In the United States, a high deductible health plan (HDHP) is an insurance option that offers a higher deductible than what you would receive through a traditional insurance plan. You will typically receive a lower monthly premium in return for paying more of the health care costs yourself before the insurance company begins to pay a greater share. Most HDHP options can be combined with a health savings account that allows you to pay for medical expenses without encountering federal taxation.
The current definition of a high deductible health plan is one that requires a deductible of at least $1,350 for an individual or $2,700 for a family. Your total yearly out-of-pocket expenses that include copayments, coinsurance, and deductibles cannot be more than $6,650 for an individual or $13,300 for a family, although this limit does not apply to out-of-network services.
If you are generally healthy and do not make a lot with your job, then a high deductible health plan can help you to receive some coverage for emergencies without requiring a significant monthly premium. It will also typically require you to pay more upfront for your services, especially at the beginning of the year when all of your deductibles reset.
Because many companies have had to restructure their benefits to keep costs affordable, one-third of large employers only offer HDHPs as an offering to their workers. If you find yourself in this situation, then here are the pros and cons of a high deductible health plan to consider.
List of the Pros of a High Deductible Health Plan
1. The monthly premiums for a HDHP are typically lower than other insurance plans.
Most households have the premium costs for their health insurance deducted automatically from their paycheck. You cannot use a health savings account to pay for them. When you look at the actual policy costs that you pay each month, you will save about 40% when opting for a high deductible health plan compared to a traditional PPO. Although this option is somewhat of a gamble because a significant medical service or procedure would be costly, most people who are in good health and don’t have a chronic illness to manage find that they can save some money.
2. Your out-of-pocket expenses do not occur at the market rate.
Although you will be paying the full cost of medical services until you reach the deductibles in your plan, an HDHP does start to save you some money right away. When you work with a network provider for your healthcare needs, then you will get to take advantage of the insurance company’s negotiated rates for each service instead of paying the market rates for what you receive. This advantage can save you upwards of 30% for many services, and sometimes up to 50% if you must receive specialist care.
3. You can open a health savings account with an HDHP.
In the United States, you have the option to open a health savings account (HSA) when you have a high deductible health plan supporting your household. This option does not have the contributed funds expire at the end of the year as other savings plans require. Your employer can contribute to this plan as they would a retirement benefit or similar plan, helping you to pay for qualifying expenses through this instead of immediately taking it out-of-pocket. Although it would not be accurate to say that it will reduce your overall costs, this advantage does allow you to pay for medical services using funds that are not subject to federal taxes.
Any earnings that you achieve through your HSA account is tax free, as are the withdrawals that you make from the account when using it for qualified medical expenses.
4. There is a cost advantage to consider for employers.
The cost to insure employees through the use of a high deductible health plan is approximately 22% lower for organizations when compared to the lower deductible traditional plans that were offered in years before. Some plans can be structure to help employees pay less in contributions because their overall costs are lower as well when choosing this structure. You can then use a portion of the premium savings to fund a health savings account that can help to offset costs since it can grow much like a 401(k) or 403(b) retirement plan.
There are network savings to consider as well, since being part of the insurer’s network can save up to 50% automatically.
5. It follows the same structure that other forms of insurance offer.
The structure of an HDHP is similar to what we already use for other essential needs in our lives, such as home or car insurance. These policies are in place to help us cover the significant expenses that are often unexpected so that we do not see a lifetime of savings wiped out by one incident. At the same time, there are incidental costs that we pay while also covering the monthly premiums to ensure that we have the catastrophic protection that is necessary.
Although the costs of health insurance are high for many households, an HDHP attempts to follow the same compromises. You receive the full coverage in an emergency without a lifetime cap as in years before while taking care of the incidental care that is needed for daily living.
6. Once the maximum is met, you do not incur additional expenses for in-network care.
When your household reaches the out-of-pocket maximum for healthcare services with an HDHP, then you no longer pay for any additional services throughout the year that you may require. That includes any co-payments or prescriptions which are sometimes excluded from the traditional plan’s catastrophic limits. Although this means you might pay over $13,000 during the year, it can also mean that a brief, severe illness can help you to access hundreds of thousands in benefits without sinking deeply into debt.
7. Many of your expenses using an HDHP qualify for HSA use.
The eligible expenses that are through a high deductible health plan are quite numerous. You can even ask for operating expenses for your vehicle when traveling for medical reasons, which are currently at $0.18 per mile. Any that you pay for yourself, spouse, or a dependent qualify, even if you paid them directly because you can ask to be recompensed in some situations. Children under the age of 24 qualify as well if they are a full-time student and younger than you and your spouse are.
8. Anyone can contribute to your health savings account with the HDHP.
When you qualify for an HSA because you have a high deductible health plan, then contributions can come from anyone. Your employer, relatives, or even strangers can put money into this account for you. The only restrictions that the IRS puts into place are the maximum caps that can be put into the account each year, which is a structure that is similar to what you would experience with an IRA. If the contributions are made using after-tax dollars, then the IRS currently allows you to deduct that money from your gross income on your tax return, which could reduce your overall responsibilities.
9. You can change your HDHP without losing your health savings account.
When you change employers or your company switches who provides the healthcare insurance, then you can port your money to a future policy assuming that it still qualifies as an HDHP. Even if you decide to retire and no longer carry the insurance, the money is still accessible in a majority of situations. Most HSAs use a debit card to access the funds, which means you can pay for your prescriptions and expenses right away instead of waiting for a bill or asking to be recompensed after the fact.
List of the Cons of a High Deductible Health Plan
1. Some families avoid seeking medical treatment because of the deductible cost.
Employees often feel that a high deductible health plan forces them to spend more money at first because they must meet specific obligations before the full benefits begin to kick-in for them. This disadvantage is true to some extent, even when you factor in premium reductions that occur with this option. If you know that there is a $1,300 bill you must pay at the first of the year if you were to visit the ER for an injury, then there is a greater chance that you would decide to skip treatment, especially if you don’t have the money available to cover the costs right away.
The University of California-Berkeley and Harvard Research found that when one large employer switched to only HDHP options, medical spending dropped by 13% because workers stopped accessing care services.
2. It costs more to manage a chronic illness with the HDHP option.
If you are trying to manage a chronic illness such as diabetes with an HDHP, then you will discover that your out-of-pocket expenses will be higher than they would be with a different option. You are put into a situation where the personal and family deductibles both apply to the situation, which means you could be paying thousands of dollars without any coverage relief until you meet the deductible. Although a health savings account can help to offset this issue somewhat, it is a significant financial burden for people who must manage specific health conditions throughout the year.
3. Everything is an out-of-pocket expense until you meet the deductible.
There are some exceptions to this disadvantage, such as a doctor’s appointment for a child to receive a vaccination. For most everything else, all of your prescriptions, diagnostic tests, medical appointments, and other medical interactions are all expenses that you must cover until you reach your deductible.
Imagine that you have three kids at home. One of them catches strep throat at school, so you go to the doctor to get the swab done to confirm the diagnosis. Then you receive the prescription, which you fulfill at your preferred pharmacy. The rate the doctor charges is $143 for private services, but your health insurance plan has a negotiated rate of $103.
You will pay the $103 for that child if the individual or family deductible as not yet been met. Then child #2 comes down with the same issue. You will face the same expense. Then you’ll face it again if the third kiddo gets it. It doesn’t take long for these costs to add up, and then you still have whatever monthly premium it is that you pay getting taken out of your paycheck.
4. There are few exceptions to the deductible rules.
Preventative care services are usually the only exception to the deductible rules for coverage, and even then, any copays you make are not likely going to count toward the final tally you must hit each year. If you have an emergency health situation, such as the need for emergency gall bladder surgery, your costs will still need to hit the deductible before you’re able to see benefits from your insurance. Depending on what the structure of your policy happens to be, you could find yourself spending thousands of dollars to have a service covered – and that assumes you are using an in-network provider.
5. It can lead to higher levels of medical debt for some households.
Because you are paying up to $13,300 in deductible costs before having your benefits kick in, there is a higher risk of experiencing long-term medical debt when using an HDHP compared to a CDHP, PPO, or other health insurance plan. The CDC found that over 15% of adults who were enrolled in a high deductible health plan in 2016 had trouble paying their medical bills, compared to the 9% of adults who were struggling using other types of insurance. When you combine this disadvantage with the families that are putting off routine care, skipping medication, or self-treating injuries to save money, it means that illnesses can go undiagnosed, creating even more costs for the overall medical system.
6. People using HDHPs are less likely to receive preventative screenings.
A report by the Robert Graham Center for Policy Studies found that people who use an HDHP for their healthcare coverage without a health savings account are less likely to receive screening services for specific diseases. When compared to people without a deductible, individuals using a high deductible health plan were 8% less likely to receive a flu vaccination, 7% less likely to be screened for breast cancer, and 4% less likely to receive hypertension testing. This disadvantage occurs even if the procedures are classified as preventative care in their plan and exempted from out-of-pocket charges.
7. The premium costs and deductible levels continue to rise.
In 2006, people with an HDHP had an average deductible that was $1,000 less than it is today. Over that same time, the cost of receiving medical care has risen by over 70%. That means the amount that households are paying for their premiums is also increasing. The employer share of those costs is going up as well, with the average policy costing more than $18,000 per year. With organizations shifting more of this burden to their workers, people with all types of healthcare plans are paying more now than ever before for this coverage. Just because you have an HDHP does not mean that you are exempt from these cost increases.
8. There are no exceptions on the timing of when you receive care.
Let’s say that you have an HDHP that resets in January each year for the deductible that you must pay. You went through the previous year in good health, and then managed to catch a severe case of the flu in December. You went to the doctor, got admitted to the hospital briefly, and came away with a $1,200 bill. That would all go to your deductible, requiring out-of-pocket expenses.
Now you are still feeling bad in January, so you return to the doctor. You receive another admission, and then this time the find another issue with your health that requires ongoing care. You receive another $1,200 bill. That amount will go to the next deductible. Most HDHPs do not offer a rotating 12-month period. It is usually a fixed-date system, which is why many individuals in this situation would not even go to the doctor until January because they knew their deductible was about to reset.
9. You have a maximum contribution cap to your HSA.
You are limited in the amount that you can contribute to your health savings account each year. For the 2019 season, the tax penalty for family accounts is gone (you could contribute $50 less as a family in 2018 compared to two individual accounts), but the numbers are still low. Since HSA plans are capped at $3,500 per year, while the family contribution limit is now $7,000. If you are above the age of 55, then you are eligible to contribute a catch-up contribution of another $1,000 to the account. If you have a lot of medical expenses during a year with your HDHP, it is not unreasonable to burn through these funds to be left with nothing in your HSA to use – or to keep the money in there any pay for everything with post-tax dollars.
Many physicians in the United States operate as an independent contractor with their hospitals or medical clinics, which means they bill for services separately. If they do not accept your insurance, then you would need to pay those costs in addition to the deductible costs. That could quickly put you over the $10,000 mark for expenses.
Blog Post Author Credentials
Louise Gaille is the author of this post. She received her B.A. in Economics from the University of Washington. In addition to being a seasoned writer, Louise has almost a decade of experience in Banking and Finance. If you have any suggestions on how to make this post better, then go here to contact our team.