What is a high-deductible health plan?
A high-deductible health plan (HDHP) comes with a higher deductible than a traditional plan.
For 2022, the IRS defines HDHPs as insurance plans with an individual deductible of at least $1,400 for an individual or $2,800 for a family and with maximum out-of-pocket expenses no more than $7,050 for an individual or $14,100 for a family. In 2023, those limits are deductibles of $1,500 for an individual and $3,000 for family coverage, with out-of-pocket maximums of $7,500 and $15,000, respectively.
How do high-deductible plans work?
A high-deductible health plan often comes with a lower monthly premium. The potentially lower premiums are attractive to many. But you’ll have to meet a relatively high out-of-pocket deductible before your insurance company starts to pay for medical expenses.
One way that policyholders manage the higher deductible is by saving for healthcare costs through a health savings account (HSA). HSAs are only available to people who have an HDHP. With an HSA, you can set aside funds to cover medical costs, including your deductible and other qualified medical expenses.
An HSA offers tax advantages for savers — the contributions and growth in an HSA aren’t taxed, so long as you only use the money to pay for qualified medical expenses. Each year, you can contribute a predetermined amount to an HSA. For 2023, the IRS has set the contribution limits at $3,850 for individuals and $7,750 for families.
The funds saved in your HSA roll over from year to year, which gives you a dedicated place to build savings for your future medical expenses.
See More: What’s the Difference Between Deductible and Out-of-Pocket in Health Insurance?
What are the pros and cons of a high-deductible health plan?
Every type of insurance policy comes with some advantages and disadvantages. Here’s what to know about high-deductible health plans:
Lower premiums: Policies with a higher deductible often have lower premiums.
Medical cost discounts: Insurance companies negotiate discounts with providers. As a policyholder, you’ll get access to those savings.
HSA eligibility: An HSA is a tax-advantaged savings tool for future medical costs. You’ll only be eligible for an HSA if you have an HDHP.
High deductible: The high deductible can put you at risk of financial hardship during a medical emergency. If possible, set aside savings to meet your deductible.
Risk of avoiding care: If you know you’ll have to pay out of pocket for medical care, you might avoid seeking necessary medical treatment.
High out-of-pocket costs: If you need a lot of medical care, you’ll face high out-of-pocket costs.