Health insurance is one of those things everyone needs but that nobody likes thinking about. Coverage can be expensive, and having to use your coverage often means that you’re sick or injured.
There are many different types of health insurance, each with pros and cons. If you’re looking for a plan with a low monthly cost, a high-deductible health plan might be the right choice for your needs. However, before signing up, make sure you understand how high-deductible health plans work and their pros and cons.
What Is a High-Deductible Health Plan?
A high-deductible health plan (HDHP) is a type of health insurance policy specifically defined by the government. These plans typically have much lower monthly premiums than other types of insurance, but at the cost of higher deductibles each time that you get medical care.
Key Features of a High-Deductible Health Plan
These are some of the features of high-deductible health plans.
One of the first places most consumers look when comparing insurance policies is the monthly premium. The premium is the amount that you pay each month to buy the insurance.
In 2018, the average annual cost for an HDHP was $6,791 for an individual and $19,527 for a family. This equates to $565.92 or $1,627.25 per month. By contrast, preferred provider organization (PPO) plans had average premiums of $7,149 annually for individuals and $20,324 for families.
Many employers subsidize the premiums, so most employees with an insurance plan through their work will pay less than these amounts each month.
After an employer pays its share of health care premiums, HDHPs premiums can be as low as half the premium charged by other types of health insurance.
As implied by their name, the cost of an HDHP’s lower monthly premiums is a higher deductible.
A deductible is the amount that you have to pay out of your own pocket before insurance kicks in. Any medical services you pay for over the course of a year count toward the deductible.
Once you reach your deductible limit for the year, insurance will begin to cover your costs, often with a copay or coinsurance requirements.
It’s important to note that some policies have separate deductibles for different types of services. For example, a plan might have a separate deductible for prescription drugs.
For 2020, any individual plan with a deductible of $1,400 for an individual or $2,800 for a family is considered a high-deductible health plan.
Every health insurance policy has an out-of-pocket maximum. This, in theory, is the maximum amount that you have to pay for medical care in a single calendar year.
Most insurance policies will make you pay copay or coinsurance, even after you’ve paid your deductible. For example, if you have to pay 10% coinsurance for a procedure that costs $1,000, your insurer will cover $900 of the cost and make you pay the remaining $100.
Once you reach your out-of-pocket maximum for the year, your insurer pays 100% of the cost of covered benefits.
This doesn’t mean that you don’t have to pay anything for medical care for the rest of the year. You may still be liable for some costs, including costs for out-of-network care or charges above the amount that your insurer allows health care providers to charge.
However, knowing the out-of-pocket maximum for a plan is important because it gives you a rough idea of how much you might have to spend in the worst-case scenario.
For 2020, individual plans must have out-of-pocket maximums no higher than $8,150. Family plans can have out-of-pocket maximums up to $16,300.
Health Savings Accounts
If you enroll in an HDHP, you have the option to open a health savings account (HSA) through a company like Lively. HSAs are designed to help people set money aside to pay the high deductibles involved in HDHPs.
However, if you use the money in the account for medical expenses, you also don’t have to pay any taxes when you withdraw it. This makes the account doubly tax-advantaged compared to retirement accounts.
The drawback is that you typically can’t pull money out of your HSA for anything but medical expenses. If you do, you have to pay a 20% penalty on the withdrawal, plus income tax on the amount withdrawn.
Unlike flexible spending accounts (FSAs), which people with other types of health plans can use to save for health care costs, the money in your HSA belongs to you permanently. You don’t lose your contributions at the end of the year.
You can keep adding to your HSA and build up a balance over the course of years.
One less-known benefit of HSAs is that you can make withdrawals from them for nonmedical reasons once you’re 65 years old. If you do, you don’t have to pay the 20% penalty but do have to pay income tax, making your HSA like a traditional IRA or 401(k).
If you’re fortunate enough to not have to use all the money in your HSA for medical expenses, it can become a second retirement account.
Pros of High-Deductible Health Plans
These are some of the top reasons to consider an HDHP.
- Lower Monthly Premiums. HDHPs come with lower monthly costs. That means more money in your pocket each month. If you don’t have many medical expenses, you won’t even notice the higher deductible, making this pure savings.
- Access to an HSA. Being able to put money in an HSA is a great benefit of HDHPs. Although you can use money in an HSA to save for medical costs, it also functions similarly to a retirement account, letting you make nonmedical-cost withdrawals after age 65. If you’re maxing out your 401(k) and IRA, HSAs give you even more tax-advantaged space for your excess income.
- Out-of-Pocket Maximums. Under the Affordable Care Act, HDHPs — and all insurance plans — must have out-of-pocket maximums. Even though you’ll have a high deductible, there is a rough upper limit on how much you’ll have to spend on health care.
Cons of High-Deductible Health Plans
High-deductible health plans aren’t perfect, so it’s important to understand their drawbacks before enrolling.
- Higher Potential Costs. If you get sick or injured, you’ll have to pay your deductible before your insurance pays for any of your care. A higher deductible can mean having to pay thousands more dollars out of pocket before your insurer helps.
- Long-Term Impact on your Health. If you have an HDHP, you might find yourself ignoring small aches and pains because you don’t want to have to pay for medical care. This can impact your health in the long run if small problems turn into larger medical issues because they were left untreated.
When Does it Make Sense to Use a High-Deductible Health Plan?
There are a few situations where it may make sense to use a high-deductible health plan.
1. You’re Young and Healthy
If you’re young and generally healthy, you can probably benefit from signing up for a high-deductible health plan.
Consider the case of someone in their mid-20s. They don’t take any medication regularly and aren’t involved in high-risk activities like extreme sports. In terms of health care, they get an annual checkup and a flu shot, but otherwise don’t have to visit the doctor or get other types of care.
In this scenario, an HDHP could offer significant savings. HDHPs typically still offer coverage for preventive care like annual checkups. Someone like this could take advantage of the lower premiums HDHPs offer and probably still not have any out-of-pocket health care expenses.
2. You Have Consistently High Medical Costs
Oddly, an HDHP may also be a good deal if you’re very sick.
If you’re regularly in and out of the hospital or need expensive ongoing medical care, it might not seem like a good idea to get an HDHP. However, keep in mind that insurance plans must have out-of-pocket maximums, and the government limits how high these out-of-pocket maximums can be. The limit is the same whether a plan has a high deductible or no deductible at all.
If you consistently hit the out-of-pocket maximum for health care costs, an HDHP likely won’t change the amount you spend out of pocket but can help you save on your monthly premium, reducing your overall costs. You also get the tax benefits of having access to an HSA, which increases your potential savings.
3. You Have Emergency Savings
If you have an emergency fund, you may be able to use an HDHP without much risk. If you do have an accident or unexpected illness, you can tap your savings to cover the deductible, letting your insurance cover the rest.
People without emergency savings might have to borrow money to cover the higher deductible. With loan fees and interest, this gets expensive quickly, eliminating the benefit of lower premiums.
Anyone considering an HDHP should make sure to — at minimum — have enough cash on hand to cover the plan’s deductible in an emergency. Ideally, you should be able to cover the plan’s out-of-pocket maximum.
Pro tip: If you don’t currently have an emergency fund, start one today. Open a high-yield savings account through CIT Bank and fund it each month with an amount that fits into your budget.
Alternatives to High-Deductible Health Plans
If you’re considering a high-deductible health plan, these are some alternatives you might be interested in.
Traditional Health Insurance Through Your State’s Marketplace
Under the Affordable Care Act (ACA), you can get a subsidy to purchase health insurance through your state’s insurance marketplace if you meet income requirements. If your primary reason for considering an HDHP is the low monthly cost, the ACA subsidies may make other policies more affordable.
The size of your subsidy will vary with your state and your income, but you’ll qualify for some level of subsidization so long as your income is 400% of your state’s poverty level or less. For 2020, the poverty level for a single person in the continental U.S. is $12,760, so you can get some subsidy if your income is under $51,040 per year.
The poverty level is higher in Alaska at $15,950 and in Hawaii at $14,680, making the maximum income to get a subsidy in those states $63,800 and $58,720, respectively.
Those with low incomes may be able to qualify for Medicaid, which will give you health coverage for low or no cost. Eligibility requirements vary slightly from state to state, but for most states, you can qualify if your income is below 133% of the federal poverty level.
If you think you qualify, you can apply for coverage through your state’s Medicaid website or through Healthcare.gov.
If you join a cost-sharing program, you’ll pay a monthly amount into the program along with the program’s other members. If you need to pay for a medical expense, the program uses the pooled payments from its members to help you pay for care.
Because cost-sharing programs aren’t traditional insurance, there are some important differences to keep in mind.
One difference is that cost-sharing programs don’t have the same obligation to cover care that insurance does. If the cost-sharing plan doesn’t have the funds to pay for your care or simply decides not to assist with your costs, you may have little recourse.
These plans also don’t have the same obligation that insurance plans have to accept people with preexisting conditions, which may make it difficult to find one that will accept you if you already have an expensive medical condition.
Additionally, many cost-sharing programs are faith-based and may require that members of the plan be members of a particular faith or follow religious rules. These rules may impact the types of care the plan will help pay for. For example, many religion-based medical sharing programs will not cover costs related to contraception. Some may refuse to cover people who live contrary to their religion’s values, such as by smoking or drinking alcohol.
Health insurance is complicated, but it’s important for everyone to have. If you’re healthy and have an emergency fund, you can use an HDHP to save money and to gain access to an HSA.
HSAs have the potential to be one of the best saving and investing accounts available to Americans. Using advanced strategies to leverage your HSA’s tax benefits can give your finances a big boost in the long run.
Do you have an HDHP? Has it been good or bad for you?