high-deductible health plan (HDHP)
DEFINITION: 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.
HDHPs are the only plans that allow an enrollee to contribute to a health savings account (HSA).
HDHPs cover preventive care before the deductible – the ACA requires this of all plans – but under an HDHP, no other benefits are provided 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).
So with an HDHP, you’ll have to pay out-of-pocket for everything other than preventive care until you hit your deductible. After that, the insurance will pay benefits based on the plan’s coinsurance level (many HDHPs have 100 percent coverage after the deductible).
HDHPs have specific guidelines in terms of allowable deductibles and out-of-pocket costs. These are adjusted annually by the IRS. For 2016, HDHPs must have deductibles of at least $1,300 for an individual, and $2,600 for a family. Total out-of-pocket exposure on an HDHP in 2016 cannot exceed $6,550 for an individual, and $13,100 for a family (note that this is lower than the total out-of-pocket allowed on non-HDHPs under the ACA).
To help pay these out of pocket costs, it’s both wise and typical to pair your high-deductible plan with an IRS-qualified health savings account. In 2016, you can make tax-free deposits into this account (even if you take the standard deductions and don’t itemize) of up to $3,350 for individuals or $6,750 for family coverage. If you’re 55 or older, you can contribute an extra $1,000 a year.
This money 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 2016 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 and HDHP at the time that you make the withdrawals. Contributions to the HSA can only be made while you have in-force coverage under an HDHP.
High-deductible insurance is considered a consumer-driven health plan, giving the patients control over how to spend and invest their money.