Who Should Consider A High Deductible Health Plan?
What is a High Deductible Health Plan?
A High Deductible Health Plan (HDHP) is a government Marketplace health plan with an annual deductible of at least $1,400 for an individual or $2,800 for a family. For 2021, the maximum out-of-pocket costs are $7,000 for an individual and $14,000 for a family.
Because of the high deductibles on these plans, the government provides tax-advantaged methods for paying out-of-pocket expenses. These include a Health Savings Account (HSA) or a Health Reimbursement Arrangement (HRA).
Note that the maximum annual out-of-pocket for a Marketplace plan is $8,550 for an individual and $17,100 for a family for 2021.
The main benefit of an HDHP is its lower monthly premium. Having an HSA allows saving pretax dollars to pay for expenses that fall within the deductible. Once the deductible is reached, the health plan takes over paying additional expenses.
An HSA doesn’t lock money into just a cash deposit account. Depending on the specific HSA features, participants invest funds in stocks, mutual funds, ETFs and more. Some HSAs can even be transitioned to a self-directed HSA, which allows for a wider variety of investments. Even if the money in the HSA isn’t being spent, it can still be utilized to potentially generate better returns than a savings account.
HSAs also provide some discretion on how funds can be used. Qualified medical expenses cover a broad range. However, HSA funds cannot be used to pay health plan premiums.
Some employers will provide a match for HSAs. Just like a 401(k) match, this is free money for the individual and goes towards paying the annual deductible, if needed. If the funds aren’t used during the year, they roll over to the next year. Assuming low medical expenses, the consistent rolling over of HSA funds will get closer and closer to equaling the full deductible amount.
All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
The largest drawback of an HDHP is the high deductible. Yes, an HSA with pretax dollars can provide some cushion. But if the individual has high medical expenses that go over the deductible, they’ll need to come up with several thousand dollars to cover their deductible. For those who aren’t planning ahead, this can be a rude awakening.
A deductible means higher out-of-pocket costs. If medical expenses are higher than expected during the year, those expenses will all be out-of-pocket costs. The lower monthly premium can help offset some of those expenses. But once expenses reach several thousand dollars, the lower premiums will no longer be able to offset them.
Those choosing to go with an HDHP should plan for some years to have higher out-of-pocket costs than others. When expenses are low, the HDHP is a good option. But that doesn’t mean the insured should spend the difference between their cost and the deductible. It’s best to put some of that difference into an HSA for when expenses are unexpectedly high.
HDHPs are best suited for those who don’t have underlying medical conditions or the need for high-cost medical services throughout the year. In other words, they are probably better for younger, healthy people who don’t live a high-risk lifestyle that might require more visits to the hospital.
For the right person, an HDHP can make a lot of sense. Contributing to an HSA provides both a tax benefit and can help pay for qualified medical expenses. Those with higher medical expenses during the year may want to consider a health plan that doesn’t have such a high deductible.
If you’re not sure if a High Deductible Health Plan is right for you, let’s discuss.