What Is a High Deductible Health Plan (HDHP)?

High Deductible Health Plans (HDHPs) are an increasingly common form of health coverage in the United States. This article clarifies what an HDHP is and how it functions within healthcare financing.

Core Characteristics of an HDHP

A High Deductible Health Plan (HDHP) is a health insurance plan with a higher annual deductible than traditional offerings. These plans adhere to specific Internal Revenue Service (IRS) requirements to qualify as an HDHP. For the 2025 tax year, an HDHP must have a minimum annual deductible of $1,650 for self-only coverage or $3,300 for family coverage. Specific plans may feature higher deductibles within these guidelines.

The deductible represents the amount an individual pays for covered healthcare services before their insurance plan begins to contribute to costs. Beyond the deductible, HDHPs also have a maximum out-of-pocket limit, which is the most an individual has to pay for covered services in a plan year before the health plan covers 100% of the remaining costs. For 2025, this maximum out-of-pocket limit is $8,300 for self-only coverage and $16,600 for family coverage, excluding premiums.

HDHPs cover preventive care, such as annual physicals and certain screenings, at 100% even before the deductible is met. This first-dollar coverage for preventive care aims to encourage proactive health management without immediate financial burden.

How an HDHP Functions

For most medical services, other than covered preventive care, the individual is responsible for paying the full negotiated cost until the annual deductible is met. For example, if a plan has a $3,000 deductible, the individual pays the first $3,000 of eligible medical expenses out of their own pocket.

Once the annual deductible has been met, the plan typically transitions into a phase involving coinsurance. Coinsurance refers to the percentage of costs an individual pays for covered medical services, with the insurance plan covering the remaining percentage. A common arrangement might be an 80/20 coinsurance, where the plan pays 80% of the costs, and the individual pays 20% for eligible services. This cost-sharing continues until the individual’s total out-of-pocket spending reaches a predetermined maximum.

The out-of-pocket maximum is a protective cap on an individual’s financial responsibility for covered services within a plan year. This limit includes amounts paid towards the deductible, coinsurance, and any copayments for in-network services. Once an individual’s accumulated expenses reach this maximum, the health plan assumes responsibility for 100% of all subsequent covered medical costs for the remainder of that plan year. Staying within the plan’s network of providers is important, as utilizing out-of-network services can lead to higher costs that may not fully count toward the in-network out-of-pocket maximum.

The Role of a Health Savings Account (HSA)

A Health Savings Account (HSA) is a tax-advantaged savings account specifically designed for qualified medical expenses, and it is almost exclusively paired with a High Deductible Health Plan. Eligibility to open and contribute to an HSA is contingent upon being enrolled in an HDHP that meets specific IRS criteria. This direct link makes HSAs a significant component of the HDHP structure.

HSAs offer a “triple tax advantage” that makes them a unique financial tool for healthcare savings. Contributions made to an HSA are tax-deductible, or pre-tax if contributed through payroll deductions, reducing an individual’s taxable income. The funds within an HSA grow tax-free through investments, similar to a retirement account. Furthermore, withdrawals are entirely tax-free when used for qualified medical expenses.

The IRS sets annual contribution limits for HSAs. For 2025, individuals with self-only HDHP coverage can contribute up to $4,300, while those with family HDHP coverage can contribute up to $8,550. An additional “catch-up” contribution of $1,000 is permitted for individuals aged 55 and older. Qualified medical expenses that can be paid with HSA funds are broadly defined by IRS Section 213(d) and include items like deductibles, copayments, prescription medications, dental care, and vision care.

Beyond their tax benefits, HSAs are owned by the individual, providing portability that means the account remains with them even if they change jobs or insurance plans. The ability to invest HSA funds allows the account to grow over time, potentially accumulating substantial savings for healthcare costs, including those in retirement. This makes the HSA not just a spending account for current medical needs but also a long-term savings and investment vehicle.