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HDHP Basics: What Are High Deductible Health Plans, Exactly, and How Do They Work?

by Elizabeth Davis on November 14, 2014 at 11:13 am

Have you heard of a high-deductible health insurance plan? If not, you probably will soon.

This year, more than 17 million Americans were covered by high-deductible health plans (HDHPs). HDHPs are rapidly becoming the most popular form of health insurance offered by employers: in 2015, almost one-third of large employers plan to offer HDHPs as the only plan option to all of their employees.

Maybe your employer is forcing you to switch, or maybe you’re young and healthy and just want to spend less on your premiums. Either way, since it’s very likely you’ll soon be covered by an HDHP, let’s explore how they work.

What is a high-deductible health plan?

A high-deductible health plan is an insurance plan where you are a responsible for 100% of the cost of your health care until you satisfy a large deductible.

For 2015, the IRS defines high-deductible plans as having a $1,300 minimum deductible for individuals, and $2,600 for families.

Once you’ve spent enough money to satisfy the deductible, your insurance typically pays the majority of the cost for in-network medical and drug costs.

Like other insurance plans, HDHPs also feature a “maximum out of pocket” amount. Once you’ve spent a large amount ($6,450 for individuals, $12,900 for families) in a given year, your insurance will pay 100% of the cost of your care. Basically, if you have a serious illness or end up in the hospital, your expenses will be capped.

Keep in mind that the deductibles and maximum out of pocket amounts only apply to doctors and services that are in-network. If you visit a doctor that’s not covered by your plan, you may be responsible for most, if not all, of the cost.

How does a deductible work?

Your plan won’t cover anything except preventative care until you meet your deductible. You may receive a discount by using providers that are in your plan’s network, but you’ll be responsible for 100% of that lower price.

An example: Need to get a flu shot? That may be covered at no cost to you, depending on your plan and where you get it. Filling a couple of prescriptions every month? If that’s your only medical expense and your total doesn’t climb above $100 or so, your insurance may never chip in.

Why are HDHPs getting so popular?

The reality of American health care these days is that you, the patient, are paying a greater portion of the cost of your healthcare.

One of the benefits of HDHPs is that they expose Americans to the true cost of medical services and prescriptions, so they can make smarter financial decisions about their health care.

Companies like HDHPs because they push more of the cost and decision-making about your health care to you, the consumer, which lowers premiums for both companies and employees.

Consumers, especially those who are younger and healthier, may like HDHPs because they simply cost less than traditional health insurance.

HDHPs are also sometimes known as “consumer-directed health plans” or CDHPs—with the idea that they encourage patients to shop around and take more control of their health spending.

How are HDHPs and Health Savings Accounts related?

You’ll need to have a high deductible plan to qualify for a health savings account.

There are actually three different types of health plan accounts: a Health Savings Account (HSA), Health Reimbursement Account (HRA) and a Flexible Spending Account (FSA). The good news is that money contributed to all three types is tax-free and can be used toward qualified medical expenses. The differences mostly lie in whether you or your employer control the account.

Bottom line?

HDHPs may work well for you if you’re healthy and don’t have many medical expenses, but they tend to be hard on people with lower incomes or health problems. It’s wise to think of an HDHP as ‘catastrophic coverage,’—if you end up in the hospital or get very sick, you will be covered by your insurance, but for typical medical expenses, you’ll be paying most of it yourself.

In our next blog post:

How you can save even with with a high deductible plan, and more on the differences between an HSA, HRA, and an FSA.

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