Is a High Deductible Health Plan (HDHP) a good option for me?
What is a High Deductible Health Plan (HDHP)?
An HDHP, or High Deductible Health Plan, is a type of health insurance plan that has a higher deductible and lower premiums, compared to traditional health insurance plans. With an HDHP you are eligible to set up a Health Savings Account (HSA), allowing you to save pre-tax dollars to cover qualified medical expenses.
Having a higher deductible means that you pay for more of your medical costs yourself before your insurance starts picking up the bill. Meanwhile, the lower premiums (the amount you pay monthly to maintain your policy, regardless of whether you need medical care or not) mean that the monthly cost to maintain this policy is much lower than with traditional health insurance plans.
With an HDHP you will pay less to the insurance company but you will pay more to your medical providers when you need care.
You may wonder why you’d bother having a health insurance plan at all if you are still on the hook for most of your medical expenses. With an HDHP there is a cap to how much you will have to pay. So the real value of having an HDHP is the protection against catastrophic levels of financial costs. If you are hit by a bus and need multiple surgeries, weeks in the hospital, and months of physical therapy, it’s going to cost you hundreds of thousands of dollars if you are uninsured.
Even if you fully recover from the bus accident, suddenly owing hundreds of thousands in medical bills would be a life-altering event. If you have an HDHP, you will only owe as much as your out-of-pocket maximum. While a $5,000 bill may be stressful, it doesn't have the lifelong impact that a $500,000 bill does.
How do typical health insurance policies work?
With most health insurance policies, you have to pay your full medical costs until you meet your annual deductible (you pay the bill, not your insurance). Once you’ve reached your deductible, your insurance will cover the bulk of the medical expenses, but you will typically still pay a co-pay (flat amount for certain types of services) or co-insurance (a certain % of the amount billed by the provider). Then, once you’ve hit your out-of-pocket maximum (this includes the amount spent towards your deductible + your co-pay/co-insurance costs) your insurance will cover your remaining expenses in full.
The specific dollar amounts will vary greatly, but this might look like this:
Sample of a hypothetical PPO Plan cost breakdown
With this sample plan, you are paying a minimum of $6,000 (monthly $500 premium x 12) even if you never get sick. And if you are hit by a bus, you will pay a total of $8,000* ($6k premiums + $500 deductible + $1,500 in co-insurance).
How is an HDHP different?
The framework of an HDHP is the same, but the numbers are very different. The premiums are lower, but the deductible and out-of-pocket maximums are significantly higher
In this case, you could pay as low as $1,200 (monthly $100 premium x 12) if you have no medical costs. Or, if you are hit by that bus, you are paying $8,200* ($1,200 premiums + $7,000 out-of-pocket max).
*Assuming all of your medical care is in-network.
Who is an HDHP best for?
If you have minimal medical expenses, an HDHP may cost you significantly less than a traditional plan, while still protecting you from potential financial ruin in the case of a major medical event.
If you have moderate/high medical expenses or just want to be prepared in case you have more medical costs than expected, an HDHP might still be a good option for you. There are a number of factors to look at when considering if an HDHP makes sense for you.
Factors to consider:
Value of specific plans available to you
Calculating the lowest and highest potential costs
Cashflow volatility/larger one-off bills
Avoiding medical care due to out-of-pocket costs
Value of plans available to you
There is so much variation between policies available to different individuals. This makes it really hard to provide standard advice.
You may work for a company that offers a range of options, and based on what policies the employer has negotiated with the provider and the amount your employer subsidizes towards the premium, the top-tier PPO may be the best value for you. Then when you move to another company or if you become self-employed and need to get insurance on the open market, you’ll have access to different policies and may find that an HDHP is now the best value for you. To make the best choice, it does require spending a little time reviewing the options available to map out the likely costs.
Employers will sometimes contribute towards an employee's FSA or HSA if they are on a lower-tiered, or HDHP, plan as a way to incentivize employees to pick certain plans. So it’s important to understand the cost of your various plan options, any incentives from your employer as well as the cost/co-pay for any specific type of care/prescriptions you anticipate needing.
Cash flow volatility
On an HDHP you have lower monthly premiums, but you will be paying for most of your medical care yourself (until you reach your out-of-pocket maximum). Having these irregular spikes in your expenses can make it much harder to plan for. Some people may opt for a traditional plan, even if it is likely going to cost more on an annual basis if it means they can keep their monthly expenses more predictable.
If you opt for an HDHP, create a plan for how you will cover the costs if a major medical expense does pop up. Even though you may typically have low medical costs, if you have a medical emergency, you don’t want the added stress of not knowing how you will pay the bill.
Having a robust Emergency Fund is one way to prepare for those costs. Another option is a Health Savings Account (HSA).
Calculating the lowest and highest potential costs
When evaluating my available plans, my first step is to calculate the lowest I could pay on each plan. In a year where I have NO medical expenses, how much would I pay? Now I don’t expect this to ever actually pan out in real life, but it’s a good baseline to know.
To find your lowest possible cost, determine your monthly premium and multiply that by 12.
Let’s say you are comparing PPO Plan A, PPO Plan B, and HDHP. On PPO Plan A you’d be paying $7,200 a year in premiums ($600/mo), on PPO Plan B $6,000 ($500/mo) and $1,200 ($100/mo).
Next, you want to calculate what the maximum out-of-pocket amount is on each of the plans. This includes the premiums and your out-of-pocket maximum. Assuming all your medical costs are “in-network”, any costs above this would be covered fully by your insurance**. So if you have a chronic illness, or that bus hits you, this is the most you can expect to pay.
**For the sake of simplicity, we are assuming all costs are “in-network”. But out-of-network costs do happen. So it’s important to understand your plan’s policy on out-of-network costs, and to identify if all of your most likely costs will be considered in-network. If you anticipate some out-of-network expenses, be sure to factor that in as extra expenses to cover outside of these calculations.
Sample of highest and lowest possible in-network medical care cost calculations using HDHP Cost Comparison Tool.
Get a free copy of this HDHP Cost Projection Tool to help you calculate the range of likely medical costs on various health insurance plans available to you
The numbers I’ve used in this example are made up, but they do match the trend that often plays out with the policy options available. You’ll see that in the no-medical-use scenario, the HDHP is by far the cheapest, and in the very-high-medical-use scenario, the total annual costs are all pretty close. In the numerous employer plans I’ve reviewed, the HDHP isn’t always the cheapest in that high-medical-use scenario, but the difference between the available plans is often relatively negligible.
The vast majority of people do have at least some medical expenses each year, so the next step is to figure out what is the most likely amount of care you will need. Looking at past years’ medical expenses is a helpful way to predict future expenses.
Here are some other questions to ask yourself:
Are there any doctors I see on a regular or annual basis?
Do I have any current issues that I know I should seek care for?
Do I have any chronic or recurring issues that may pop up again?
Do I take any prescription medications?
Of course, I don’t know exactly what is in store for me, but based on my own medical history, I typically assume I’m going to have approximately 5 doctors in a year (1 visit to my GP, 1 to my OBGYN, 1 to my Dermatologist, and 2 TBD appointments) and one TBD prescription. Because I’m married with 2 kids, I also make similar projections for my family members.
Next, I make an educated guess of how much those appointments would cost me on the various plans. If you have medical costs that you know are inevitable, you could call the provider and ask what the out-of-pocket price is, or you can just do a quick Google search for a price range. Keep in mind that if you are in a High Cost of Living Area, your prices are likely higher than average.
You’ll want to plug in what those expenses will cost on the different plans, factoring in things like deductibles and co-pays. So if the plan has a deductible, you can assume you are paying for any medical costs (excluding some “preventative care”) in full until that deductible is met. Once the deductible is met, you will typically pay a small portion of the costs, either a flat co-pay amount or a co-insurance percentage of the cost. For this calculation, it doesn’t matter the order you put the expenses in because you are just trying to map out a rough estimate of how things might play out.
After mapping this scenario out, I typically map out a moderately higher-use scenario year. Maybe you find out you are pregnant a few months into the year. Maybe you have a trip to the ER. This scenario is likely to be higher than your “typical” year, but not quite the hit-by-a-bus level of expenses either.
Sample of the projected Average and High medical care cost calculations using HDHP Cost Comparison Tool.
Once you’ve mapped out these various scenarios you should have a better idea of what your medical costs will be on each plan. The first thing to identify is: Which plan is the cheapest for your most realistic estimate? And how does that plan compare if it turns out your medical costs are way higher than expected?
For me, with the plans I have had access to, the HDHP has always been the cheapest in the average years and comes out as roughly a wash in the most expensive years.
Avoiding medical care due to out-of-pocket costs
When trying to decide if a HDHP is right for you, there is a tendency to focus on the potential dollars saved. While this is an important detail, another detail that is sometimes overlooked is the potential impact on your health, or the likelihood of actually seeking medical care.
When you’ve got that weird symptom that’s probably nothing, but maybe you should get it checked out just in case, it’s much easier to justify going when you know it's only going to cost you a $20 co-pay. But when you know it’s going to cost $275 to see a doctor who is probably going to say it’s nothing and that you just need to get more rest or drink more water, it's a little harder to justify. So if you know that the out-of-pocket cost of care is likely to prevent you from seeking care, perhaps a different plan, with a lower deductible is a better fit.
Saving a few hundred or even a few thousand dollars on care now probably isn’t worth it if it means you don’t address underlying medical concerns. Letting medical conditions go untreated can cost you significantly more in the long run.
What is an HSA? How is it different from a FSA?
A Health Savings Account (HSA) is a tax-advantaged savings account specifically for people enrolled in an HDHP. It’s a way for people to save money specifically for medical expenses. Because people on an HDHP typically have more out-of-pocket medical expenses to cover, having a dedicated savings account for medical costs is a great way to ensure you are prepared to cover those, often unpredictable, costs when they do occur.
The money you contribute to an HSA (annual max of $3,850 for individuals or $7,750 for families in 2023) is tax-deductible.
If you currently have a work-sponsored insurance policy (that is not an HDHP), you may be familiar with the Flexible Spending Account (FSA). An HSA and FSA serve a similar purpose, in that they help individuals save for out-of-pocket medical expenses. However, an HSA has a lot more flexibility.
Unlike an FSA, where contributions are lost if not used by the end of the year, with an HSA the money you contribute now can be used immediately, or can be used for eligible expenses many years later. So you don’t have to worry about accidentally overfunding an HSA the way you might with an FSA.
If you have an HSA, you are the account owner (not your employer), so if you change jobs you still retain ownership of the account. You can also have an HSA even if you are self-employed or unemployed.
With an HSA, there is also the option to invest some of your funds in the stock market. Investments made through an HSA are “triple tax-advantaged” which means the money isn’t taxed on the way in, the growth on your investments isn’t taxed, and the money you withdraw isn’t taxed. If you don’t need the money in your HSA to cover medical costs, this can be a great option. I’ll cover more on this in an upcoming article.
The optimal health insurance plan for you depends on so many variables, some of which can only be evaluated in hindsight (once you know what your actual medical care needs were).
In many cases, your annual medical costs will be lower with an HDHP, but it’s important to recognize that seeking the lowest possible cost isn’t always the optimal choice. Having to pay a few hundred dollars every time you visit the doctor may feel more painful than having an equivalent amount automatically deducted from your paycheck to cover your higher monthly premiums. Understanding the numbers is important, but finding a plan that helps you sleep better at night is important too.
To help you better understand the range of medical costs you can expect on your specific plan options, download your copy of the HDHP Cost Comparison Tool now!
