A high deductible health plan (HDHP) is defined as a health insurance plan with annual minimum deductibles of $1,300 for single coverage and $2,600 for family coverage . The HDHP must also have an annual maximum out-of-pocket of $6550 for single coverage and $13,100 for family coverage. The deductibles and out-of-pocket maximums are only applied for in-network spending for the benefits covered by the HDHP. These cost share amounts are for 2016 and are set annually by the Internal Revenue Service (IRS) using rules they create and tweak over time. Finally, it should be noted that the maximum out-of-pocket amounts for the HDHP are slightly lower than defined by Obamacare (PPACA) for the non-group and small business markets.
The HDHP is designed so you are responsible for using 100% of your own money for health care until the high deductible is met (except for some preventive health care services which are 100% reimbursed). As such, it will insure against serious illness or injury (catastrophic). Because more of the health care costs are paid by you and not the insurance company, you are rewarded with a lower premium price than found in other managed care health insurance plans with comparable benefits (like PPOs).
While high deductible health insurance has been around for a long time (called catastrophic insurance before Obamacare (PPACA)), the high cost of health care kept people away from them. Most people understand that the risk of getting sick is real and potentially very costly. To distance the HDHP from the unappealing, yet fitting catastrophic and high deductible labels, HDHPs are often called consumer-driven health plans today.
The HDHP delivers health services like a PPO (and sometimes HMO, EPO, or POS plan) by providing participants with in-network discounted rates for health care services under contract to the insurer. HDHPs are available in both the non-group (individual) and employer-sponsored insurance groups. Depending on the HDHP, out-of-network providers may be available, but the cost will always be higher and entail additional deductibles and out-of-pocket maximums.
HOW DID IT COME ABOUT?
In 2003 the HDHP wasn’t even on the employer-sponsored health benefit radar according to the Kaiser Family Foundation (54% of covered workers chose PPOs, 24% HMOs, 17% POS, and 5% traditional plans). Government policymakers wanted to change this situation because they reasoned that low cost share, health insurance was encouraging consumers to frivolously seek out unnecessary health care. To make the HDHP more palatable to consumers, our government created the taxpayer-subsidized Health Savings Accounts (HSAs) for use with the HDHP (in the Medicare Modernization Act of 2003).
Who is Eligible for the HSA?
You are eligible to open an HSA only if:
- You are covered under a high deductible health plan (HDHP) and
- You have no other health coverage and
- You are not enrolled in Medicare and
- You are not being claimed as a dependent on someone else’s tax return.
The HSA is a trust or custodial account (like an IRA or a 401K) and functions like any bank (or investment) account that can be invested for growth. It can be opened by you personally or by your employer for you. You own the HSA and it is controlled by you and you alone. All contributions and accumulated earnings are tax-free. This is an advantage that Flexible Spending Account (FSA) used with other managed care plans (like PPOs), do not enjoy. The HSA also has no limit on carry-overs or when the funds may be used in the future. The FSA, has a maximum year-to-year carry-over of just $500 and all money must be used for medical expenses by March 15 of the next year or the money is forfeited. These taxpayer-subsidized perks in the HSA-qualified HDHP can be very cost-effective especially for people who are young and have many years of low spending on health care while they accumulate HSA funds.. Be warned though, if you get sick and have an HDHP, you will pay more for your health care than if you had been insured with a lower cost share, health insurance plan.
In 2016, the maximum tax-exempt contribution to the HSA is $3350 ($4350 for those 55 and older) for single coverage and $6750 ($7750 for those 55 and older) for family coverage. These contributions can be deposited through direct payroll deduction or separately using personal funds (you then take a tax-deduction on your income taxes).
If your employer chooses to contribute to your HSA, he can contribute any amount up to the maximum allowed. For federal employees, the employer contribution is called the “premium pass through”. The amount contributed by your employer is not counted as taxable income to you.
The employer contribution varies from employer to employer and can be set higher to encourage employees to choose the HDHP over other more costly managed health insurance plans. This strategy works in industries where employees are well paid (finance and insurance), have spare cash, and use the HSA for extra retirement savings. In California, with its strong HMO presence, higher employer contributions do not result in higher HDHP participation.
If you switch from a HDHP to a different type of plan, your HSA contributions must stop. The earlier unspent contributions in the HSA are yours to keep for future payment of qualified medical expenses.
The money in a HSA can be removed in several ways. You withdraw money to pay for your unreimbursed qualified medical expenses without paying any income taxes or penalties on the money. Many HSA accounts come with debit cards for direct use when paying cost share at time of service. You may spend the HSA money tax-free on out-of-pocket medical expenses (deductible, co-payments, co-insurance) and any medical expenses incurred outside the HDHP benefit coverage. Qualified medical expenses are set by the Internal Revenue Service.
If you use the money for other reasons, you will pay income taxes and a 20% penalty tax on the withdrawal. Once you reach age 65 (or become disabled) however, you can use the money for anything (even buying a boat) without incurring the penalty tax, but you will have to pay income tax on the money you withdraw. If you die, your spouse can inherit it tax-free. Non-spouse heirs, while not enjoying the same tax-free transfer, do get the money penalty-free.
The HSA can be summarized in the image below.
Even with the tax-free HSA incentive, there were few Americans that made the switch from low cost share health insurance to the HDHP for many years. In 2006, only 4% of employer-sponsored health insurance participants chose HDHPs according to the Kaiser Family Foundation survey. Thanks to the looming Cadillac tax (starting in 2020), HDHP participation in the employer-sponsored insurance group was up to 24% in 2015 (according to the latest survey by the Kaiser Family Foundation) as employers replace low cost share health insurance options (like PPOs) with HDHPs.
The Bottom Line
The HDHP is a catastrophic health insurance plan designed to provide insurance against serious illness or injury. It is defined by a minimum deductible ($1,300 for single coverage or $2,600 for family coverage in 2016) and a maximum annual out-of-pocket ($6550 for single coverage and $13,100 for family coverage). These cost shares are only for in-network benefits covered by the HDHP so your total health care costs in any given year can be higher than the maximum out-of-pocket.
When coupled with a tax-advantaged Health Savings Account (HSA), this lower premium health insurance product can be cost effective, especially for people who are young and healthy. Be warned though, if you get sick and have an HDHP, you will pay more for your health care than if you had been insured with a lower cost share, health insurance plan. In 2016, you or your employer will be able to contribute any amount up to $3,300 ($4350 for those 55 and older) for single coverage and $6,550 ($7750 for those 55 and older) for families coverage into your HSA. The HSA contributions, earnings, and withdrawals are totally tax-free if used for qualified medical expenses.