What Does a High Deductible Health Plan Mean?
Navigate health insurance complexities. Understand High Deductible Health Plans to make informed choices about your coverage and financial well-being.
Understanding health insurance terminology is important for individuals navigating today’s healthcare landscape. A clear grasp of health plan structures and their financial impact helps individuals make informed decisions about coverage options that align with their needs.
Understanding High Deductible Health Plans
A High Deductible Health Plan (HDHP) is a health insurance plan characterized by a higher deductible compared to traditional health insurance options. This means policyholders are responsible for paying a larger amount of their medical costs out of pocket before the insurance coverage begins. For 2025, an HDHP must have a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage. These deductible thresholds are set by the Internal Revenue Service (IRS) and are subject to annual adjustments.
The deductible represents the initial sum a policyholder must pay for covered healthcare services within a plan year before their insurance company starts to pay. For instance, if an individual has a $2,000 deductible, they would need to pay the first $2,000 of their eligible medical bills before their plan contributes.
How HDHPs Manage Healthcare Costs
After the deductible in an HDHP is satisfied, cost-sharing mechanisms like coinsurance typically come into play. Coinsurance means the insurance plan and the policyholder each pay a percentage of the covered medical expenses. For example, if a plan has an 80/20 coinsurance arrangement, the plan covers 80% of the cost, and the policyholder is responsible for the remaining 20%.
While some traditional plans use copayments, HDHPs generally do not apply copays for most services until after the deductible has been met. For non-preventive care, copayments are often either absent or only apply once the deductible threshold has been reached.
The out-of-pocket maximum caps the total amount a policyholder will pay for covered medical services in a plan year. This maximum includes payments towards the deductible, coinsurance, and any applicable copayments. Once this limit is reached, the health insurance plan typically covers 100% of all further covered medical costs for the remainder of that plan year. For 2025, these limits are set at $8,300 for self-only coverage and $16,600 for family coverage.
Health Savings Accounts and HDHPs
High Deductible Health Plans are often paired with Health Savings Accounts (HSAs), which are tax-advantaged savings accounts designed for qualified medical expenses. An individual must be enrolled in an HDHP to be eligible to contribute to an HSA. This direct relationship allows HDHP enrollees to save and pay for healthcare costs with tax benefits.
HSAs operate as personal savings accounts where funds can be contributed by the individual, an employer, or both. These contributions are made on a pre-tax basis or are tax-deductible, reducing taxable income. Funds in an HSA roll over from year to year, do not expire, and can be invested, allowing the account balance to grow over time through interest or investment returns.
The tax advantages of HSAs extend beyond contributions; earnings within the account grow tax-free, and withdrawals used for qualified medical expenses are also tax-free. For 2025, individuals with self-only HDHP coverage can contribute up to $4,300 to an HSA, while those with family HDHP coverage can contribute up to $8,550. Additionally, individuals aged 55 and older can make an extra “catch-up” contribution of $1,000 annually.
What Qualifies as a Medical Expense
A “qualified medical expense” refers to costs incurred for the diagnosis, cure, mitigation, treatment, or prevention of disease, or for the purpose of affecting any structure or function of the body. These expenses are eligible for payment from an HSA without being subject to taxes, and they count towards meeting an HDHP’s deductible and out-of-pocket maximum. The IRS provides detailed guidance on what constitutes a qualified medical expense.
Common examples of qualified medical expenses include:
Doctor visits
Prescription medications
Hospital stays
Preventive care services
Dental care
Vision care
Certain medical equipment
Treatments like acupuncture, alcoholism treatment, artificial limbs, and medically necessary cosmetic surgery
However, not all health-related expenditures qualify. Expenses that are merely beneficial to general health, such as vitamins or a vacation, are not included. Cosmetic procedures that are not medically necessary, or general health supplements, do not qualify. Refer to IRS Publication 502 for a comprehensive list and specific conditions for eligible expenses.