A High-Deductible Health Plan, commonly referred to as an HDHP, is a health insurance option designed with lower monthly premiums but significantly higher deductibles. This means the insured individual must pay a larger amount out-of-pocket before insurance benefits begin to apply for covered medical services.
A Closer Look at HDHPs
Traditional group health insurance often includes options like HMOs, PPOs, and POS plans. However, employers are increasingly turning to HDHPs due to their cost-saving potential. These plans contrast sharply with traditional ones: instead of paying more each month with a lower deductible, HDHP participants enjoy reduced premiums but must cover a higher deductible.
According to IRS guidelines for 2024, an HDHP must meet these minimum thresholds:
- Deductible: At least $1,650 for individuals or $3,300 for families
- Out-of-Pocket Maximum: No more than $8,300 for individuals or $16,600 for families, covering deductibles, copays, and coinsurance, but not premiums
For example, if someone has an HDHP with a $2,000 deductible for self-only coverage, they are responsible for the first $2,000 in eligible medical expenses. Only after this amount is met will the plan begin covering additional costs.
Preventive services like annual wellness exams and basic screenings are typically exempt from the deductible and are covered right away.
HDHPs and Tax-Advantaged Accounts
To make HDHPs more affordable, they are frequently paired with healthcare spending or reimbursement accounts.
HDHP + Health Savings Account (HSA)
An HSA is a tax-advantaged savings account used to pay for qualified healthcare costs. To open and contribute to an HSA, the individual must be enrolled in an HDHP. Contributions can be made via payroll deductions, and employers like Beyond may also contribute.
Importantly, employees aren’t limited to employer-sponsored HSAs, they can establish one independently if they meet eligibility requirements.
HDHP + Health Reimbursement Arrangement (HRA)
An HRA is a plan funded by the employer to reimburse workers for qualified medical costs on a tax-free basis. The employer determines the annual amount available, which is often disbursed monthly. Unlike HSAs, HRAs remain the property of the employer.
There are multiple HRA structures, such as QSEHRAs and ICHRAs, and whether they can be paired with an HDHP depends on the specific HRA type.
Beyond offers guidance on topics like “QSEHRA vs. ICHRA” to help businesses and employees navigate their options.
Ultimately, both HSAs and HRAs provide a way for individuals to cover medical expenses not fully paid for by their HDHP and when used correctly, these funds are entirely tax-free up to annual IRS limits.
Advantages and Drawbacks of HDHPs
Potential Benefits:
- Reduced monthly costs: Lower premiums help employees manage monthly budgets more easily
- Tax perks: Contributions to an HSA or compatible HRA reduce taxable income for both employees and employers
- Promotes cost-conscious care: With more financial responsibility, participants may make smarter, more efficient healthcare decisions
Possible Downsides:
- Higher upfront costs: Employees who frequently need medical care may end up paying more overall due to high deductibles
- Cost of non-preventive care: Until the deductible is met, most services must be paid for entirely out-of-pocket
- Lower satisfaction levels: A 2022 survey found that 66% of traditional plan users reported high satisfaction, compared to 52% of those in HDHPs, highlighting a possible preference for traditional plans
Growing Popularity of HDHPs
Data from ValuePenguin indicates that, by 2021, over half (55.7%) of private-sector employees in the U.S. had enrolled in HDHPs, marking the eighth straight year of growth. According to the Kaiser Family Foundation, HDHPs were the second most common health plan in 2023.
Here’s how plan enrollments were distributed:
- 47% in PPOs
- 29% in HDHPs with a savings feature
- 13% in HMOs
- 10% in POS plans
Despite their rising popularity, it’s crucial for employers to educate their workforce about how HDHPs function. Companies like Beyond emphasize the importance of clear communication to boost understanding, engagement, and satisfaction among employees.