What Is a High-Deductible Health Plan (HDHP)?

Health care is expensive. And the price never seems to stop rising! That’s why some people avoid it altogether. But skipping health insurance is like white-water rafting without a life jacket. The sun and the spray might feel nice for a while, but when you go overboard, it’ll be tough to stay afloat by yourself.

So, what’s a budget-minded guy or gal to do in these choppy waters? For many, the answer is to accept the possibility of higher out-of-pocket costs while reaping the benefit of lower premiums. It’s called a high-deductible health plan (HDHP).

What Is a High-Deductible Health Plan (HDHP)?

As you can probably guess from its name, a high-deductible health plan has a higher deductible than other health insurance plans. But there’s a significant payoff—lower monthly premiums. HDHPs are a relatively new approach to health coverage, but they’re becoming more popular every year, both as an employee benefit and for the self-employed.

There are two big reasons you should consider an HDHP:

• Health coverage at a lower monthly cost
• The opportunity to save more money by using a Health Savings Account (HSA) to help pay your health care costs

How does an HDHP offer these savings? Well, there’s something about a flat fee that tends to encourage people to overuse a benefit. You know, like your Aunt Maxine and your Uncle Mike? Yeah, the ones who are usually in great health, but go to the doctor for blood work and an MRI anytime they sneeze? Those things cost a lot, and if insurance is paying out for those all the time it pushes premiums up.

But when you have to shoulder more of your health care costs (with the bigger deductible up front), you’ll probably look for ways to save. Nobody wants to spend more, obviously.

So, with that in mind, insurance companies created the high-deductible health plan. Lower premiums attract budget-conscious people while the higher deductible makes sure they don’t visit the doctor for every minor thing. Plus, the IRS got in the game and threw in some tax incentives. It’s a win-win for a lot of people.

But is it the right plan for you?

Understanding a High-Deductible Health Plan (HDHP)

So, what is a high-deductible health plan? For a health insurance plan to qualify as a high-deductible health plan (and give you all the premium cuts you’re looking for), it has to meet a minimum deductible dollar amount and a maximum out-of-pocket cost set by the IRS. We’ll get into those specifics a little later.

An HDHP works best for people who are generally healthy and only need health insurance coverage to protect their savings from a catastrophic event like a car accident or appendicitis.

That way, you’ll only be on the hook for low premiums and occasional medical expenses. And you also have health insurance coverage if you need it for big expenses like emergency surgery or treatment for a newly diagnosed medical condition. Plus, your out-of-pocket maximum on your plan puts a limit on how much you’ll have to pay for medical costs in a calendar year.

But our favorite benefit of an HDHP is the ability to have a Health Savings Account (HSA), where you can save the cash to cover your part of the costs tax-free (and stress-free)!

An HSA is only available to people enrolled in an HDHP, and it gives you a triple tax benefit on the money you set aside to pay your health care costs. You‘re not required to have an HSA, but it makes a ton of sense to have one if you have an HDHP. (But if you’re working the Baby Steps, wait until Baby Step 3 to start contributing.)

Here’s how an HSA works:

• The money you put in your HSA goes in pretax. That lowers your taxable income for the year.
• You can invest the money in your HSA. And if you go that route, it also grows tax-free. (This is getting exciting.)
• You can use the money in your HSA tax-free when you use it to pay for qualified medical expenses.
• Any money you save in the account can be used to cover qualified medical expenses. This is a great place to bank the money you’ll save on premiums once you’ve switched to an HDHP.
• Employers who offer an HDHP with an HSA as an employee benefit often include an employer match on the money you put in your HSA. That’s free money to use for your health care costs!
• Your HSA money rolls over every year so you can use it for any future health care needs.
• And last (but not least), after you retire, your HSA acts just like a traditional IRA. So you can spend your HSA funds for anything you’d like. Qualified medical expenses will still be tax-free, and any nonqualified medical expenses will be taxed as income, just like withdrawals from a 401(k).   

This is basically like having a turbocharged emergency fund just for your medical expenses. If you can contribute the amount of your annual deductible each year, even better! At minimum, take advantage of any employer match and watch the money grow.

What Does a High-Deductible Health Plan Cover?

A high-deductible health plan (HDHP) will cover all the same health incidents and illnesses a regular health plan would cover—you’ll just have to meet a higher deductible before that coverage kicks in. Like with every plan, your specific policy will have its own particular rules and limitations, but HDHPs don’t exclude anything special as a rule.

One great thing to know is that preventive care like vaccines, annual wellness exams and some screenings are covered in an HDHP even before you reach your deductible. But this plan isn’t designed to help you cover things like doctor visits, prescriptions or trips to the emergency room. You’ll need to cover those out of pocket, up to the amount of your deductible.

Example of a High-Deductible Health Plan

Okay, so we’ve covered a lot of technical info. It’s time for an example of a high-deductible health plan (HDHP).

Let’s look at Kitty. She’s a healthy, 31-year-old, single professional. She’s taking advantage of her employer’s HSA-qualified HDHP.

Every month, Kitty pays a premium of 90 bucks (that’s $1,080 a year). She has a deductible of $5,000, so she doesn’t go to the doctor for things like a sore throat. And when she does go, she uses funds from her HSA to cover her costs. Her annual max out-of-pocket limit is $5,500 and her copay is $20 (more on these two things later).

One day, Kitty’s abdomen starts hurting. It gets really bad, and she ends up having her appendix removed. The bill is $29,000. She pays most of her $5,000 deductible from her HSA and the rest directly out of pocket. After her $20 copay, insurance kicks in and covers the other $23,980 for her surgery.

Now let’s look at a family.

Kitty and Brian tie the knot, pop out a few kids and get an HDHP with family coverage.

They’re now paying $500 a month ($6,000 a year) for a policy that covers all of them. Yes, they have a hefty deductible of $10,000, but nobody has any health issues and they’re financially covered in case something major like a car accident or sudden illness happens.

And they can pay most of that deductible out of their HSA, which they’ve maxed out at the family limit of $7,750. So how did they swing this? They were intense. In the first six months of the year, they loaded up their account with $960 monthly contributions and made sure to nab their matching employer contribution up to $2,000.

How Much Does a High-Deductible Health Plan Cost?

So, what are the actual numbers on one of these things?

On average, single Americans with an HSA-qualified HDHP had an annual premium of $7,170 ($598 a month) in 2022. For families, the average premium was $21,079 per year ($1,757 a month).¹

If you got your HSA-qualified HDHP through your employer, your average numbers looked like $90 per month if you were single and $432 for your family.²

Now keep in mind, those are averages. When you’re looking at health insurance plans, there are some costs you should compare between each one:

Premiums: Look over your options and add up how much you’ll save on premiums in a year with an HDHP so you can compare it to how much you’d pay out in a deductible.  

Deductible: This is where you take on a little more risk to save money. In 2022, the average deductible for a single person with an HDHP was $2,458 and $4,533 for a family.³ Take a look at what you’ll pay out of pocket and stack it up against how much less you’d pay with a regular health insurance plan. The biggest consideration here is how often you need health care.

Copays and coinsurance: Whenever you do go to the doctor or hospital (even after you’ve met your deductible), you’ll have to pay a small part of the cost of service. A copay is a flat fee (like $20 for a doctor’s visit) while coinsurance is a percentage of the cost (like 15% of a trip the emergency room). Your copay and coinsurance will vary by plan, so always compare.

Out-of-pocket maximums: Your HDHP limits what you’ll have to pay for covered health care expenses within a calendar year. Once you reach that out-of-pocket maximum, insurance pays 100% of your covered costs for the rest of the year. In 2022, the average out-of-pocket maximum was $4,422 for single coverage.⁴

Let’s look at an example: If your HDHP has a $5,500 out-of-pocket maximum and your deductible is $3,000, you’d have to pay your deductible in full (along with your copay). Say you have an additional $2,500 in covered medical costs in the same year. After that, you wouldn’t have to pay your copay or coinsurance for covered costs for the rest of the year (because you’ve reached your out-of-pocket maximum).

Employer contribution: In case you didn’t know, you can save big bucks if you get your health insurance through your employer. In 2022, the average American worker with an HSA-qualified HDHP through their employer paid $1,078 per year in premiums. For a someone with family coverage, their average premium was $5,188.⁵

Employers will often contribute toward your HSA as well if you’ve got one. The average employer contribution to HSAs was $1,815 for singles and $3,322 for families in 2022.⁶

How Do HDHP Premiums Compare to Other Plans?

On average, single Americans with a high-deductible health plan (HDHP) have an annual premium of $7,170, while those with a more traditional type of health plan (like an HMO or PPO) have an average premium of $8,162. For families, the premium comparison is $21,079 with an HDHP versus $23,003 without.⁸

So on average, you’d save over $800 bucks a year on premiums alone if you were single or $1,800 for family coverage (but remember, the HSA is where the real saving begins).

What Qualifies as a High-Deductible Health Plan (HDHP) for a Health Savings Account (HSA)?

One of the best things about using a high-deductible health plan (HDHP) is that you qualify to have a Health Savings Account to double down on savings. But not all HDHPs are HSA qualified.

Minimum Deductibles and Maximum Out-of-Pocket

For you to snag some extra savings with an HSA, your HDHP has to meet the minimum deductible requirement and the maximum out-of-pocket amount set by the IRS (including what you pay for your deductible and copay or coinsurance). The government updates those requirements every year.

These are the numbers for 2023:

• Minimum deductible for an individual: $1,500
• Minimum deductible for a family: $3,000
• Maximum out-of-pocket expenses for an individual: $7,500
• Maximum out-of-pocket expenses for a family: $15,000¹⁰

In 2024, the numbers will go a little higher:

• Minimum deductible for an individual: $1,600
• Minimum deductible for a family: $3,200
• Maximum out-of-pocket expenses for an individual: $8,050
• Maximum out-of-pocket expenses for a family: $16,100¹¹

Remember, these numbers are minimums and maximums set by Uncle Sam. The actual HDHP policy you get could have a higher deductible or a lower out-of-pocket max.

Other Qualifications

On top of meeting those minimums and maximums, your HDHP can’t offer any insurance coverage until you’ve fully paid the deductible (except for some preventative care like screening services).¹²

And it’s not just your health plan that has to be up to snuff—you also have to meet some qualifications:

• You can’t have any other health insurance coverage, including Medicare.
• You can’t be claimed as a dependent on anyone else’s tax return.¹³

If you’re not sure if you qualify for an HSA, talk to a health insurance expert. They can help you figure out if your health plan qualifies and help you set up your HSA if it does.

HSA Contribution Limits

Now, you can’t just fill up your HSA like a bottomless pit. The government sets a limit each year on how much you can put into your HSA.

Contribution limits for 2023:

• Contribution limit for an individual: $3,850
• Contribution limit for a family: $7,750¹⁴

Contribution limits for 2024:

• Contribution limit for an individual: $4,150
• Contribution limit for a family: $8,300¹⁵

How Can HSA Funds Be Used?

This probably won’t come as a surprise, but you can’t spend money from your HSA on just anything tax-free. The government has strict rules around what is a qualified medical expense.

The IRS has a full (and very long) list of all the medical expenses that qualify to be paid for out of an HSA, but here are a few of the common ones:

• Acupuncture
• Ambulance
• Bandages
• Breast pumps and supplies
• Chiropractor
• Contact lenses
• Dental treatment
• Drugs
• Eyeglasses
• Fertility enhancement
• Hospital services
• Laboratory fees
• Long-term care
• Medicines
• Osteopath
• Psychologist
• Surgery
• Therapy
• X-rays¹⁶

Here are a few you might hope it covers, but it doesn’t:

• Cosmetic surgery
• Electrolysis or hair removal
• Hair transplant
• Health club dues
• Insurance premiums
• Nonprescription drugs and medicines
• Nutritional supplements¹⁷

Pros and Cons of a High-Deductible Health Plan (HDHP)

If we haven’t made it crystal clear by now, we’re a fan of the high-deductible health plan and HSA combo. But that doesn’t mean you should drop what you’re doing right now and go get one without another thought. Let’s go over the pros and cons of an HDHP so you can figure out if it really is the best fit.

Pros of an HDHP

If the idea of accepting the risk of higher out-of-pocket costs sounds, well, risky—we get it. But for most people, the advantages are more than worth it!

Pros:

• Save money on premiums every month
• Save on taxes when you contribute to an adjoining HSA
• Save on taxes when you spend money from your HSA on qualified medical expenses
• Get untaxed money from your employer when they contribute to your HSA
• Use your money for medical services and supplies you actually need with an HSA
• Use your HSA to pay your higher deductible (which is usually close to your out-of-pocket max anyway)
• Be protected financially from big, unforeseen medical expenses with an out-of-pocket max

We can’t say too often that having an HDHP means you’ll pay lower premiums than in a traditional plan. And that means more flexibility in your monthly budget.

Cons of an HDHP

As much as we like HDHPs, they’re not for everyone. If you or someone in your family suffers from a chronic medical condition, an HDHP might not be your best option. Depending on your situation, you could end up spending a lot of time and money at doctors’ offices, all while getting little or no financial help from your health insurance.

Let’s look at Joe. He has an HDHP with a family deductible of $3,000 and pays $300 monthly premiums. Joe and his wife spend $500 a month to keep a handle on their young son’s asthma.  

By June, Joe will end up paying around $3,000 just to cover doctor visits and medicine. By then he’s met the family deductible, but he’ll now be responsible for coinsurance that’s 25% of expenses for the rest of the year. And of course he’ll pay for premiums all year long.

Here’s how the annual breakdown of medical costs looks for Joe’s family:

• They’ll pay a total of $3,600 to cover premiums.
• They’ll pay in the neighborhood of $3,750 in doctor visits and medicine by the end of the year.
• Their grand total will be around $7,350 for the year before they try to put any money in their HSA.

See the problem here? This could end up costing Joe a similar amount, or even more than what he might pay in a traditional plan. At the same time, he won’t have any help from his insurance until midyear.

In cases like Joe’s, it might be worth looking into a plan with higher premiums and a lower deductible. That combo could help you save money by shifting some of the cost to your health plan earlier in the year.

The dollars and the math will vary, both by plan and your family’s changing needs, so run the numbers before you commit to anything. A health insurance expert can be a big help with this.

Is a High-Deductible Health Plan Right for You?

There’s no one-size-fits-all answer to this question. While high-deductible health plans (HDHPs) are being offered by more employers all the time, health care is too complex to solve with one universal plan. Here are a few things to consider as you decide:

1. Are you young and pretty healthy? If so, this could be a great plan for you. If you don’t visit the doctor’s office much, it’s worth having a high deductible so you can pocket the savings you get with lower premiums.
2. How big is your family? The smaller the crew in your house, the better you’ll fit with an HDHP. You and your spouse are a lot less likely to blow through a high deductible than a family of six. It’s just simple math. But that’s not to say this approach can’t work for a big family—especially when paired with an HSA and its awesome tax advantages.
3. Do you have other options? If an HDHP is one of several options you have (like with employee benefits), you’ll need to do the math. Try to see what a typical month or year will look like financially in each option. Sometimes the savings on one side or the other are small. In that case, strongly consider an HDHP so you can take advantage of an HSA.
4. Do you, or does a family member, have chronic health conditions? It could be worth your while to accept higher monthly premiums if you already know you’ll have higher-than-average medical costs in a given year.

Who Offers High-Deductible Health Plans?

If you’re thinking an HDHP with an HSA is for you, you may be wondering who offers them. It’s not hard to find one—most insurance companies offer them. But what’s hard is finding the right one for you.

Whether you’re 100% sure you want an HDHP or you’re still feeling it out, our friends at Health Trust Financial can walk you through all the details, take a look at your situation, and help you figure out what’ll serve you best. They’re a bunch of independent insurance agents, so they can answer all your questions and make sure you get the right fit for the best price.