What Does It Mean to Have a High Deductible?

A health insurance deductible represents the amount an individual must pay for covered medical services before their insurance plan begins to contribute to costs. This financial responsibility is an annual requirement, resetting at the start of a new plan year. The concept of a “high deductible” refers to plans structured with higher initial out-of-pocket costs before insurance coverage becomes substantial.

Defining a High Deductible

A health plan is classified as a High Deductible Health Plan (HDHP) based on specific annual deductible thresholds established by the Internal Revenue Service (IRS). For the 2025 calendar year, a health plan qualifies as an HDHP if it has a minimum annual deductible of at least $1,650 for self-only coverage or $3,300 for family coverage.

In contrast, many traditional health insurance plans feature lower deductibles, meaning the insured person’s financial responsibility before cost-sharing begins is less. HDHPs also include a maximum limit on the sum of annual deductible and out-of-pocket medical expenses.

How High-Deductible Plans Work

High-deductible health plans operate by requiring the insured individual to pay the full cost of most covered medical services until the annual deductible amount is satisfied. For example, if a plan has a $3,000 deductible, the enrollee is responsible for the first $3,000 in covered medical expenses.

Once the deductible is met, the plan begins to share costs through coinsurance or copayments. Coinsurance is a percentage of the medical bill that the insured person is responsible for, while the insurance company pays the rest. For instance, with an 80/20 coinsurance arrangement, the plan pays 80% of the covered costs, and the individual pays the remaining 20%. This cost-sharing continues until the annual out-of-pocket maximum is reached.

The out-of-pocket maximum is a ceiling on the total amount an individual or family will pay for covered medical services in a plan year. This limit includes deductibles, coinsurance, and copayments, but it does not include monthly premiums. For 2025, the out-of-pocket maximums for HDHPs cannot exceed $8,300 for self-only coverage and $16,600 for family coverage. Once this maximum is reached, the health plan covers 100% of additional covered medical expenses for the remainder of the plan year.

A key feature of HDHPs is that many preventive care services are covered at 100% even before the deductible is met. Individuals can receive services like annual physicals, certain screenings, and immunizations without incurring out-of-pocket costs. HDHPs often have lower monthly premiums compared to plans with lower deductibles.

Understanding Health Savings Accounts

A Health Savings Account (HSA) is a tax-advantaged savings account specifically designed for individuals enrolled in a High Deductible Health Plan. These accounts provide a way to save money for qualified medical expenses on a tax-favored basis. Eligibility for an HSA is directly tied to enrollment in an HDHP, meaning an individual must be covered by such a plan to contribute to an HSA.

HSAs can be funded by the individual, their employer, or both. Contributions made to an HSA are tax-deductible, reducing the individual’s taxable income. For 2025, the annual contribution limit for self-only HDHP coverage is $4,300, and for family HDHP coverage, it is $8,550. Individuals aged 55 and older can contribute an additional $1,000 annually as a catch-up contribution.

The funds within an HSA grow tax-free, and withdrawals are also tax-free when used for qualified medical expenses. This “triple tax advantage” makes HSAs a valuable financial tool for healthcare planning. Qualified medical expenses cover a wide range of services and products, including doctor’s office visits, prescription medications, dental treatment, and vision care, as defined by the IRS in Publication 502.

Funds in an HSA can be used to cover current medical costs or saved for future healthcare expenses, even into retirement. Unlike some other health savings vehicles, the HSA is owned by the individual, not the employer. This means the account is portable; it remains with the individual even if they change jobs or health insurance plans.