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Understanding How High Deductible Health Plans Work

ByWallstreet Observer

Quick answer

  • High Deductible Health Plans (HDHPs) feature lower monthly premiums but require you to pay more out-of-pocket before insurance coverage kicks in.
  • They are often paired with a Health Savings Account (HSA) for tax-advantaged savings.
  • HDHPs can be cost-effective for individuals or families who are generally healthy and don’t expect frequent medical visits.
  • Understanding your total potential out-of-pocket costs is crucial before enrolling.
  • Carefully assess your healthcare needs and financial situation to determine if an HDHP is the right fit.

What to check first (before you buy or change coverage)

Coverage needs

Before considering any health plan, including an HDHP, take stock of your typical healthcare usage. Do you or your family members have chronic conditions requiring regular doctor visits, specialist care, or ongoing prescriptions? Do you anticipate any surgeries or significant medical procedures in the near future? If your healthcare needs are generally low, an HDHP might be a good option. However, if you foresee substantial medical expenses, a plan with a lower deductible and higher premium might offer better financial predictability.

Deductibles and premiums

The core feature of an HDHP is its high deductible, meaning you’ll pay a significant amount of medical costs yourself before your insurance plan starts to cover a larger portion. In exchange for this higher deductible, HDHPs typically come with lower monthly premiums compared to traditional health insurance plans. It’s vital to understand the specific deductible amount and the monthly premium for any HDHP you are considering. Calculate the total annual cost by adding your annual premiums to the maximum possible deductible to get a clear picture of your potential financial exposure.

Exclusions and limits (general)

Every health insurance plan, including HDHPs, has specific services that are not covered (exclusions) and caps on how much the plan will pay for certain services (limits). It’s essential to review the plan’s Summary of Benefits and Coverage (SBC) to understand what is and isn’t covered. Pay close attention to coverage for essential benefits, prescription drugs, mental health services, and any pre-existing conditions. Knowing these details upfront can prevent unexpected costs and ensure you have the coverage you need.

Claim process

While the claim process is generally similar across most health insurance plans, understanding how it works with an HDHP is important. Typically, healthcare providers will bill your insurance company, and you will be responsible for paying your deductible and any co-insurance until you meet your deductible. If you have an HSA, you can use those funds to pay for qualified medical expenses. Familiarize yourself with how to submit claims if you receive out-of-network care or if a provider doesn’t bill your insurance directly.

Bundling and discounts (general)

Many insurance providers offer discounts for bundling different types of insurance, such as home, auto, and health insurance. While this is a general cost-saving strategy, it’s worth exploring if you are purchasing health insurance independently or through an exchange. Additionally, some employers or insurance plans may offer wellness programs or discounts on gym memberships or preventative care services. Inquire about any available discounts or incentives that could reduce your overall healthcare expenses.

Step-by-step (simple workflow)

Step 1: Assess your current health and expected medical needs

  • What to do: Honestly evaluate your health status and that of your dependents. Consider any chronic conditions, ongoing treatments, and anticipated medical appointments or procedures for the upcoming year.
  • What “good” looks like: You have a clear, realistic understanding of how often you typically use healthcare services and what your potential medical expenses might be.
  • A common mistake and how to avoid it: Underestimating future medical needs due to a recent period of good health. Avoid this by looking at a longer historical average of your healthcare usage, not just the last year.

Step 2: Research available HDHP options

  • What to do: Look for HDHPs offered by your employer, through the Health Insurance Marketplace (Healthcare.gov), or directly from insurance companies.
  • What “good” looks like: You’ve identified several HDHP plans that are available to you, noting their specific deductibles, premiums, and provider networks.
  • A common mistake and how to avoid it: Only looking at one or two options without comparing. Avoid this by casting a wider net and comparing at least three different plans.

Step 3: Understand the deductible and out-of-pocket maximum

  • What to do: Carefully review the Summary of Benefits and Coverage (SBC) for each HDHP. Note the individual and family deductible amounts and the annual out-of-pocket maximum.
  • What “good” looks like: You can clearly state the deductible you must meet and the absolute maximum you would pay in a year for covered services.
  • A common mistake and how to avoid it: Confusing the deductible with the out-of-pocket maximum. Avoid this by reading the SBC definitions for both terms carefully.

Step 4: Calculate your total potential annual cost

  • What to do: Add the annual premium cost (monthly premium x 12) to the highest possible out-of-pocket expense (the out-of-pocket maximum).
  • What “good” looks like: You have a concrete number representing the worst-case financial scenario for your healthcare costs in a year.
  • A common mistake and how to avoid it: Only considering the monthly premium and forgetting the potential for high out-of-pocket spending. Avoid this by performing the full calculation as described.

Step 5: Investigate Health Savings Account (HSA) eligibility and benefits

  • What to do: Confirm if the HDHP is HSA-eligible. Understand the contribution limits, tax advantages (pre-tax contributions, tax-free growth, tax-free withdrawals for qualified medical expenses), and investment options within an HSA.
  • What “good” looks like: You understand how an HSA works, its tax benefits, and how it can help you save for and pay for medical expenses.
  • A common mistake and how to avoid it: Not realizing that you must be enrolled in an HSA-eligible HDHP to contribute to an HSA. Avoid this by confirming HSA eligibility before enrolling in the HDHP.

Step 6: Review the provider network and prescription drug formulary

  • What to do: Check if your preferred doctors, hospitals, and specialists are in the plan’s network. Review the formulary to see if your regular medications are covered and at what tier (which affects cost).
  • What “good” looks like: Your essential healthcare providers are in-network, and your commonly used medications are covered at a reasonable cost.
  • A common mistake and how to avoid it: Assuming all doctors are in-network or that your medications will be covered. Avoid this by actively verifying provider participation and checking the drug formulary.

Step 7: Compare HDHPs with other plan types

  • What to do: If you have options, compare the HDHP’s total potential cost (premiums + max out-of-pocket) against traditional PPO or HMO plans. Consider your risk tolerance for unexpected medical bills.
  • What “good” looks like: You have a clear comparison of the financial implications of different plan types based on your specific circumstances.
  • A common mistake and how to avoid it: Focusing solely on the lower monthly premium of the HDHP without considering the significantly higher potential out-of-pocket costs. Avoid this by comparing total annual costs and considering your risk tolerance.

Step 8: Make your enrollment decision

  • What to do: Based on your research, calculations, and risk assessment, choose the health plan that best aligns with your needs and financial situation.
  • What “good” looks like: You have confidently selected a plan and completed the enrollment process.
  • A common mistake and how to avoid it: Procrastinating and missing the enrollment deadline. Avoid this by starting the research process early and making your decision well before the deadline.

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