If you’re looking for relief from never-ending hikes in your health insurance premiums, a high deductible health plan (HDHP) may well be worth considering. Though they’re not for everyone, they do work well for many people that are comfortable moving away from more traditional coverages, such as PPOs and HMOs.
In this article, we’ll look at the pros and cons of HDHPs, but let’s clarify exactly what an HDHP is before we do that.
A high deductible health plan is a health insurance plan with lower premiums and a higher deductible than traditional health insurance plans. But how do you know if you have a high deductible health plan?
According to the tax code, for the calendar year 2021, the minimum individual deductible to qualify as an HDHP is $1,400 and $2,800 for a family. (These deductibles are the same as they have been in 2020.)
Also needed for a plan to qualify as an HDHP is the maximum out-of-pocket requirement. In 2021, that amount is $7,000 for an individual and $14,000 for a family. These numbers also haven’t changed from the 2020 requirement.
Now that you understand what is considered a high deductible health plan, let's take a closer look at the pros and cons of this type of coverage.
HDHPs offer several distinct advantages that consumers stand to benefit from, including:
Lower monthly premiums
Since you’re assuming more financial risk by having a higher deductible and out-of-pocket expenses, insurance companies will offer you lower monthly premiums for this type of coverage. This is very beneficial if you anticipate primarily needing preventive care, which is covered at 100% under HDHPs.
Some examples of preventive care that is covered 100% before you meet your deductible are:
- Abdominal aneurysm screening for men of specified ages that have previously smoked
- Aspirin to prevent heart disease for adults of certain ages
- Blood pressure screening
- Cholesterol screening
- Colorectal cancer screening for adults over age 50
- Depression Screening
- Type 2 diabetes screening for adults with high blood pressure
- Certain immunizations, such as flu shots
A complete list of preventative services and screening is available at HealthCare.gov.
HDHP’s are a good fit for individuals/families that don’t have a history of pre-existing conditions, and infrequently have doctor’s office visits. Insureds are willing to pay out-of-pocket for smaller medical expenses and have health insurance in force to cover large medical costs, such as surgery and hospital stays.
Health Savings Accounts
If you have elected HDHP coverage, you have the opportunity to pair it with a Health Savings Account (HSA). HSAs are tax-advantaged accounts that allow you to deposit money into them on a pre-tax basis. The money in the account can then be used to pay deductibles, co-pays, and out-of-pocket expenses. At the end of the calendar year, unused funds roll over for use the following year.
Making deposits each month into an HSA can quickly lead to your deductible being self-funded. An individual depositing $120 per month into their account would have enough saved to pay their deductible within a year. For a family, depositing $250 per month would also achieve this. If you continue to make these deposits year-over-year with minimal medical expenses, you could not only cover your annual deductible but your out-of-pocket maximum as well.
[ Related: HSA vs. FSA: Which is better for you? ]
While HDHPs can keep your monthly premiums low, they also carry several risks consumers should be aware of, such as:
Considerable financial exposure
HDHPs put you at risk of facing large medical bills that you may not be able to afford. A severe accident or serious illness can result in very substantial medical costs. According to a study cited by Business Insider, the average hospital stay in the U.S. costs over $10,000, with many procedures exceeding these costs.
For example, a hospital stay resulting from a heart valve disorder costs over $40,000. While this may be a covered stay under your policy, you would still be responsible for the deductible and out-of-pocket maximum, which would add up to $8,400.
You may not think this could happen to you, but if it did, would you have the money to pay the $8,400 for that hospital stay? To some, the savings in premiums over a couple of years will equate to enough money to make it worth the risk. For others, they would rather pay a higher premium and have less financial exposure if they are faced with large medical bills.
Reluctance to seek medical assistance
HDHPs can have a negative impact on your future health. Because of the higher deductible and out-of-pocket costs, some people avoid going to the doctor or emergency room to treat an injury or infection, which could result in more extensive care down the road. Avoiding doctor visits and filling prescriptions can open the door to larger medical bills for hospitalization, rather than paying for an in-office visit.
Participants in high deductible health plans may need to consider supplemental insurance to fill the gaps, such as disability insurance and critical illness insurance. Fortunately, these types of coverage are generally quite affordable and easy to apply for online.
Taking your current health into account is a major determinant if an HDHP is a good alternative for you. If you have a favorable health history, are currently in good health, rarely go to the doctor or take prescription medication, an HDHP can equate to significant savings for you.
A high deductible health plan is generally not a good fit for families with young children. They’re more likely to visit the doctor for colds, cases of the flu, and viruses. Kids are exposed to many of these viruses at school and carry them home, exposing the entire family, further increasing the chances of visits to the doctor by multiple family members.
You’re also prone to having higher medical expenses as you age. Chronic conditions needing ongoing treatment are more likely to develop as we get older. Before choosing an HDHP, you should consider your current health and what your medical expenses could be in the next year. If you’re in good health and don’t anticipate higher healthcare costs, an HDHP may make sense for you.
How much money an HDHP will help you save depends on your particular situation. You’ll need to crunch the numbers and see if the lower premiums and tax advantages outweigh the financial exposure you’ll have. HDHPs don’t make sense for everyone, but they can take away some of the pain of your healthcare costs under the right circumstances.
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