High-deductible health plans (HDHPs) are designed to lower your monthly insurance costs, but they also come with higher upfront expenses when you need care. These plans typically require you to pay a significant deductible before insurance begins covering most medical services. For some people, HDHPs can be a smart way to save money on premiums, but for others, they can lead to steep out-of-pocket bills.
Key Characteristics of HDHPs
- Lower monthly premiums compared to traditional plans
- A single, higher deductible that must be met before coverage applies
- Preventive care, such as annual checkups and routine screenings, covered at no cost
- Eligibility for a Health Savings Account (HSA) in many cases
What Qualifies as an HDHP?
The IRS sets annual standards for what counts as an HDHP. These requirements change each year and determine the minimum deductible and maximum out-of-pocket limits. For example, deductibles typically start at several thousand dollars for individuals and even more for families. On the flip side, there are caps on how much you’ll ever have to pay in a given year, which provides some financial protection.
What’s Covered
HDHPs require you to cover most medical costs out-of-pocket until you meet your deductible. That means doctor visits, hospital stays, and prescription medications generally aren’t covered upfront. However, preventive care—like vaccines, mammograms, and wellness visits—must be included at no extra charge, as required by the Affordable Care Act.
If your plan is HSA-compatible, you can use tax-free dollars to pay for qualified expenses, making the costs more manageable.
Health Savings Accounts (HSAs)
An HSA is a personal account that allows you to save pre-tax money for healthcare expenses. Funds in an HSA roll over each year, and the account remains yours even if you switch jobs or retire. Unlike flexible spending accounts, there’s no “use it or lose it” rule.
HSAs can be funded by you, your employer, or both. Contributions are tax-deductible, and the money can be withdrawn tax-free for qualified medical costs. For some, HSAs also serve as long-term savings vehicles since unused funds can grow over time and even be invested.
Who Can Open an HSA?
You must be enrolled in an HSA-qualified HDHP to contribute. Other eligibility requirements include:
- Not being enrolled in Medicare
- Not being listed as a dependent on someone else’s tax return
- Having a plan that meets IRS standards for HSA compatibility
Not all HDHPs qualify automatically, so it’s important to confirm with your insurance provider before setting up an HSA.
Prescription Drug Coverage in HDHPs
Most prescription drugs must be paid for out-of-pocket until your deductible is met, unless they fall into the “preventive” category. Preventive medications, such as those for managing chronic conditions, may be covered in full before the deductible applies. Coverage varies by insurer, so always check the list of approved medications under your plan.
Is an HDHP the Right Choice?
HDHPs can work well for healthy individuals who don’t need frequent medical care and want to keep monthly premiums low. They are also appealing for those who want to take advantage of HSA tax benefits.
However, they may not be the best fit for people with chronic conditions, high prescription drug costs, or those who live on tight budgets. Unexpected emergencies, such as a broken bone or sudden illness, can create significant financial strain before insurance kicks in.
Things to Consider Before Choosing an HDHP
HDHPs may be a good option if you:
- Rarely need medical care beyond preventive services
- Don’t take costly medications
- Prefer lower monthly premiums and can save for emergencies
They may not be ideal if you:
- Have ongoing health conditions that require regular treatment
- Need multiple or expensive prescriptions
- Participate in activities where injuries are common
- Struggle to cover large out-of-pocket expenses
Next Steps
Before committing to an HDHP, review your medical needs, financial situation, and ability to manage unexpected costs. If paired with an HSA, these plans can be a valuable tool, but they’re not the right choice for everyone. Taking the time to compare your options can help you find the best balance between monthly costs and long-term protection.
