- High deductible health plans can carry more risk but also free up money for investing in a health savings account or other fund.
- If you’re healthy, have liquid funds, or don’t have numerous dependents, a high deductible plan can be an effective way to save money while staying protected.
- If you go with a high deductible plan, a health savings account is an optimal way to invest pre-tax money and ensure you’re covered in an emergency.
It’s no secret that healthcare and health insurance can be costly. But the cost of not having any health insurance at all can be even higher: The average cost of a single day in the hospital is nearly $4,000. This is where health insurance comes into play.
What Is a High Deductible Health Plan?
Whether you get insurance through an employer or buy it independently through the marketplace or a broker, you’ll likely come across two primary types of insurance plans: low deductible health plans and high deductible health plans.
First things first, a deductible is the amount you have to pay before your insurance kicks in and provides coverage. Once you’ve reached your deductible, insurance will start covering more of your health expenses (as described in your plan) although you may still have to cover costs such as copays for doctor’s visits, exams and prescriptions.
Now, a low deductible health plan, or LDHP, is a type of plan that typically has a higher premium or monthly cost, but a lower deductible. This means the insurance will kick in and cover the cost of treatment after a lower threshold than a high deductible plan.
A high deductible health plan, or HDHP, tends to have a lower monthly premium but much higher deductible than an LDHP plan. This means you will have to pay more out of pocket before your deductible is met and your insurance kicks into full effect and offers more coverage.
Note that the deductible doesn’t include any copays or percentages you may have to pay until your out-of-pocket maximum is met, at which stage insurance covers all costs. The out-of-pocket maximum is the absolute limit for how much you have to pay before insurance covers everything. In many cases insurance will still require you pay a percentage until your out-of-pocket limit, hence the difference between the deductible and the out-of-pocket maximum.
For example, let’s say you have an HDHP with a deductible of $5,000 and out-of-pocket max of $6,000, while your friend has an LDHP with a deductible of $1,000 and out-of-pocket max of $2,000. Let’s use the average $4,000 a day hospital bill to illustrate.
Your friend has to pay for the first $1,000 of health expenses, after which his coverage will start. After hitting his out-of-pocket max of $2,000, your friend’s insurance will kick in and cover all expenses, including copays, doctor visits, surgery, prescriptions, and so on. This means that $4,000 day at the hospital will likely cost your friend $2,000 and then nothing else until his deductible resets the following year.
Because your plan comes with a $5,000 deductible and higher out-of-pocket max, that means you could be paying the full cost of the hospital stay and still not be at your deductible or max.
Any copayments, deductibles, and coinsurance charges will go toward the out-of-pocket maximum, so keep that in mind when looking at various plans.
2019 and 2020 HDHP Limits
There are limits or thresholds defined by the Internal Revenue Service (IRS) that determine if a plan qualifies as HDHP or not. For 2019, any plan that has a deductible of at least $1,350 for an individual or $2,700 for a family, with a maximum of $6,750 for an individual and $13,500 for a family, is an HDHP. Legally, a plan’s deductible shouldn’t go any higher than that.
In 2020, the IRS has defined HDHP limits starting at $1,400 for an individual or $2,800 for a family, with a maximum of $6,900 for an individual or $13,800 for a family. Again, any plans you’re looking at shouldn’t be allowed to define limits beyond those. If you see plans with higher limits, they may not be legally authorized plans, as those are deductible limits set by the government.
Who Is an HDHP Ideal For?
The deductible on an HDHP can be unattractive when compared to that of an LDHP, but the plan can still be a solid choice for certain people. If your situation matches any of the following scenarios, you might be a good candidate for an HDHP.
You’re Generally Healthy
If you don’t go to the doctor more than once a year for an annual checkup, you might be able to get by with minimal coverage. Preventive care, like a checkup, is covered with most health plans, so if you find you’re only visiting your doctor for that annual checkup, keep this in mind when looking at plans.
You Don’t Have a Family History of Health Problems
Even if you’re personally healthy, think about your family’s medical history. If your family has a strong history of medical illnesses, consider a more secure health plan. Those out-of-pocket costs can be financially devastating in extreme cases, so keep this in mind and review your family’s history before settling on a plan.
You Have Funds to Cover Gaps and Invest
If you’re financially stable and can afford to pay up front for health care costs or have the money to make sizable HSA (Health Savings Account) contributions, you might be okay with a higher deductible. (More on HSA contributions below.) With the lower premiums that come with a higher deductible plan, you’ll be able to invest more as well. Just keep in mind the hefty cost of medical bills and how high your deductible is with this plan, and ask yourself if you have the funds to cover an emergency if one were to arise.
You’re Flying Solo
An HDHP can be especially appealing if you don’t have to worry about a family plan. When you’re only financially obligated to yourself, it’s easy to determine if you need a tight or lax insurance policy. If you have dependents, you’ll have to consider their medical needs. An individual plan can be significantly cheaper than a family plan as well, which can free up more of your funds to save for an HSA or to create an emergency fund for medical costs.
How to Get the Most out of an HDHP
On the surface, an HDHP might look like it’s lacking compared to an LDHP, but there are several tips you can use to really get the most out of your HDHP. With the right prep work, you can make a high deductible plan work for you.
1. Utilize a Health Savings Account
A health savings account, or HSA, is a great way to save for medical care and one that you can only open with an HDHP. An HSA is an account that you can put pre-tax money into with each paycheck. This money reduces your taxable income, and can then be used tax-free to cover qualifying medical expenses. The HSA provides this rare combination of saving taxes three ways.
Qualifying medical expenses can include visits to the doctor, prescriptions, certain care services, and major expenses like surgery. In some cases, employers will even make contributions to your HSA if you set one up, making this a great way to build a healthy fund. These accounts are only available to those on an HDHP, so if you go the route of a higher deductible, don’t neglect this powerful account.
Note, however, that the IRS imposes a hefty 20% penalty plus ordinary income tax if funds are withdrawn from the HSA for any non-approved medical costs.
Unlike the Flexible Spending Account (FSA), the account belongs to you and does not have the “use it or lose it” disadvantage of the FSA. Your HSA also goes with you even if you leave your employer, so is one of the main benefits of having an HSA along with an HDHP.
A smart strategy to start is to take at least the difference between what you would pay for an LDHP and what the HDHP costs you and save at least that amount monthly in your HSA. Build up your HSA until your annual deductible is covered, then your out-of-pocket maximum. Save even more if you anticipate higher medical expenses down the road.
2. Build an Emergency Fund
Outside of your HSA, it’s a great idea to build a general emergency fund to help cover the deductible. Not all expenses will qualify for HSA spending, and in the event you or a loved one is in the hospital, you might need additional money to cover lost income, general living expenses, and so on.
3. Use Any Available Care or Prescription Discounts
Many health plans come with prescription discounts and certain care discounts. These can include complimentary counseling services, phone-based medical services, and more. When looking at health plans, check out the additional discounts and perks they offer. These can quickly add up and give a seemingly weak plan a lot of added benefit.
4. Cut Spending Where You Can
If you’re on an HDHP, it’s a great idea to cut extraneous spending. (This is a great idea regardless.) If you have multiple streaming services, more data than you need on your cell phone plan, a gym membership that’s collecting dust, etc., think about cutting these services to save up. This money can be diverted to your HSA or emergency fund and give you peace of mind.
5. Continue Going to the Doctor
Many make the mistake of avoiding the doctor once they’re on an HDHP. Despite the higher deductible, most healthcare providers still cover preventive care. This includes doctor visits like annual checkups. You have insurance, so don’t be afraid to use it and take care of yourself. It’s always more costly to ignore a problem than to catch it early.
Thriving on a High Deductible Health Plan
At first glance, an LDHP can look like the best option. While the lower deductible is appealing if you anticipate needing more frequent or costly doctors’ visits, there are numerous advantages to consider with an HDHP. With the above information, you can easily go from surviving on an HDHP to thriving. Sure, high deductible plans aren’t the right fit for everyone, but for those that fit the bill they’re a great way to cover current expenses, invest in your future, and even prepare for retirement.
Use this guide to make a more informed choice between health insurance plans, and consider speaking with a health insurance or financial planning professional beforehand. Ultimately, you’ll know what’s best for you and your loved ones.