What Is a High-Deductible Health Plan?

A high-deductible health plan, or HDHP, is a health insurance plan with a high minimum deductible for medical expenses that the insurance holder must pay before insurance coverage kicks in. A high-deductible health plan usually has a higher annual deductible than a typical health plan. The minimum deductible for a plan to fall into the category of an HDHP varies each year. For 2017, it was $1,300 for individuals and $2,600 for families. In 2018, it rose to $1,350 for individuals and $2,700 for families.

Understanding High-Deductible Health Plan (HDHP)

High-deductible health plans are thought to lower overall healthcare costs by forcing individuals to be more conscious of medical expenses.

The higher deductible also lowers insurance premiums, making health coverage more affordable. This benefits healthy people who need coverage mostly in case of a serious health emergency and can take advantage of HSA savings for retirement as well as any health needs now.

For wealthy families who can afford to self-insure, an HDHP gives them access to HSA tax-advantaged savings.

Health Savings Account (HSA)

High-deductible health plans became more common when the new health savings account (HSA) legislation was signed into law in 2003. A Health Savings Account, or HSA, is a medical savings account available to United States taxpayers who are enrolled in a HDHP. Taxpayers contribute funds to an account to be used for medical costs that the high-deductible health plans don't cover. These funds are not subjected to federal income taxes at the time of the deposit.

A Health Savings Account is one of the ways an individual can cut costs if he or she is faced with high deductibles. A deductible is the portion of an insurance claim that the insured pays out-of-pocket. When an individual has paid the portion of a claim she is responsible for, the insurance company will cover the other portion, as specified in the contract.

As long as withdrawals from a Health Savings Account are used to pay for qualified medical expenses that are not covered under the HDHP, the amount withdrawn will not be taxed. Qualified medical expenses include deductibles, dental services, vision care, prescription drugs, co-pays, psychiatric treatments, and other qualified medical expenses not covered by a health insurance plan.

Contributions made to an HSA do not have to be used or withdrawn during the tax year. Any unused contributions can be rolled over to the following year.