What is a high-deductible health plan (HDHP)?

High-deductible health plan (HDHP) definition and meaning

A high-deductible health plan (HDHP) is a type of health insurance that typically offers lower monthly premiums and a higher deductible. The deductible is the amount the plan member must pay before the insurance company starts paying for covered medical services.

More about high-deductible health plans

While the term “group health plan” often brings to mind traditional insurance options like Health Maintenance Organization (HMO), Point of Service (POS), and Preferred Provider Organization (PPO), employers are increasingly opting for high-deductible health plans. Unlike traditional plans, which generally feature higher premiums and lower deductibles, an HDHP offers lower monthly premiums but requires a higher deductible.

The IRS sets annual limits defining an HDHP. For 2024, these limits include:

• A minimum annual deductible of $1,600 for self-only coverage and $3,200 for family coverage.
• Maximum annual out-of-pocket expenses capped at $8,050 for self-only coverage and $16,100 for family coverage. These expenses pertain to deductibles, copayments, coinsurance, and other payments, excluding premiums.

For instance, a $2,000 deductible for self-only coverage means the employee covers the first $2,000 in medical services, after which the plan covers all subsequent eligible medical expenses for the year.

It’s important to note that HDHP deductibles do not apply to certain preventive care services such as annual checkups and routine screenings, which are covered upfront, even before meeting the deductible.

To help offset the cost of HDHPs, employers often combine them with savings or reimbursement programs.

How does an HDHP work with a savings or reimbursement account?

Health Savings Account + HDHP

A health savings account (HSA) is a type of savings account that lets employees pay for qualified medical expenses on a tax-free basis via payroll deduction. To be eligible for an HSA, the employee must participate in a high-deductible health plan. This is why an HDHP is often referred to as an HSA-eligible plan. Notably, employers can contribute to their employees’ HSA.

Individuals are not restricted to obtaining an HSA solely through their employer. They can independently set up an HSA, provided they have an HDHP.

Health Reimbursement Arrangement + HDHP

A Health Reimbursement Arrangement (HRA) is an employer-funded plan offering tax-free reimbursements to employees for qualified medical expenses. Employers set the HRA’s annual funding as a fixed dollar amount, often allocated in monthly installments. In contrast to HSAs, which are employee-owned, HRAs are employer-owned.

There are several types of HRAs, including traditional HRAs, Qualified Small Employer Health Reimbursement Arrangements (QSEHRAs), and Individual Coverage Health Reimbursement Arrangements (ICHRAs). Whether the HRA can be combined with a high-deductible health plan depends on the type of HDHP.

For more in-depth information on HRAs, refer to our article “QSEHRA vs. ICHRA: Understanding the differences between these health reimbursement arrangements.”

Ultimately, the money in the employee’s HSA account or that is reimbursed through an HRA enables them to pay for certain medical expenses not covered by their HDHP. These amounts are tax-free, provided they do not exceed the legally prescribed annual limits.

Pros and cons of high-deductible health plans

Potential advantages:

• Lower monthly premiums: Plan members can save more money each month, potentially decreasing financial stress.
• Tax savings through HSA or compatible HRA: Contributions made to an HSA or HRA are exempt from payroll taxes, benefitting both the employee and employer.
• Encourages responsible healthcare spending: Since employees must shoulder a larger share of their medical expenses in order to receive lower monthly premiums, they are incentivized to make more informed and economical healthcare choices.

Potential disadvantages:

• High out-of-pocket expenses: The appeal of lower monthly premiums may be overshadowed by substantial out-of-pocket costs, particularly for employees with frequent medical needs, resulting in potentially higher overall expenses.
• Payment for non-preventative care: Employees must bear the full cost of non-preventative healthcare services until they meet the high deductible threshold.
• Possible lower satisfaction rates: A 2022 survey revealed a disparity in plan satisfaction levels. Specifically, 66% of traditional plan participants expressed high satisfaction compared to only 52% of HDHP participants, indicating a potential preference for traditional healthcare plans over HDHPs.

Popularity of high-deductible health plans

Per a ValuePenguin survey, the number of U.S. private-sector workers enrolled in HDHPs in 2021 rose for the eighth consecutive year, reaching a record high of 55.7%. Moreover, in 2023, the Kaiser Family Foundation ranked HDHPs as the second most common type of health insurance.

The distribution of worker enrollments in various plans is as follows:

• 47% of workers are enrolled in a PPO
• 29% are enrolled in an HDHP with a savings option
• 13% have chosen an HMO
• 10% are enrolled in a POS plan

Despite the growing popularity of HDHPs, it’s important for employers to educate their employees about these plans. Such education is essential, not only for promoting enrollment but also for enhancing employee engagement and satisfaction.