Do you want to save money on your monthly insurance premiums and have the opportunity to open a health savings account? If so, you should know how a High-Deductible Health Plans HDHP works. Below we will explain what these plans are like their advantages, disadvantages, and the moments in your life when an HDHP is convenient or not for you.
Advantages of a high deductible health insurance plan
An HDHP will typically have lower premiums than an equivalent health insurance plan with a lower deductible. People who don’t expect to have a lot of medical expenses next year should minimize their premiums and choose an HDHP. There’s a good chance of saving money, maybe several hundred dollars or more over the year, this way.
Just make sure you can pay the maximum out of pocket in the worst-case scenario. If you can’t, you could end up with medical debt, and the extra interest will make it even harder to pay your bills. A health insurance plan with higher premiums but an affordable out-of-pocket maximum might be a safer option if the HDHP’s out-of-pocket maximum is more than you can afford.
Comparison of annual health insurance premiums
The comparison above shows a situation where it makes sense to go with the HDHP. With either plan, you’ll end up spending $4,500 of your own money on premiums and deductibles if your medical expenses for the year are at least as large as your deductible. But with HDHP, you’re only guaranteed to spend $1,500 in premiums unless you know for sure what your next medical expenses will be.
High Deductible Health Plans and Preventive Care
If you choose the high deductible plan, you will still have 100% coverage for preventive services from network providers before you meet your deductible due to Affordable Care Act requirements. Quite a few services fall into this category, and you are not responsible for any copays or coinsurance for any of them
As already noted, the other big advantage of having an HDHP, aside from the typical lower premiums, is that it allows you to contribute to a health savings account. Because HSA contributions come from pre-tax dollars, you can save a significant amount on your medical expenses when you pay for them with your HSA. For example, if you are in the 24% federal tax bracket, a $100 medical bill will effectively cost you only $76. You must have an HDHP to be eligible to contribute to an HSA and to be eligible to receive any employer contribution to your HSA.
In fact, “free” money in the form of optional employer contributions to your HSA is another great benefit of having an HDHP and HSA. Plus, you don’t have to keep your HDHP indefinitely to take advantage of an HSA in future years. Contributions roll over from year to year, and you can invest your contributions to help them grow, too. In the future, even if you no longer have an HDHP, you can use money previously deposited in your HSA to pay for health expenses.
Disadvantages of High Deductible Health Plans
The big drawback to choosing an HDHP is having to incur significantly high out-of-pocket costs over the year. As of January 1, 2020, the Affordable Care Act rules state that the most anyone can pay out of pocket is $8,150 for in-network benefits. The family maximum is $16,300. Previously, insurance plans could require that a person on a family plan meet the family maximum. This new rule limits your risk if you have a family health insurance plan. Once any family member has $8,150 in medical expenses, their costs will be 100% covered for the rest of the year.
Another problem with joining an HDHP is that you might try to skip doctor visits because you’re not used to having such high out-of-pocket costs. Do not choose an HDHP if there is a high chance that you will become ill or have a difficult recovery process because you want to save money in the short term by avoiding doctors, procedures, or prescriptions. It will cost you more in the long run, plus you’ll be more physically compromised.
You and high deductible health plans
Whether or not it makes sense to have an HDHP depends on the stage of your life and the associated medical expenses you are likely to incur. If you’re young and healthy and rarely go to the doctor or take prescription drugs, you’ll probably save a lot of money by choosing an HDHP because the premiums are lower.
An HDHP may not be the best option if you have young children, as they tend to visit the doctor often. When your children are older and if you and they are healthy, an HDHP might make more sense. On the other hand, if someone has a chronic condition that needs ongoing treatment, a plan with a lower deductible might be more convenient.
I f you are older, statistically you are more likely to have higher medical expenses. Therefore, it is preferable not to risk hiring an HDHP. But if you’re still in good health and have no reason to anticipate high health care costs, an HDHP might be a good option for your circumstances despite your age.
Whether an HDHP saves you money always depends on the details of the specific plans available to you and your projected medical expenses for the year. An HDHP is not automatically a better or worse option than an insurance policy with a lower deductible just because your circumstances fall into a certain category. You will always have to analyze your situation.
How a High Deductible Health Insurance Plan Works
An HDHP can save you money in the form of lower premiums and the tax relief you can get on your medical expenses through an HSA. It is important to estimate your health expenses for the coming year and see how much you will have to pay out of pocket with an HDHP before you enroll. In some cases, a plan with a lower deductible will save you money, although it will generally have higher premiums and won’t allow you to have an HSA. Plus, if your employer offers it, you can use an FSA to get tax savings on your medical expenses with a plan with a lower deductible.