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What is a high-deductible health plan?

Key takeaways

What is a high-deductible health plan?

In lay terms, a high-deductible health plan could simply be considered a policy with a high deductible. But the term “high-deductible health plan,” or HDHP, is specific to plans that not only have high deductibles, but also conform to other established federal guidelines.

Can I combine a high-deductible health plan with an HSA?

Yes. HDHPs are the only plans that allow an enrollee to contribute to a health savings account (HSA). High-deductible insurance is considered a type of consumer-driven health plan, so you may hear the term CDHP used in conjunction with these plans. The idea is to give patients control over how to spend and invest their money.

HDHPs cover certain preventive care before the deductible – the ACA requires this of all plans – but under an HDHP, no other services can be paid for by the health plan until the insured has met the deductible. That means HDHPs cannot have copays for office visits or prescriptions prior to the deductible being met (as opposed to a plan that’s got a high deductible but also offers copays for office visits from the get-go; people might generally consider the latter to be a high deductible plan, but it’s not an HDHP).

In 2020, to address the COVID-19 pandemic, the IRS issued guidelines that allow HDHPs to pay for COVID-19 testing and treatment before the member has met the deductible. Federal rules require virtually all health plans, including HDHPs, to cover COVID-19 testing with no cost-sharing. But it’s optional for insurers to cover treatment with no cost-sharing, so this varies from one insurer to another (many insurers waived COVID treatment costs for several months in 2020, but virtually all insurers stopped doing this once COVID vaccines became widely available in early 2021).

And the IRS also issued new guidelines in mid-2019, expanding the list of preventive services that can be covered pre-deductible on an HDHP, with enrollees retaining their HSA eligibility. The new rules allow certain treatments related to certain chronic conditions to be classified as preventive care for HDHP purposes. These include:

  • Congestive heart failure or coronary artery disease: ACE inhibitors and/or beta blockers
  • Heart disease: Statins and LDL cholesterol testing
  • Hypertension: Blood pressure monitor
  • Diabetes: ACE inhibitors, insulin or other glucose-lowering agents, retinopathy screening, glucometer, hemoglobin A1c testing, and statins
  • Asthma: Inhalers and peak flow meters
  • Osteoporosis or osteopenia: Anti-resorptive therapy
  • Liver disease or bleeding disorders: International Normalized Ratio (INR) testing
  • Depression: Selective Serotonin Reuptake Inhibitors (SSRIs)

The IRS does not consider male contraception to be preventive care, but some states have begun mandating male contraceptive coverage on all plans. The IRS is considering new rules on this, but through the end of 2019, the IRS still considered a plan to be HSA-qualified if it covered male contraception before the deductible. That gave states time to modify their requirements to allow an exemption for HSA-qualified plans, in order to ensure that the male contraceptive mandates wouldn’t cause people to lose the ability to contribute to an HSA.

So with an HDHP, you’ll have to pay out-of-pocket for everything other than preventive care until you hit your deductible (as noted above, there are exceptions for COVID-19 testing and treatment, and the list of allowable preventive care benefits that can be covered pre-deductible by HDHPs is more extensive than the regular list of preventive care benefits that are required to be covered with no cost-sharing by all plans). After that, the insurance will pay benefits based on the plan’s coinsurance level (many HDHPs have 100% coverage after the deductible).

Minimum deductibles and maximum out-of-pocket

HDHPs have specific guidelines in terms of allowable deductibles and out-of-pocket costs. These are adjusted annually by the IRS, although there have been some years when there were no changes.

For 2021 coverage, the minimum deductibles for HDHPs are unchanged from 2020, at $1,400 for an individual, $2,800 for a family. But the maximum allowable out-of-pocket caps increased to $7,000 for an individual and $14,000 for a family. Note that this is quite a bit lower than the total out-of-pocket allowed on non-HDHPs under the ACA; the gap between the maximum allowable out-of-pocket limit for HDHPs versus other health plans has been steadily widening since the ACA was implemented.

For 2022, the minimum deductibles are again unchanged, at $1,400 and $2,800, respectively. But the HDHP maximum out-of-pocket has increased again, to $7,050 for an individual and $14,100 for a family.

But not all plans that fall within these dollar limit guidelines are HDHPs, since HDHPs are also required to only cover non-preventive services after the enrollee has met the deductible.

HSA contribution limits

To help pay these out-of-pocket costs, it’s both wise and typical to pair your high-deductible plan with a health savings account (HSA).

For 2021, the contribution limits are $3,600 for an individual and $7,200 for a family (note that “family” status under an HDHP just means that at least one additional family member is covered along with the policyholder; it does not have to include the entire family). People who had HDHP coverage in 2021 have until April 15, 2022 to contribute to their HSA for 2021.

For 2022, the contributions limits grew to $3,650 for an individual and $7,300 for a family.

If you’re 55 or older, you can contribute an extra $1,000 a year. This amount is not indexed for inflation.

The money that you contribute to an HSA will reduce your ACA-specific modified adjusted gross income – or MAGI – (which determines your eligibility for premium subsidies in the exchange). In some cases, selecting an HDHP and contributing to an HSA could result in larger premium subsidies than you’d otherwise receive.

Although the American Rescue Plan has temporarily eliminated the ACA’s subsidy cliff, subsidies are still not available if the cost of the benchmark plan (second-lowest-cost silver plan) is less than 8.5% of your MAGI. So reducing your MAGI with HSA contributions could also result in subsidies when you might not otherwise be eligible for them.

How can HSA funds be used?

This money in your HSA is yours to withdraw, tax-free, at any time, to pay for medical expenses that aren’t covered by your high-deductible policy. You can reimburse yourself after the fact if you prefer – so if you incur a medical expense in 2021 but pay for it without withdrawing money from your HSA, you can opt to reimburse yourself for that spending several years down the road, as long as you keep your receipts.

If you take money out of your HSA for anything other than a qualified medical expense, you’ll pay taxes on the withdrawal, plus a penalty. But once you turn 65, the HSA functions in much the same way as a traditional IRA: you can pull money out for any purpose, paying only income taxes, but no penalty.

You also have the option to just keep the money in the HSA and use it to fund long-term care later in life. The money is never taxed if you’re withdrawing it to pay for qualified medical expenses, even if you’re no longer covered by an HDHP at the time that you make the withdrawals. But contributions to the HSA can only be made while you have in-force coverage under an HDHP.

You can also withdraw money from your HSA to pay Medicare premiums (for Part A, if you don’t get it for free, and for Parts B and D, but not for Medigap plans), or to pay long-term care premiums. There are limits, based on age, on how much you can pull out of your HSA to pay long-term care insurance premiums with pre-tax money (the following limits are for 2022; they’re indexed for inflation each year by the IRS). If your age is:

  • 40 or younger, you can withdraw $450 tax-free to pay long-term care insurance premiums
  • 41 to 50, you can withdraw $850
  • 51 to 60, you can withdraw $1,690
  • 61 to 70, you can withdraw $4,510
  • 71 or older, you can withdraw $5,640

How do HDHP premiums compare to other plans?

In terms of premiums, HDHPs are usually among the lower-cost plans available in a given area, but they’re typically not the least expensive plans. That’s because the rules that govern maximum out-of-pocket costs for HDHPs are different from the rules that govern maximum out-of-pocket costs for all ACA-compliant plans. In 2014, the two were equal: the maximum allowable out-of-pocket for HDHPs was $6,350 for an individual and $12,700 for a family, and those were the same limits that applied to all ACA-compliant plans. So in that year, HDHPs were among the least expensive plans available.

But as time went on, the limits that apply to all ACA-compliant plans climbed faster than the limits that apply to HDHPs. For 2022, HDHPs can have a maximum out-of-pocket of $7,050 for an individual and $14,100 for a family. But the 2022 upper limit for out-of-pocket costs on non-HDHPs is $8,700 for an individual, and $17,400 for a family. So there are non-HDHP plans available that have higher out-of-pocket exposure (and thus lower premiums) than HDHPs.

If being able to contribute to an HSA is a priority for you, you’ll want to focus on the HDHPs available in your area. But if the premium is your primary concern and you don’t plan to contribute to an HSA, you may find less-expensive plans that aren’t HDHPs, and that have higher out-of-pocket exposure than the available HDHPs.

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