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A high-deductible health plan (HDHP) is a type of health insurance policy that offers lower premiums in exchange for higher out-of-pocket costs. Depending on your situation, an HDHP may or may not make sense, so it's important to understand how it works and consider the benefits and drawbacks.
What Is a High-Deductible Health Plan?
In short, an HDHP is a type of health insurance plan that comes with a higher deductible than traditional health insurance policies. A plan's deductible is the amount you pay out of pocket before your insurance coverage kicks in, up to a certain maximum.
HDHPs can provide you with access to certain tax-advantaged accounts, so the IRS determines what qualifies for the designation. Here's what the deductible and out-of-pocket maximum—the total amount you'll pay out of pocket during a plan year, not including premiums—are for 2023:
| Self-Only Plan | Family Plan | |
|---|---|---|
| Minimum deductible | $1,500 | $3,000 |
| Maximum out-of-pocket amount | $7,500 | $15,000 |
If your employer offers health insurance as a benefit, you can opt for an HDHP if it's included in your employer's offerings. If you're self-employed or your employer doesn't offer health insurance, you can select an HDHP through the federal health insurance marketplace at HealthCare.gov or directly from an insurance carrier.
HDHPs are generally used by people who don't have a lot of health issues, as well as people who want to take advantage of the tax benefits offered by health savings accounts (HSAs).
What Do High-Deductible Health Plans Cover?
As with traditional health plans, HDHPs cover 100% of your preventive care, such as a yearly physical examination, well-child visits, routine vaccinations and mammograms.
It also covers other medical expenses like a traditional plan; the difference is that you'll have to pay more upfront for medical expenses than you would with a plan that has a lower deductible and copays.
As with other health plans, an HDHP likely won't cover:
- Cosmetic surgery
- Infertility treatment
- Adult dental care
- Vision care
- Weight loss programs
- Acupuncture and other alternative therapies
- Private nursing care
- Long-term care
Pros and Cons of High-Deductible Health Plans
Like any other insurance policy, it's important to weigh the advantages and disadvantages that come with an HDHP. Here's how they break down.
Pros
- Lower premiums: While you may need to budget for out-of-pocket costs, you'll benefit from a lower monthly premium. If you and others on your policy are generally healthy, you may be able to maximize your cost savings.
- Cap on out-of-pocket maximums: The IRS limits how much health insurance companies can require you to pay, and in some cases, the out-of-pocket maximum and the deductible can be equal. In other words, once you meet your deductible, you're 100% covered for the rest of the plan year.
- Access to an HSA: HSAs require you to have an HDHP to be able to make contributions. If you qualify, you can deduct your contributions from your income when you file your tax return. What's more, your funds can grow tax-free, and you can withdraw them on a tax-free basis as long as it's for qualified medical expenses. Depending on your effective tax rate, this could save you hundreds of dollars in taxes.
Cons
- Could be more expensive overall: If you have a lot of health issues, you could end up paying more with a higher deductible than you would with a plan that has a higher premium but a lower deductible. Even if you generally don't have a lot of health problems, a major event such as a hospital stay, emergency visit, surgery or procedure could put a strain on your budget.
- Could lead to worse health outcomes: If you avoid going to the doctor because of the cost, your medical issue could get worse and damage your health in the long run, ultimately costing you more.
Is a High-Deductible Plan a Good Choice for You?
If you're considering an HDHP, it's important to carefully consider your medical history and current physical health and your budget. Situations where it might make sense to get one include:
- You're young, healthy and single with no dependents.
- You rarely visit the doctor and don't have any reason to expect that to change over the next year.
- Your financial situation is in good shape, and you can afford to pay your medical expenses without relying on credit cards or other costly debt.
- You have the financial means to make significant contributions to an HSA.
- Your employer makes contributions to your HSA at a level that covers most, if not all, of your plan's deductible.
Keep in mind that you typically can't change your health insurance plan more than once per year during open enrollment unless you experience a major life event, such as losing your existing coverage, getting married, having a baby, adopting a child or moving.
As such, it's important to take your time to make your decision, as it can impact your finances over the coming year.
Establish an Emergency Fund to Help With Medical and Other Unexpected Expenses
Regardless of which type of health insurance policy you choose, it's a good idea to build an emergency fund to cover unexpected costs. While financial experts recommend maintaining three to six months' worth of basic expenses in a savings account, think about your situation and determine an amount that would give you peace of mind.