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 whitewater rafting without a life jacket. The sun and the spray might feel nice for a while, but when you go overboard, you’ll wish you’d put one on.
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 an HDHP?
As you can probably guess from its name, a high-deductible health plan has a higher deductible than other 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.
The two purposes of HDHPs are:
- To contain spiraling health care costs across the board
- To encourage consumers to make better informed choices about their health care
How do they achieve those purposes? Well, there’s something about a flat fee that tends to encourage people to sometimes overuse a benefit. You know, like your Aunt Betsy and your Uncle Mike? Yeah, the ones who are usually in great health, but go to the doctor for blood work and an MRI absolutely anytime they sneeze? That outlook can lead to runaway spending, as well as ballooning costs over time—causing health care costs to keep rising.
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But when you have to shoulder some of the cost associated with your health care, you’re probably going to try to find ways to save on insurance. Nobody wants to spend more, obviously.
So, to help make an HDHP more worth your while, the IRS has built in a few features that make this kind of plan very budget friendly. But is it the right plan for you?
How Does a High Deductible Health Plan (HDHP) Work?
To qualify as an HDHP and to take advantage of all the associated benefits, the IRS sets minimum deductibles and maximum out-of-pocket costs. These are the numbers for 2020:
- Minimum deductible for an individual: $1,400
- Minimum deductible for a family: $2,800
- Maximum out-of-pocket expenses for an individual: $6,900
- Maximum out-of-pocket expenses for a family: $13,800
One great thing to know is that preventive care like vaccines, annual wellness exams and some screenings are covered in an HDHP. But this plan’s not 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, which is often the same or close to your out-of-pocket maximum.
But the good thing about an HDHP is that in years when you’re relatively healthy, you’ll only be on the hook for low premiums and occasional medical expenses. You’re also well protected from catastrophes—stuff like needing emergency surgery or treatment for a newly diagnosed medical condition, which could bankrupt you if they happened without health insurance.
Although an HDHP will mean paying for a big portion for an event like that out of pocket, lower premiums help cushion the blow. So, if you do go through something like that, you’ll probably be able to afford the out-of-pocket maximum, especially if you take advantage of a tool that’s available only to people enrolled in an HDHP: a Health Savings Account (HSA).
When you have an HSA, it’s a triple tax shelter you can use to grow your money. Even though an HSA is not a required part of the plan, it’s definitely something you should open if you have an HDHP. It’s almost like a 401(k) for health care! (But if you’re working the Baby Steps, wait until Baby Step 3 to start contributing.) Here’s how an HSA works:
- Any money you save in the account can be used to cover qualified medical expenses. This would be 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 will often include an employer match. That’s a great way to boost your investment at no cost to you!
- Anything you save in an HSA goes in pre-tax. Hello tax shelter!
- The money can be invested. And if you go that route, it also grows tax-free. (This is getting exciting.)
- When you need to withdraw the money to cover medical expenses, you still won’t be taxed!
- You don’t have to worry about losing your HSA savings either. Funds roll over every year, and they continue to be available for any future health care needs you might have.
- And last (but not least!), after retirement, your HSA acts just like a traditional IRA. So you can use your HSA funds for anything you’d like. Qualified medical expenses will still be tax-free, and any non-qualifying medical expenses will be taxed as income, just like a 401k.
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.
Benefits of a High Deductible Health Plan
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. Here’s an example.
Let’s say you’re currently paying $500 a month for your family’s health insurance in a traditional plan, and you have a $500 deductible before insurance kicks in. To switch to an HDHP, you’d have to sign on for a deductible of at least $2,800. But guess what else would change? The premium. It could easily drop to $150 a month. That’s saving you $350 monthly, and over $4,000 annually! Here’s a breakdown of that scenario:
|Total cost before coinsurance||$6,500||$4,600|
But that’s just the savings when you meet your deductible! What if you’re relatively healthy, and you only spend $800 on medical expenses throughout the year? That’s another $2,000 saved! And that’s before we even count the huge tax advantages you get if you’re in an HSA.Looking at the annual cost alone shows that an HDHP is better for your budget. In this example, you could save yourself nearly $2,000 in one year with those lower premiums.
If the idea of accepting the risk of higher out-of-pocket costs sounds—well, risky—we get it. But the advantages are more than worth it! Still not convinced? Here’s a quick recap of why an HDHP is a winner:
- You’ll have lower premiums, and those are savings you can bank toward future medical needs.
- You can start an HSA to offset the high deductible.
- An HSA lets you take advantage of three tax shelters!
- Once you’ve met your annual out-of-pocket maximum (which for many high-deductible plans is pretty close to the deductible), an HDHP covers you 100% for the rest of the year.
Disadvantages of a High Deductible Health Plan
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. That’s because to ensure you get the care you need, you could end up spending a lot of time and money inside doctors’ offices, while getting little or no financial advantage 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.
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 begin to 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 are going to vary, both by plan and depending on your family’s changing needs, so make sure you run the numbers before you commit to anything. To be sure you’re getting the best coverage available and saving as much as possible, it’s a great idea to get with a health insurance pro who can help you run the numbers and compare plans.
Should I Get a High Deductible Health Plan?
There’s no “one-size-fits-all” answer to this question. While HDHPs are being offered by more employers all the time, health care is too complex to solve with one universal approach. Here are a few things to consider as you decide:
- 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 to be able to pocket what you’ll save with lower premiums.
- How big is your family? The smaller the crew in your house, the better you’ll fit with an HDHP. A household of just you and your spouse is 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, an HDHP can work in families of many sizes.
- Do you have other options? If an HDHP is one of several options you have (like with employee benefits) you’ll once again need to do the math. Run some imaginary numbers through each option. 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.
- 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’re going to have higher-than-average medical costs in a given year.
We know figuring out how to pay for health care can feel like a headache. But what can be even more painful is falling off the raft without a plan in place to stay afloat. We all deal with big medical costs at some point in our lives. And facing them without insurance is something nobody can afford. HDHPs are helping millions of Americans pay for health care.
If you’re considering an HDHP, or you’re already in one, you need to pair it with a health savings account. The best type of HSA to have is one that’s flexible, available on demand, and includes a debit card you can use to pay for medical expenses. And we found it for you. Open your HSA account today!