, you’ll reach it. Your plan will then pay 100% of your cost for in-network care for the rest of the year.
Advantages of an HDHP
HDHPs are popular because they have low monthly premiums. Because the premiums are lower than other health insurance plans, the deductible is higher.
However, many HDHPs provide 100% in-network coverage for preventive services before you meet your deductible. This includes services such as physicals and vaccinations.
If you’re generally healthy and don’t have medical expenses beyond annual physicals and preventive screenings, an HDHP could save you several hundred dollars or more a year.
And if you need a higher level of care, an HDHP gives you access to both primary and specialty care, local medical facilities, lab services, and prescription drugs.
Another benefit of an HDHP is that it may allow you to contribute to a health savings account (HSA).
Pros
- Low monthly premiums
- Access to quality medical care if you need it
- Similar benefits to other plans once the deductible is met
- Eligible plans give you access to a tax-advantaged health savings account
How to shop for a high deductible health plan
There’s a lot to consider when choosing health insurance. An HDHP can save you money, but it depends on the plan and your medical expenses. Make sure to compare the coverage options of available HDHPs. Go beyond the premiums and look at the provider networks, out-of-pocket costs, and out-of-pocket maximums.
If your employer doesn’t offer an HDHP, or you don’t have employer coverage, you can shop for an HDHP at HealthCare.gov . Many state-run health insurance exchanges also have options for HDHPs.
Disadvantages of a high deductible health plan
The main drawback of an HDHP is high out-of-pocket expenses for nonpreventive care. If you're healthy but go to urgent care a few times, you can pay a lot out of pocket but not exceed your yearly deductible. Or you could require unexpected expensive treatment early in the year. Then, on top of dealing with a major health problem, you're responsible for paying a surprise large bill.
Another possible downside to HDHPs is that you may put off doctor visits. If your budget is tight, paying the initial out-of-pocket costs can be difficult. A 2024 survey found that about 1 in 4 U.S. adults said they skipped or postponed getting needed care because of the cost.* Choosing not to get care can lead to more serious health problems and larger medical bills down the road.
Cons
- You pay all costs for nonpreventive care until you’ve paid the high deductible
- Possible unplanned high out-of-pocket costs when you receive covered services
- Worries about money might influence your health care decisions
When an HDHP might not make sense
In some situations, a plan with a lower deductible and higher premiums is a better choice. Consider a PPO or HMO if:
- You have a family with young children
- You’re planning to have a baby soon
- You have a chronic condition that needs ongoing treatment
- You take several prescription medications, or just one expensive drug
- You or your children engage in high-risk sports or hobbies
- You couldn’t pay the full deductible if you had a medical emergency early in the year
Tips for shopping for PPO and HMO health plans
If you’re leaning toward getting an HMO or PPO, learn how to compare HMO and PPO health insurance plans.
Learn more about affordable health insurance
Learn how a flexible spending account (FSA) or health savings account (HSA) can help cover out-of-pocket medical expenses.
Learn how to plan for routine health care costs and prepare for the unexpected.
Learn more about Kaiser Permanente
Footnotes
*KFF, “Americans’ Challenges with Health Care Costs,” March 1, 2024, https://www.kff.org/health-costs/issue-brief/americans-challenges-with-health-care-costs.