What’s a High-Deductible Health Plan and How Does It Work?

High-deductible health plans (HDHPs) provide health insurance with low monthly premiums, but a high deductible threshold before the insurance coverage kicks in. 

As of 2023, a health insurance policy must have a deductible of at least $1,500 for an individual and $3,000 for a family to be considered an HDHP. Policies also can’t have annual out-of-pocket limits of more than $7,500 for individual plans or $15,000 for family coverage.^[1]

Because of potentially high out-of-pocket costs, HDHP insurance may not be right for everyone. Understanding how these plans work can help you determine if an HDHP is the best option for your health insurance needs.

What is a high-deductible health plan?

High-deductible health plans are a type of health insurance with a minimum deductible and maximum out-of-pocket cost set by the IRS. It’s a relatively new innovation in health insurance.

Starting in the early 2000s, insurance companies began offering health insurance plans with high deductibles. This new offering allowed policyholders to reduce the cost of their monthly premiums while increasing the amount of money they may have to pay out of pocket for medical expenses.^[2]

HDHPs grew in popularity after the 2003 creation of health savings accounts (HSAs). 

As of 2023, an HDHP must have a minimum deductible of $1,500 for an individual and $3,000 for a family — and the operative word is “minimum.” Many HDHPs have much higher deductibles than that.^[3]

With the exception of preventive care, HDHPs will not cover medical expenses until after you meet your deductible. But the maximum out-of-pocket expenses for an HDHP means you’ll know the highest amount you may have to pay over the course of a year in medical expenses. 

The IRS also sets maximum out-of-pocket amounts for HDHPs that are eligible for use with an HSA. In 2023, that limit is $7,500 for an individual and $15,000 for a family. 

However, other HDHP policies may have higher out-of-pocket maximums. The Department of Health and Human Services governs these policies, which are set up to be compliant with Affordable Care Act (ACA) requirements. 

For ACA-compliant HDHP insurance, the 2023 out-of-pocket maximum is set at $9,100 for an individual and $18,200 for a family. If you want to use your HDHP with a health savings account, you must choose a policy that has out-of-pocket limits that don’t exceed the IRS maximums.^[4]

If your employer’s health insurance plan doesn’t offer an HDHP option, you can purchase your own HDHP through the HealthCare.gov online marketplace. To find an HDHP option that allows you to use an HSA, just look for plans that are marked “HSA-eligible.”

Learn More: Do I Need Health Insurance Coverage?

How do high-deductible health plans work?

Like a traditional health insurance plan, an HDHP requires the policyholder to pay premiums to the insurer. In exchange, the insurance company will pay for your medical care after you meet the deductible. The plan will cover some preventive care even if you haven’t yet met the deductible.

The deductible is the amount of money you’re required to pay for covered medical care before your insurance plan starts to pay. For example, if you have a $3,000 deductible, then you’ll have to spend $3,000 on covered medical care before your insurance company will pay any portion of your care. 

But that doesn’t mean the insurance pays for everything after you reach the deductible. You’ll also have either a copayment or co-insurance for covered care, even if you’ve met your deductible. 

Let’s say your HDHP has a $3,000 deductible and a 20% co-insurance. You have a covered surgery in the first week of January to fix your torn meniscus. The procedure costs $9,000. You’ll pay $3,000 to fulfill your deductible, plus 20% ($1,200) of the remaining $6,000. Your total out-of-pocket cost for this surgery will be $4,200.  

That $4,200 will count toward your out-of-pocket maximum of $7,500. For the remainder of the year, you’ll have to make co-insurance payments of $3,300 before your plan begins paying 100% toward covered costs.

Read More: What’s the Difference Between Deductible and Out-of-Pocket in Health Insurance?

What do HDHPs cover?

Exact coverages may differ from plan to plan, but HDHPs generally cover the same types of healthcare services as other plans. The key difference is that an HDHP won’t begin paying for covered services until you’ve met your deductible amount — with some exceptions.

Some preventative services may be paid for before you reach your deductible. This preventive care will generally include:

• An annual physical

• Routine prenatal care

• Routine well-child checkups

• Immunizations for children and adults

• Smoking-cessation programs

• Certain screening services, such as cancer, diabetes, and depression

 Check Out: When is Health Insurance Open Enrollment?

How much does a high-deductible health plan cost?

Monthly premiums for HDHP policies tend to be much lower than premiums for other types of health insurance plans. You assume more of the cost of medical care with such a high deductible. The insurer doesn’t pay for your medical care until you reach your deductible, so the premiums are lowered to reflect that.

If you have an HDHP through your employer, that may further reduce the amount you pay in premiums. As of 2021, the Kaiser Family Foundation reports that the average annual cost of HDHP premiums was $6,877 for an individual and $20,507 for a family. Of that cost, the employer covered an average of $5,743 for individual policies and $15,255 for family policies — or 83.5% and 74.4%, respectively.^[5]

However, that doesn’t necessarily mean signing up for an HDHP will save you money. You could spend more on your out-of-pocket medical costs than you save with lower premiums. If you have a run of bad medical luck, you can expect to pay at least the full deductible amount before your HDHP coverage kicks in. And even then, you’ll have to continue to pay your copay or co-insurance until you’ve reached the out-of-pocket maximum. 

HSAs and high-deductible health plans

Most HDHP policies qualify you for a health savings account or HSA. With an HSA, you can contribute pre-tax income to the account and withdraw the money for qualified medical expenses. 

The money rolls over each year and is yours to keep even if you switch employers or health insurance providers. You can only contribute to an HSA if you have HDHP coverage — other types of health insurance plans aren’t eligible for an HSA.

Your money grows tax-free in the HSA, and you pay no taxes on money used for qualified healthcare expenses. These can include:^[6]

• Deductibles

• Copayments

• Co-insurance

• Ambulance costs

• Doctor visits

• Prescription drugs

• Hearing aids or other medical devices

• Psychiatric care

• Some qualified long-term care

This means your HSA money could be entirely tax-free, since you pay no taxes on the income that you contribute, no taxes on any growth, and no taxes when you withdraw and spend the money on qualified medical expenses.

However, if you decide to use the money for something other than a qualified medical expense before you reach age 65, you’ll owe the IRS income tax on the withdrawal, plus a 20% penalty. After age 65, you can withdraw the money without penalty, but you’ll still owe income taxes on your withdrawal.

The IRS sets an HSA contribution limit each year. The table below shows the contribution limits for 2022 and 2023 for both self-only (individual) and individual with family coverage:

These limits are a combination of employer and employee contributions, which means your employer may be able to help your money go even further. In 2021, the Kaiser Family Foundation found that the average employer contributed $575 to individual HSAs and $987 to family HSAs.

Keep Reading: What is an HRA and How Does It Work?

What are the pros and cons of HDHPs?

HDHPs can be a savvy way to save money on your healthcare costs — or they can be more expensive than more traditional health insurance. It’s important to understand the benefits and drawbacks of these kinds of policies so you can make the best decisions for your healthcare spending.

High-deductible health plan FAQs

These are some of the most frequently asked questions about high-deductible health plans.