Health Insurance

What Is A HDHP

By David Krug David Krug is the CEO & President of Bankovia. He's a lifelong expat who has lived in the Philippines, Mexico, Thailand, and Colombia. When he's not reading about cryptocurrencies, he's researching the latest personal finance software. 9 minute read

Having health insurance is one of those necessities that no one wants to think about. Having to utilize your insurance plan usually means you’re in need of it because of an illness or injury, which can add up to a hefty bill.

Many various kinds of health insurance exist, and they all have their advantages and disadvantages. A high-deductible health plan may be the best option for you if you’re seeking a low monthly premium. Don’t get into a high-deductible health plan without first learning its ins and outs.

What Is a High-Deductible Health Plan (HDHP)?

The government has designated a certain category of health insurance plans as high-deductible health plans (HDHPs). The monthly premiums for these plans are often significantly lower than those of other insurance types, but the deductibles you’ll have to pay out of pocket for medical care are much greater.

Important Elements of High-Deductible Health Plans

Some of the benefits of high-deductible health plans include the following.

The Monthly Premium

When comparing insurance products, a lot of people look at the monthly payment first. Each month, you will be charged a sum known as the premium for the insurance.

An HDHP cost an average of $6,791 per year for a person and $19,527 per year for a family in 2018. This is equivalent to $1,627.25 per month, or $565.92 per week. Preferred provider organization (PPO) plans, on the other hand, had yearly premium averages of $7,149 for individuals and $20,324 for families.

As monthly payments for workplace insurance are typically less than this due to employer contributions, it’s important to keep this in mind. In some cases, the price for an HDHP might be as low as half of the premium for another type of health insurance after the employer’s contribution.

The High Deductibles

A larger deductible is the trade-off for reduced monthly premiums in high-deductible health plans (HDHPs). When an insurance policy kicks in, it does so after the policyholder has paid a deductible. The deductible is applied to all of your out-of-pocket healthcare costs in a given year.

Your insurance company will start paying for your medical expenses after your yearly deductible has been met, though you may have to pay a copayment or a percentage of the bill.

Some insurance has variable deductibles for various services. An insurance plan’s prescription drug coverage, for instance, may have its own deductible. In 2020, a high-deductible health plan is defined as one with an individual deductible of at least $1,400 or a family deductible of at least $2,800.

The Out-of-Pocket Maximum

The maximum amount you’ll have to pay out of pocket is different for each plan. You are only responsible for this much in annual medical expenses, at least in theory.

After meeting your deductible, most insurance plans still require you to pay a copayment or share of the cost of your care (called coinsurance). If you have 10% coinsurance and surgery costs $1,000, your insurance will pay for $900 of the cost and you will be responsible for the remaining $100.

The insured person is responsible for paying nothing for covered services until the deductible has been met for the year. This in no way absolves you from further medical costs in the remaining months of the year. 

Some expenses, such as those incurred for treatment received outside of your insurance plan’s network or for treatment that exceeds the maximum allowed cost by your policy, may still be your responsibility.

However, it is vital to be aware of the plan’s out-of-pocket limit so that you have an idea of how much you could have to pay in the event of a catastrophic event.

Individual plans in 2020 may not include deductibles or copayments that total more than $8,150. There is a limit of $16,300 per year for a family in terms of out-of-pocket expenses.

Accounts for Savings in Health

Health savings accounts (HSAs) can be opened with companies like Lively if you sign up for an HDHP. The large deductibles associated with HDHPs can be costly, but HSAs are a tax-advantaged way to save up for that expense.

Similar to a traditional IRA or 401(k), health savings accounts (HSAs) allow you to deduct contributions made during the tax year in which they were made (k).

However, you won’t have to pay taxes on withdrawals from the account if you use the money for healthcare costs. Because of this, the account enjoys double the tax benefits of a traditional retirement savings plan.

The downside is that you may usually only use the funds from your HSA for qualified medical costs. The penalty for early withdrawal is 20% of the withdrawal amount, in addition to income tax on the withdrawal amount.

The funds in your HSA are completely yours, unlike flexible spending accounts (FSAs) that consumers with other health plans can use to set aside money for future medical expenses. Your donations will remain in the account when the calendar year ends. A Health Savings Account (HSA) is a tax-favored savings account that allows you to gradually amass funds over time.

After reaching age 65, HSA holders can access their funds for purposes other than healthcare. Unlike a regular IRA or 401(k), a health savings account (HSA) is not subject to an early withdrawal penalty if the funds are withdrawn before age 65. (k).

If you don’t end up using the funds for medical bills, your HSA can function as a second retirement account.

The Advantages Of High-Deductible Health Plans

As you can see, there are several advantages to having an HDHP.

  1. Lower Regular Premiums. HDHPs have cheaper monthly premiums. That’ll put a little extra cash in your monthly budget. A higher deductible may seem like a waste of money, but if you don’t have a lot of medical bills, it ends up being net savings.
  2. Use of a Health Savings Account (HSA). An attractive feature of HDHPs is the opportunity to contribute to a health savings account. A health savings account (HSA) is a type of retirement account that allows you to withdraw funds for purposes other than healthcare once you reach the age of 65. If you’ve already contributed the maximum to your 401(k) and IRA, you can put any remaining money into an HSA to save on taxes.
  3. Maximum Amount You’ll Have to Pay Personally. Each insurance plan, including HDHPs, must have an out-of-pocket maximum in order to comply with the Affordable Care Act. There is a cap on how much you will have to pay for health care, even though your deductible is quite high.

The Disadvantages of High-Deductible Health Plans

It is essential to understand the disadvantages of high-deductible health plans before signing up.

  1. Potentially Higher Expenses. In the event of an illness or injury, you will be responsible for the deductible amount before your insurance company begins to pay for your treatment. A greater deductible can increase the amount of money you’re responsible for paying out of pocket before your insurance kicks in.
  2. Results that Last for Years on Your Health. There is a risk of disregarding minor ailments if you have a high-deductible health plan (HDHP) because of the high cost of treatment. If minor health issues are ignored, they may grow into major ones and compromise a person’s health in the long run.

When Is Using a High-Deductible Health Plan a Good Idea?

While a high-deductible health plan isn’t always the best option, there are times when it makes the most sense.

3. You Are Young And In Good Health.

Getting a high-deductible health plan may be a good idea if you’re young and healthy. Think about the circumstances of a person in their mid-twenties. They don’t partake in dangerous hobbies or activities like extreme sports and they don’t use any medications on a daily basis. 

They are required to obtain a checkup and flu vaccination once a year but are not required to receive any other medical attention.

A high-deductible health plan (HDHP) might be cost-effective in this case. Preventive care, such as checkups once a year, is often still covered by HDHPs. If this describes you, you may be able to take advantage of the lower rates offered by HDHPs without incurring any out-of-pocket costs at all.

2. Your Medical Expenses Are Consistently High.

Surprisingly, if you’re severely unwell, an HDHP may also be a bargain. You might be hesitant to invest in an HDHP if you have a history of frequent hospitalizations or require pricey ongoing medical treatment. 

Insurance plans must have out-of-pocket maximums, but these maximums can’t be too high because they’re capped by law. Whether a plan has a large deductible or none at all, the limit remains the same.

If you frequently reach your health insurance plan’s out-of-pocket maximum, switching to an HDHP is unlikely to impact the total amount you spend on healthcare each year, but it may lower your premium payments. In addition to the ability to save more money, you can take advantage of tax breaks by using an HSA.

3. You Have Savings for Emergencies

To some extent, you can use a high-deductible health plan (HDHP) without worrying too much if anything unexpected happens. In the event of an accident or illness not covered by insurance, you can use your savings to pay the deductible.

In order to pay the higher deductible, those who do not have an emergency fund may need to borrow money. Loan fees and interest can quickly make this option prohibitively expensive, nullifying any savings from cheaper premiums.

A person who is thinking about getting an HDHP should save up at least enough money to pay the deductible in case of an unexpected medical bill. Maximum out-of-pocket costs associated with the plan should be affordable.

Replacements for High-Deductible Health Plans

These are some options for high-deductible health plans that you should examine.

Common Medical Coverage To Your State’s Online Market

If you are below a certain income threshold, the Affordable Care Act (ACA) will provide you with financial assistance to help you pay for health insurance through your state’s insurance exchange. Reasonable Care Act subsidies may make alternative policies more affordable if the low monthly cost of an HDHP is the key factor in your decision.

If your annual household income is less than 400% of your state’s poverty level, you may be eligible for a subsidy, the amount of which will vary depending on both your state and your income. If your annual income is less than $51,040, you may qualify for a subsidy because the poverty level for a single individual in the continental United States is $12,760 in 2020.

The federal poverty line is now set at $13,820 per year for a family of four, while in Alaska it is $15,950 and in Hawaii, it is $14,680, hence the maximum income to get a subsidy in those states is $63,800, and $58,720, respectively.

Medicaid

Medicaid is a health care program that provides low- or no-cost coverage to those who qualify based on their income level. While the specific eligibility standards may differ from state to state, in most cases, if your household income is at or below 133% of the federal poverty threshold, you will be considered low-income and so eligible. You can apply for Medicaid or healthcare.gov if you believe you are eligible.

The Cost-Sharing Programs

Programs that share the cost of healthcare expenses are an alternative to full health insurance. Organizations like Medi-Share that pool their members’ medical costs are not insurance companies, although they do function in a similar fashion.

Participants in a cost-sharing scheme often contribute the same monthly amount as the rest of the group’s members. The pooled funds from the program’s members are used to cover medical costs. Keep in mind that there are substantial distinctions between regular insurance and cost-sharing schemes.

One key distinction between insurance and cost-sharing plans is that the latter is under no legal obligation to do so. There may be little you can do if the cost-sharing plan refuses to help cover your medical expenses, either because it has the finances to do so or because it just does not want to.

In addition, unlike insurance policies, these plans are not required to cover people with previous conditions, so it may be difficult to locate one that would cover you if you have a costly medical condition.

Not only that, but many cost-sharing plans have religious requirements, such as membership in a specific faith or adherence to specific religious tenets. It’s possible that the plan’s willingness to cover a given treatment modality will change as a result of these guidelines. 

For instance, many health insurance plans founded on religious beliefs do not pay for contraception. They might say no to insuring someone who smokes or drinks alcohol, for example, because those behaviors go against their religious beliefs.

Bottom Line

Having health insurance is essential, but it may be difficult to navigate. A high-deductible health plan (HDHP) is a good way to save money and qualify for a health savings account (HSA) if you are healthy and have money set aside for emergencies.

In the future, HSAs may rank among the most advantageous financial vehicles available to Americans. Profiting from your HSA’s tax advantages through the use of cutting-edge methods can have a significant impact on your financial situation.

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