Open enrollment is a time at the end of the insurance year when you can decide whether you want to keep your health insurance plan or change to a different plan. When you’re deciding what type of health insurance is best for you, you might wonder if you should choose a high-deductible health plan (HDHP).
These plans might save you money. It’s important to understand how they work so you can decide if they’re a good option for you. This guide from Banner Health and Cedar (a health care financial engagement platform) will help you understand their pros and cons.
What is a high-deductible health plan?
HDHPs are health insurance plans that have lower premiums. So you don’t pay as much for your health insurance every month, but you must pay more out-of-pocket for your medical costs before your insurance kicks in. “That’s where the ‘high-deductible’ part comes in,” said Emily Phillips, commercial insurance specialist for Cedar.
The deductible is the amount of money you must pay for your medical bills before your insurance pays. In an HDHP, the deductible is $1,400 or more for individuals and $2,800 or more for families.
For example: If you have an HDHP with a $2,000 deductible, you must pay the first $2,000 of your medical bills in a year. You could be responsible for expenses such as:
- A $200 bill for a doctor’s appointment
- A $200 bill for lab tests
- A $100 bill for a prescription medication
- A $500 bill for two visits to a specialist
- A $1,000 bill for an imaging test
Once you’ve paid that $2,000 to cover your deductible, your insurance starts sharing the costs with you until you reach your out-of-pocket maximum.
HDHPs pay for preventive care
With an HDHP, your insurance still covers preventive care. Preventive care is care that helps you stay healthy, like annual check-ups, vaccinations, cancer screenings like mammograms or some lab tests. It’s a way of looking for possible health problems early when they are more likely to be less serious and easier to treat.
“You can manage your health and help avoid future health problems,” Phillips said.
If you choose an HDHP, check the guidelines and recommendations for preventive care. Be sure to schedule your annual check-ups and recommended screenings.
How a health savings account can help with costs
The main downside of HDHPs is the high deductibles. If you have unexpected medical bills, it could be a challenge to pay them, so you’ll need to budget for possible health care costs. A health savings account (HSA) can help you do this more effectively.
An HSA is a special savings account that can help you save on medical expenses. You can only contribute to an HSA if you have a high-deductible health plan. You, your employer or both can put money into your HSA. You can use the money in it when you have to pay for doctors’ appointments, prescription medication, hospital bills or other costs.
Plus, with HSAs, you also get three types of tax benefits (sometimes called a triple-tax advantage):
- Your contributions are tax-deductible. That means you can deduct the amount you put into an HSA from your taxable income. So you might owe less in taxes when you file your tax return. For example: If your taxable income is $50,000 and you put $2,000 into your HSA, you’re only taxed on $48,000.
- When you need to withdraw from your HSA to pay for medical expenses, you usually don’t have to pay taxes on this money.
- You can invest the money you put in your HSA the same way you can invest in a 401(k) or an IRA. The earnings from your HSA investments are usually tax-free, as long as you use them for medical expenses.
Your HSA belongs to you. It’s not tied to your job or health plan. You can use it to manage your health expenses over the long term. The money you put into it can stay there from year to year. You don’t have to spend it by a certain time.
How to decide if an HDHP is right for you
If you are thinking about enrolling in a high-deductible health plan, you’ll want to estimate your health care expenses and look at your finances. Here are some points to consider:
- Your past health care expenses: What did you spend on doctor visits, prescriptions, medical procedures and other costs last year? Do you expect these costs to increase, decrease or stay the same?
- Your overall health: Are you healthy, for the most part? Or do you have conditions where you need regular medical care over the long term?
- Your expected expenses: Do you think you’ll have any major health care expenses in the next year? For example: Are you planning to have a baby, have joint replacement surgery or need medical treatment for obesity?
- Your monthly budget: Can you pay the high deductible if you need to?
- Your emergency fund: Do you have enough money set aside to cover unexpected medical expenses?
- Your income: Do you have money you can contribute to a health savings account?
A high-deductible health plan might be a good option if you’re generally healthy, don’t expect to need much medical care and have enough savings or income to cover the deductible. With the lower premiums, you might save money. HDHPs could be a good fit for:
- Young adults who are relatively healthy and can save in an has.
- Healthy retirees who can use the HDHP to cover costs Medicare doesn’t pay for.
- People who want to benefit from the tax savings of an HSA and can afford the high deductibles.
If you expect to need a lot of medical care, you’ll want to estimate those expenses and see if an HDHP works out for you. A preferred provider organization (PPO) or health maintenance organization (HMO) might be a better fit for:
- People with chronic (ongoing) health conditions or people who need to see specialists on a regular basis.
- People who expect to have high medical costs in the next year.
- People who would rather have an HMO or PPO with a large network of doctors, specialists and hospitals.
- People who don’t want the risk of having to pay a high deductible.
- People who can’t afford a high deductible.
It can be hard to figure out which plan is best for you and your situation. It may help to talk to:
- Human resources (HR): They can help you understand how an HDHP works with the rest of your benefits.
- A financial advisor: They can explain the tax benefits of an HSA and see whether an HDHP works with your long-term goals.
- Your doctor and any specialists: They can help you figure out what type of medical care you might need in the next year.
The bottom line
High-deductible health plans (HDHPs) are health insurance plans where you pay lower premiums in exchange for higher deductibles. You can pair them with health savings accounts (HSAs) to make it easier to pay for your medical expenses.
HDHPs are good choices for some people. You need to look closely at your health expenses and your finances to see if an HDHP is right for you.
