What’s a High-Deductible Health Plan and How Does It Work?

Emily Guy Birken
Written by
Emily Guy Birken
Emily Guy Birken
Written by
Emily Guy Birken
Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson. Her work has appeared on The Huffington Post, Business Insider, Kiplinger's, MSN Money, and The Washington Post online. She is the author of several books, including The 5 Years Before You Retire, End Financial Stress Now, and the brand new book Stacked: Your Super Serious Guide to Modern Money Management, written with Joe Saul-Sehy. Emily lives in Milwaukee with her family.
Evelyn Pimplaskar
Edited by
Evelyn Pimplaskar
Evelyn Pimplaskar
Edited by
Evelyn Pimplaskar
Editor-in-Chief, Director of Content
Evelyn Pimplaskar is Insurify’s director of content. With 30-plus years in content creation – including 10 years specializing in personal finance – Evelyn’s done everything from covering volatile local elections as a beat reporter to building fintech content libraries from the ground up.Prior to joining Insurify, she was editor-in-chief at Credible, where she launched and developed the lending marketplace’s media partnership’s content initiative, and managed the restructuring of the editorial team to enhance content production efficiency. Formerly, as Credit Karma’s tax editor, Evelyn built a library of more than 300 educational articles on federal and state taxes, achieving triple-digit year-over-year growth in e-files from organic search.Her early career included work as a content marketer, vice president and managing officer of a boutique public relations agency, chief copy editor for 14 weekly Forbes publications, reporting for large and mid-sized daily newspapers, and freelancing for the Associated Press.Evelyn is passionate about creating personal finance content that distills complex topics into relatable, easy-to-understand stories. She believes great content helps empower readers with the information they need to make important personal finance decisions.

Updated December 20, 2022

Reading time: 7 minutes

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High-deductible health plans (HDHPs) provide health insurance with low monthly premiums, but a high deductible threshold before the insurance coverage kicks in. 

As of 2023, a health insurance policy must have a deductible of at least $1,500 for an individual and $3,000 for a family to be considered an HDHP. Policies also can’t have annual out-of-pocket limits of more than $7,500 for individual plans or $15,000 for family coverage.[1]

Because of potentially high out-of-pocket costs, HDHP insurance may not be right for everyone. Understanding how these plans work can help you determine if an HDHP is the best option for your health insurance needs.

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What is a high-deductible health plan?

High-deductible health plans are a type of health insurance with a minimum deductible and maximum out-of-pocket cost set by the IRS. It’s a relatively new innovation in health insurance.

Starting in the early 2000s, insurance companies began offering health insurance plans with high deductibles. This new offering allowed policyholders to reduce the cost of their monthly premiums while increasing the amount of money they may have to pay out of pocket for medical expenses.[2]

HDHPs grew in popularity after the 2003 creation of health savings accounts (HSAs)

Important Information:

An HSA allows you to set aside pre-tax income for future medical expenses. If you use the money for eligible healthcare costs, you don’t have to pay taxes on it at any point. You can put pre-tax money into the HSA, allow it to grow tax-free, and withdraw it tax-free to pay for eligible medical expenses.

As of 2023, an HDHP must have a minimum deductible of $1,500 for an individual and $3,000 for a family — and the operative word is “minimum.” Many HDHPs have much higher deductibles than that.[3]

With the exception of preventive care, HDHPs will not cover medical expenses until after you meet your deductible. But the maximum out-of-pocket expenses for an HDHP means you’ll know the highest amount you may have to pay over the course of a year in medical expenses. 

The IRS also sets maximum out-of-pocket amounts for HDHPs that are eligible for use with an HSA. In 2023, that limit is $7,500 for an individual and $15,000 for a family. 

However, other HDHP policies may have higher out-of-pocket maximums. The Department of Health and Human Services governs these policies, which are set up to be compliant with Affordable Care Act (ACA) requirements. 

For ACA-compliant HDHP insurance, the 2023 out-of-pocket maximum is set at $9,100 for an individual and $18,200 for a family. If you want to use your HDHP with a health savings account, you must choose a policy that has out-of-pocket limits that don’t exceed the IRS maximums.[4]

HDHP TypeMinimum Deductible AmountOut-of-Pocket Limits
Minimum HDHP
  • $1,500 individual
  • $3,000 family
  • $7,500 individual
  • $15,000 family
ACA-compliant
  • $1,500 individual
  • $3,000 family
  • $9,100 individual
  • $18,200 family

If your employer’s health insurance plan doesn’t offer an HDHP option, you can purchase your own HDHP through the HealthCare.gov online marketplace. To find an HDHP option that allows you to use an HSA, just look for plans that are marked “HSA-eligible.”

Learn More: Do I Need Health Insurance Coverage?

How do high-deductible health plans work?

Like a traditional health insurance plan, an HDHP requires the policyholder to pay premiums to the insurer. In exchange, the insurance company will pay for your medical care after you meet the deductible. The plan will cover some preventive care even if you haven’t yet met the deductible.

The deductible is the amount of money you’re required to pay for covered medical care before your insurance plan starts to pay. For example, if you have a $3,000 deductible, then you’ll have to spend $3,000 on covered medical care before your insurance company will pay any portion of your care. 

But that doesn’t mean the insurance pays for everything after you reach the deductible. You’ll also have either a copayment or co-insurance for covered care, even if you’ve met your deductible. 

Insurance Definition:

A copayment is a fixed dollar amount ($50, for example) that you must pay for covered services after you meet your deductible. Co-insurance is a percentage of costs (such as 20%) that you must pay for covered services after meeting your deductible.

Let’s say your HDHP has a $3,000 deductible and a 20% co-insurance. You have a covered surgery in the first week of January to fix your torn meniscus. The procedure costs $9,000. You’ll pay $3,000 to fulfill your deductible, plus 20% ($1,200) of the remaining $6,000. Your total out-of-pocket cost for this surgery will be $4,200.  

That $4,200 will count toward your out-of-pocket maximum of $7,500. For the remainder of the year, you’ll have to make co-insurance payments of $3,300 before your plan begins paying 100% toward covered costs.

Read More: What’s the Difference Between Deductible and Out-of-Pocket in Health Insurance?

What do HDHPs cover?

Exact coverages may differ from plan to plan, but HDHPs generally cover the same types of healthcare services as other plans. The key difference is that an HDHP won’t begin paying for covered services until you’ve met your deductible amount — with some exceptions.

Some preventative services may be paid for before you reach your deductible. This preventive care will generally include:

  • An annual physical

  • Routine prenatal care

  • Routine well-child checkups

  • Immunizations for children and adults

  • Smoking-cessation programs

  • Certain screening services, such as cancer, diabetes, and depression

 Check Out: When is Health Insurance Open Enrollment?

How much does a high-deductible health plan cost?

Monthly premiums for HDHP policies tend to be much lower than premiums for other types of health insurance plans. You assume more of the cost of medical care with such a high deductible. The insurer doesn’t pay for your medical care until you reach your deductible, so the premiums are lowered to reflect that.

If you have an HDHP through your employer, that may further reduce the amount you pay in premiums. As of 2021, the Kaiser Family Foundation reports that the average annual cost of HDHP premiums was $6,877 for an individual and $20,507 for a family. Of that cost, the employer covered an average of $5,743 for individual policies and $15,255 for family policies — or 83.5% and 74.4%, respectively.[5]

However, that doesn’t necessarily mean signing up for an HDHP will save you money. You could spend more on your out-of-pocket medical costs than you save with lower premiums. If you have a run of bad medical luck, you can expect to pay at least the full deductible amount before your HDHP coverage kicks in. And even then, you’ll have to continue to pay your copay or co-insurance until you’ve reached the out-of-pocket maximum. 

HSAs and high-deductible health plans

Most HDHP policies qualify you for a health savings account or HSA. With an HSA, you can contribute pre-tax income to the account and withdraw the money for qualified medical expenses. 

The money rolls over each year and is yours to keep even if you switch employers or health insurance providers. You can only contribute to an HSA if you have HDHP coverage — other types of health insurance plans aren’t eligible for an HSA.

Good to Know:

You can use HSA money for any qualified medical expenses, even if you’re no longer covered by an HDHP when you use the funds. This means an HSA could be a helpful way to set aside money for future healthcare expenses, even if you’re currently in the bloom of good health.

Your money grows tax-free in the HSA, and you pay no taxes on money used for qualified healthcare expenses. These can include:[6]

  • Deductibles

  • Copayments

  • Co-insurance

  • Ambulance costs

  • Doctor visits

  • Prescription drugs

  • Hearing aids or other medical devices

  • Psychiatric care

  • Some qualified long-term care

This means your HSA money could be entirely tax-free, since you pay no taxes on the income that you contribute, no taxes on any growth, and no taxes when you withdraw and spend the money on qualified medical expenses.

However, if you decide to use the money for something other than a qualified medical expense before you reach age 65, you’ll owe the IRS income tax on the withdrawal, plus a 20% penalty. After age 65, you can withdraw the money without penalty, but you’ll still owe income taxes on your withdrawal.

The IRS sets an HSA contribution limit each year. The table below shows the contribution limits for 2022 and 2023 for both self-only (individual) and individual with family coverage:

YearIndividual LimitFamily Limit
2022$3,650$7,300
2023$3,850$7,750

These limits are a combination of employer and employee contributions, which means your employer may be able to help your money go even further. In 2021, the Kaiser Family Foundation found that the average employer contributed $575 to individual HSAs and $987 to family HSAs.

Keep Reading: What is an HRA and How Does It Work?

What are the pros and cons of HDHPs?

HDHPs can be a savvy way to save money on your healthcare costs — or they can be more expensive than more traditional health insurance. It’s important to understand the benefits and drawbacks of these kinds of policies so you can make the best decisions for your healthcare spending.

HDHP Pros

  • Lower monthly premium costs

  • Could save money if you don’t need much healthcare

  • Allows you to set money aside in an HSA

  • May not require you to differentiate between in-network and out

  • Preventive care is generally covered without needing to meet your deductible

HDHP Cons

  • Must meet a higher deductible before coverage kicks in for non-preventive care

  • May be more expensive if you have a chronic condition or illness

  • Money set aside in an HSA can’t be used for non-medical expenses without paying a 20% penalty

  • High out-of-pocket maximums

  • Can lead to care avoidance if you don’t have the money to go to the doctor

High-deductible health plan FAQs

These are some of the most frequently asked questions about high-deductible health plans.

  • A high-deductible health plan could save you money under certain circumstances, including:

    • You’re in good health, with no chronic or pre-existing health conditions that increase healthcare costs.

    • You can afford to contribute to an HSA and take advantage of the tax savings.

    • You have enough saved to be able to afford the deductible and your out-of-pocket maximum without hurting your finances.

  • PPO stands for preferred provider organization. This type of health insurance generally charges higher premiums, but it allows you to go see specialists or care providers who are out of network without requiring you to get a referral from your primary care doctor.

    With a PPO, you’ll generally pay much higher premiums than an HDHP, but its deductible, copay or co-insurance, and out-of-pocket maximums will all generally be much lower. A PPO could be a better option for someone with chronic health problems or who anticipates needing to see a number of specialists.

  • For 2023, the HSA contribution limit is $3,850 for individuals (or $4,850 if you’re over the age of 55) and $7,750 for families.

  • High-deductible health plans aren’t right for everyone. These plans will work best for someone who:

    • Is in good health

    • Has enough income to contribute to an HSA

    • Has the ability to pay for the high deductible

    • Has an employer paying a percentage of the premium costs

    • Has an employer contributing to their HSA

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Sources

  1. Internal Revenue Service. "Rev. Proc. 2022-24." Accessed December 14, 2022
  2. Health Affairs Journal. "Health Policy Brief: High-Deductible Health Plans." Accessed December 18, 2022
  3. HealthCare.gov. "High Deductible Health Plans (HDHPs) & Health Savings Accounts (HSAs)." Accessed December 18, 2022
  4. Society of Human Resources Management. "IRS Announces Spike in 2023 Limits for HSAs and High-Deductible Health Plans." Accessed December 18, 2022
  5. Kaiser Family Foundation. "2021 Employer Health Benefits Survey." Accessed December 19, 2022
  6. Health Insurance Marketplace. "What's a Health Savings Account?." Accessed December 19, 2022
Emily Guy Birken
Written by
Emily Guy Birken
Linkedin

Emily Guy Birken is a former educator, lifelong money nerd, and a Plutus Award-winning freelance writer who specializes in the scientific research behind irrational money behaviors. Her background in education allows her to make complex financial topics relatable and easily understood by the layperson.

Her work has appeared on The Huffington Post, Business Insider, Kiplinger's, MSN Money, and The Washington Post online.

She is the author of several books, including The 5 Years Before You Retire, End Financial Stress Now, and the brand new book Stacked: Your Super Serious Guide to Modern Money Management, written with Joe Saul-Sehy.

Emily lives in Milwaukee with her family.

Learn More
Evelyn Pimplaskar
Edited by
Evelyn Pimplaskar
Linkedin

Editor-in-Chief, Director of Content

Evelyn Pimplaskar
Edited by
Evelyn Pimplaskar
Editor-in-Chief, Director of Content
Evelyn Pimplaskar is Insurify’s director of content. With 30-plus years in content creation – including 10 years specializing in personal finance – Evelyn’s done everything from covering volatile local elections as a beat reporter to building fintech content libraries from the ground up.Prior to joining Insurify, she was editor-in-chief at Credible, where she launched and developed the lending marketplace’s media partnership’s content initiative, and managed the restructuring of the editorial team to enhance content production efficiency. Formerly, as Credit Karma’s tax editor, Evelyn built a library of more than 300 educational articles on federal and state taxes, achieving triple-digit year-over-year growth in e-files from organic search.Her early career included work as a content marketer, vice president and managing officer of a boutique public relations agency, chief copy editor for 14 weekly Forbes publications, reporting for large and mid-sized daily newspapers, and freelancing for the Associated Press.Evelyn is passionate about creating personal finance content that distills complex topics into relatable, easy-to-understand stories. She believes great content helps empower readers with the information they need to make important personal finance decisions.