What does HDHP mean in Health Insurance
HDHP (High Deductible Health Plan) is a health policy that features low premiums and a high deductible when compared to traditional insurance plans but also falls in line with other established federal guidelines.
Normally, HDHP is combined with a Health Savings Account (HSA), which allows members to save and withdraw funds- tax-free to help pay for qualified medical costs.
Typically, features of an HDHP include:
- Low monthly premiums
- Higher deductibles (IRS sets this at $1,400 a year for individuals and $2,800 for families at a minimum)
- Ability to enroll in an HSA.
How does HDHP work
HDHP Basic Steps:
| 1 | Enroll and pay monthly premiums | Member pays premium after enrollment. This is the amount that’s paid each month for the insurance coverage. |
| 2 | Meet the deductible | Any time a member seeks medical attention, they pay for eligible charges up to the annual limit before the plan kicks in (HDHP will only start paying after you meet the full annual deductibles).
Please note:
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| 3 | Pay any copayments | This is a fixed-dollar payment made by a member for each visit to a doctor, treatment, test, prescription, etc. For example, you might pay $35 for every office visit and $50 for a test.
Also note:
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| 4 | Pay coinsurance | A % of medical charges paid by a member per medical visit (after you meet the deductibles). For example, you might pay 20 %( for 80/20 coverage) of your medical costs until reaching the out-of-pocket max for the year. |
| 5 | Out-of-Pocket Maximum | The maximum amount (stop loss limit-other than preventive care)that a member pays out of pocket on an annual basis (consists of the deductible, coinsurance, and copayments. The HDHP generally covers 100% of the max amount for the rest of the calendar year once a member reaches the annual out-of-pocket max(In-network providers) |
HDHP eligibility
HDHP is open to anybody but taking part in an HSA Account is limited. As per IRS rules, to join HSA you (the account holder only):
- Must be a member of a Qualified HDHP
- Are Not covered by Health Covered by spousal FSA, Medicare, Tricare, IHS, or a traditional health plan
- Currently not covered by Medicare A or B
- Are Not listed as a dependent on a current tax return
- Not enjoying a VA for a non-service-related injury
HDHP benefits
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For Young and Healthy People
They seldom use the health system except for preventative care (well visits and immunizations-fully covered by HDHPs). Enrolling in a traditional health plan might be an overkill and hence a waste of premiums. These funds can be easily channeled into an HSA to get a head start on saving for retirement.
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Families
They can save up to $7,200 in your HSA every year. Please note, that these funds do not expire so you’re major visits are for well-visits and immunizations. These funds can help boost your nest egg over the years. Invest these funds in the market or in an HSAs (covers any dependent whether it’s a family HDHP or an individual HDHP)
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Couples/individuals nearing retirement
Research estimates show that an average 65-year-old couple on retirement spends over $200k on healthcare alone! Preemptive tax-free contributions to an HSA (plus catch-ups) that grow (and withdraw) tax-free will go a long way in catering to these health-related costs in the future.
HDHP deduction
These are the amounts paid by a member before health insurance coverage kicks in.
Deductibles typically expire or are renewed over every plan year.
The IRS has minimum rules for HDHP deductibles, which are adjusted annually. As of 2022, the minimum deductibles were:
| Individual | Family | |||
| 2021 | 2022 | 2021 | 2022 | |
| Minimum annual deductible(≥) | $1,400 | $1,400 | $2,800 | $2,800 |
| Out-of-pocket maximum(≥) | $7,000 | $7,050 | $14,000 | $14,100 |
Embedded deductible
Certain HDHPs have embedded deductibles (multiple deductibles). For such plans, the lowest deductible is used to determine if the HDHP meets the IRS requirements for a qualified HSA.
A member can set a lower deductible aside for themselves, totally different from the family’s total deductible i.e. the specific family member need to meet the full family plan deductible before their health insurance payments kick in.
Please note, should either the deductible for the entire family or the deductible for an individual fall below the minimum annual IRS sanctioned deductibles for families, then the plan is not an HSA-qualified HDHP.
Carry-over deductible
Some health plans allow members to carry over or apply medical costs from the last three months of the current year to the following year’s deductible. After this portion is borne by the member, the coverage kicks in to cater for the remaining cost up to the policy limits.
This is not an IRS requirement, but rather an added benefit when costs pile up late in the year. Please note, that carry-over deductibles may lead to your HDHP losing HSA eligibility.
HDHP requirements| HDHP with HSA plan
Please note not all HDHP are HSA-qualified.
HDHPs and HSAs make a great pair and complement one another. Once the HDHP coverage begins, a member can thereby open an HSA and immediately start contributions.
If the coverage began any time before the 1st of December, IRS allows maximum contributions, and the fund are immediately available for use.
HDPS plans will only be eligible if they meet the three conditions below;
- Have a higher deductible than traditional insurance plans.
- Meet the IRS requirements on Annual Maximum deductibles (on medical costs, Co-pays, and Coinsurance).
Coverage is only available after the deductible is met. However, there are exceptions for:
- Health insurance premiums
- Long-term-care premiums
- Dental costs
- Vision costs
How to know if I have an HDHP
Characteristics of an HDHP
- It adheres to the statutorily prescribed minimum deductible and maximum out-of-pocket limits.
- HDHPs do not pay any medical costs until the stated deductibles are met.
- The only exception to the deductible rule is when it comes to preventive care.
Preventive Care
IRS has provided guidance (“safe harbor”) on the scope of preventive care. It includes:
- Routine health tests and examinations e.g. annual physicals,
- Prenatal and Antenatal care,
- Immunizations both for children and adults,
- Programs designed to help quit Tobacco use,
- Weight loss programs and,
- Specific screening services (See IRS new guidelines).
In 2020, IRS issued guidelines for HDHPs on COVID-19 testing and treatment to ensure treatment is available before you meet the plan’s deductibles.
Services intended to treat pre-existing cases like injury or illnesses do not under Preventive care.
HDHP or PPO
A preferred provider organization (PPO) is characteristically defined by;
- lower or no deductibles and out of pocket
- Higher monthly premiums–typically come highest premiums compared to all health insurance options
- Inability to contribute to an HSA
- No provider limitations or restrictions
- The majority of preventative care is 100% covered prior to meeting the deductibles
PPOs do come with a wider group of in-network of medical providers and hospitals (with deeply negotiated rates). An option for out-of-network providers is available, though at lower coverage.
HDHPs can easily be structured to mimic a PPO by offering the same flexibility when choosing providers and out-of-network coverage (although at lower levels), and also offer the same freedom to choose specialists without a referral.
Please note that HDHPs structured as PPOs do not require members to choose a primary care provider but might need the provider’s referral when getting certain tests and services e.g. MRIs.
The choice of HHP or PPO should be based on your answers to the following questions;
Are you a frequent visitor to the Doctor?
If yes, Choose the PPO. HDHP plan won’t be suitable because it has higher deductibles, and the co-payment only applies to higher payments.
PPO plan makes sense due to its lower deductibles that can easily take care of frequent doctor visits. Also, your employer’s copayment will kick in sooner.
Do you suffer from any Chronic Condition?
Choose an HDHP with HSA if the answer is yes. Automatically your monthly doctor charges will be higher than the plan’s deductible.
If for any reason the overall monthly doctor charges do not exceed your deductibles, then gun for the PPO plan. This way, even smaller doctor charges will be taken care of by the PPO, and you will not be charged higher premiums.
Are you a frequent ER user?
If this happens frequently, an HDHP plan with an HSA is the best choice. However, if the chances are low and you are worried about paying out-of-pocket costs, then the PPO plan is more suitable.
Costly Surgery or operation Coming Up?
If you have a planned surgery within the next coming year, then an HDHP plan with an HSA is preferable This is because it offers higher deductibles but will make sure high medical bills are taken care of without hassles.
Planning for a baby?
Just married or expecting a baby? An HDHP with an HSA plan is way suitable for covering pre-natal and the baby’s medical costs.
Also if you plan to raise a family in a few coming years, take advantage of the HSA associated with the HDHP plan as it has higher deductibles and a wider pool of medical benefits for the member and their family.
Spouse’s or Childs’s Medical Costs?
If you are paying alimony or other medical costs for your kid or ex-wife then HDHP is best for catering to the high medical costs.
Save up and invest in the HSA tax-free. These funds will in the future help in taking care of your child or spouse’s medical costs.
HDHP employer contribution
If the employer provides an HDHP as an employee benefit, members might be eligible for employer matches in an HSA.
Please note that Employers are under no obligation to fund their employees’ HSAs.
Bottom line
Do not sign up for an HDHP if you can’t afford to cover the deductibles or copays. This will lead to big trouble.
If your employer is offering HDHP with an HSA, please consider:
- If the employer matches your HSA? Is it enough to cover the deductible and any coinsurance?
- Can your paycheck allow savings to an HSA?
- Does the HDHP come with HSA? Are my emergency funds enough to cover the deductible?
If you have a solid answer to the above, you are good to go.
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