What Is a Medical HDHP and How Do They Work?

A High-Deductible Health Plan (HDHP) is a type of health insurance with lower monthly premiums. In exchange for reduced upfront costs, individuals covered by an HDHP assume a greater initial financial responsibility for their healthcare services. HDHPs are designed to cover significant medical events while offering a different approach to managing routine healthcare expenses.

Understanding High-Deductible Health Plans

An HDHP is a health insurance policy with a substantial deductible, meaning you pay a significant amount out-of-pocket for covered medical services before the plan contributes. The Internal Revenue Service (IRS) sets specific criteria for a plan to qualify as an HDHP, including minimum deductible amounts and maximum out-of-pocket limits. For 2025, an HDHP must have a minimum deductible of at least $1,650 for individual coverage and $3,300 for family coverage.

The insured individual pays for most medical costs, such as doctor visits, tests, and prescription drugs, until the deductible is met. Preventive care services are covered at 100% by the plan, even before the deductible is satisfied. These services include routine physicals, immunizations, and various cancer screenings.

Beyond the deductible, an HDHP includes an out-of-pocket maximum. This is the highest amount an individual or family will pay for covered services within a plan year, including deductibles, copayments, and coinsurance, but it does not include premiums. Once this maximum is reached, the health plan covers 100% of all additional covered medical expenses for the remainder of that plan year. For 2025, the maximum out-of-pocket limit is $8,300 for self-only coverage and $16,600 for family coverage.

HDHPs feature lower monthly premiums compared to health plans with lower deductibles. This reduced recurring cost appeals to individuals who anticipate minimal medical needs or seek to manage their monthly budget. The balance between a higher deductible and lower premiums is a fundamental aspect of an HDHP’s structure.

The Health Savings Account Connection

A Health Savings Account (HSA) is a specialized savings account designed to complement an HDHP, providing a tax-advantaged way to save and pay for qualified medical expenses. Unlike some other health-related accounts, an HSA is owned by the individual, offering portability even if employment or health plans change. Funds roll over and accumulate year after year, without a “use-it-or-lose-it” provision.

Eligibility to open and contribute to an HSA is tied to enrollment in an HDHP. To be eligible, one must be covered by a qualified HDHP. Additional criteria include not being covered by any other non-HDHP health plan, not being enrolled in Medicare, and not being claimed as a dependent on someone else’s tax return.

HSAs offer distinct tax advantages. Contributions are generally tax-deductible or pre-tax if made through payroll deductions, reducing taxable income. Any interest earned or investment growth within the HSA accumulates tax-free. Withdrawals from an HSA are tax-free, provided they are used for qualified medical expenses.

Employer contributions also receive this tax-favored status. While employer contributions count towards the annual limit, they contribute to the tax-free growth potential of the account. The HSA allows for strategic financial planning, providing a dedicated resource for healthcare costs that benefits from favorable tax treatment throughout its lifecycle.

How HDHPs and HSAs Interact

HDHPs and HSAs work together to manage healthcare costs. When medical services are needed, individuals typically use HSA funds to cover eligible expenses until their HDHP deductible is met. Initial costs for doctor visits, prescriptions, or other covered services are paid from the HSA until the deductible is satisfied.

Once the deductible is paid, the HDHP provides coverage for a percentage of subsequent medical costs. This post-deductible coverage involves coinsurance, where the plan pays a portion of the costs, and the individual pays the remainder. HSA funds can continue to be used for coinsurance and copayments until the annual out-of-pocket maximum is reached.

The out-of-pocket maximum limits an individual’s financial exposure within a plan year. After the total amount paid for covered services, including the deductible and coinsurance, reaches this limit, the HDHP covers 100% of all further covered medical expenses for the remainder of the plan year.

HSA funds can be used for a broad range of qualified medical expenses, as defined by the IRS. These include:

• Doctor visits
• Prescription medications
• Dental care
• Vision care
• Eyeglasses
• Hearing aids
• Certain long-term care services

Key Financial Aspects

Health Savings Accounts (HSAs) include annual contribution limits, which are established by the IRS and adjusted periodically. For 2025, individuals with self-only HDHP coverage can contribute up to $4,300 to their HSA, while those with family HDHP coverage can contribute up to $8,550. These limits encompass contributions made by both the individual and, if applicable, their employer.

Individuals aged 55 and over can make “catch-up” contributions, allowing them to contribute an extra $1,000 annually beyond the standard limit. This additional contribution opportunity helps older individuals boost their savings for anticipated medical expenses in later life.

HSAs offer investment potential. Funds contributed to an HSA can be invested, allowing them to grow over time, similar to retirement accounts like a 401(k) or IRA. This growth is tax-free, enhancing the long-term value of the account. Many HSA providers offer various investment options, enabling account holders to choose strategies aligned with their financial goals.

Unused HSA funds roll over from year to year. Combined with their investment potential, this positions HSAs as a long-term savings vehicle. This allows individuals to accumulate substantial savings for future medical expenses, including those incurred during retirement. Unlike other retirement accounts, withdrawals for qualified medical expenses remain tax-free in retirement. After age 65, funds can be withdrawn for non-medical expenses without penalty, though these withdrawals are subject to ordinary income tax.