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Choosing between high vs low deductible health plans

June 4, 2020
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Insurance is often confusing

Here’s a scenario for you: It’s mid-November. Open enrollment is here and you’re trying to figure out which insurance plan to choose. There are acronyms and jargon-filled descriptions flying at you left and right, but you still don’t know what any of it means. You just want to make sure that you and your family have the coverage you need without paying more than you need to.

Sound familiar?

Whether you’re an employer looking for group plan options for your employees or an individual looking for yourself and your family, there is almost always a debate between a high deductible health plan (HDHP) and a low deductible health plan (LDHP). It’s a big decision with lots of variables, but this guide will walk you through how to evaluate which type of plan will work best for you based on your specific situation.

Quick guide to insurance terminology

Before we start, let’s make sure we’re all on the same page with the terminology:

HDHP: In 2020, a high deductible health plan (HDHP) is any health plan with a deductible of at least $1,400 for an individual or $2,800 for a family. Out-of-pocket maximums cannot exceed $6,900 for an individual or $13,800 for a family.

LDHP: In 2020, a low deductible health plan (LDHP) is any health plan with a deductible of less than $1,400 for an individual or $2,800 for a family.

Deductible: The amount of money you must pay before your insurance carrier starts to pay for any health care expenses.

Coinsurance: The percentage of health care expenses that an individual is responsible for paying once they’ve met their plan’s deductible.

Out-of-pocket maximum: The total amount of money an individual would be responsible for paying in a given plan year regardless of total health care expenses. This includes deductibles, copayments, and coinsurance.

Premium: The amount of money you pay your insurance carrier each month to be covered by your health plan.

Now that’s out of the way, let’s get started.

What are the differences between an HDHP and an LDHP?

There is one obvious answer here: the deductible. HDHPs have higher deductibles than LDHPs, so you will pay more out of your own pocket before your insurance carrier starts helping you out. However, there is a reward for taking on more risk.

HDHPs almost always have a lower premium than LDHPs, and that’s because the policyholder is taking on much more risk in the event that they have major health care expenses in that plan year. If something unexpected happens, someone with an HDHP could pay much more out of their own pocket compared to someone who had an LDHP.

One common way to help close that gap is to open a health savings account (HSA). These are accounts that are available only to people insured under a qualified HDHP. Account holders contribute pre-tax funds that can be used tax-free on hundreds of qualified health care expenses. You can even invest the HSA funds to make them grow, leaving you with more money than if you’d only contributed yourself. As an employer, you can offer an HSA alongside your company’s HDHP and even contribute funds to your employees’ accounts as an extra benefit.

However, some employers don’t like the idea of HSAs. Employer contributions can be used for non-health care expenses—with a tax penalty—and healthy employees may not use the funds for years, at which point they could have left the company. Instead, these employers tend to offer a group coverage HRA, sometimes referred to as an integrated HRA.

A group coverage HRA can be used to supplement both HDHPs and LDHPs and allows an employer to reimburse employees for health care expenses without having to fund any accounts. The employer chooses an allowance amount that employees can use to get reimbursed after they incur a medical expense. Any unused portion of an employee’s allowance returns back to the company at the end of the plan year, and since a GCHRA is an arrangement—not an account—where participation is tied to employment, accrued allowance funds do not leave with an employee when they leave the company.

Which type of health plan is right for me?

Cue everybody’s least favorite answer: it depends. There is a lot to consider and no right answer for everyone, but there are some situations where one type of plan will usually be a better fit than the other. Each plan type is broken down into those looking as individuals and as employers so that you can refer to the section that fits your situation.

Who should choose an HDHP?

Individuals

Due to the higher out-of-pocket maximums that come with HDHPs, this type of plan is best for healthy individuals who expect little to no health care expenses. If you are an extreme sports athlete, this is not the plan for you. In these cases, the lower premium of the HDHP will save you more money than you spend on health care in the plan year.

Choosing an HDHP is also a good way for individuals who cannot afford an LDHP but still want coverage. Even if you are a high user of your health plan, it’s better to have insurance through an HDHP than nothing at all. Insurance carriers negotiate rates with providers so you will pay less for products and services than you would if you go uninsured, and many providers offer payment plans in the event you incur a large expense that cannot be paid upfront.

HDHPs can still make sense even if you have the money to pay for an LDHP. If you open an HSA and invest the extra money you would have spent on your LDHP premiums, then over time, and with enough savings in your HSA, you can lower or even eliminate the out-of-pocket expenses required by your HDHP. You can also use HSA funds without a tax penalty—though you will still pay income tax when you withdraw—once you reach the age of 65, so it can function as an extra retirement account if you’re maxing out your 401(k) and IRA contributions.

Employers

As an employer, you’ll be thinking about your employee population instead of yourself, but the same principles apply. If your workforce is primarily young and healthy, you can save a lot of money on premiums by opting for an HDHP. You can always supplement your plan with a group coverage HRA or an HSA to take some of the financial burden off of your employees.

Budget also comes into play here. It’s a well-known fact that group health insurance is expensive in the United States—so much so that only 46.8% of US-based companies offered it in 2018, many of whom were legally required to so due to the employer mandate. If an HDHP is all that your organization can afford, that’s ok.

If you get group quotes on HDHPs and that’s still not in your price range, you still have options. The qualified small employer HRA (QSEHRA) and individual coverage HRA (ICHRA) allow employers to offer a health benefit to employees while maintaining complete control over your costs. You simply set an allowance amount that fits within your budget and reimburse employees when they incur a qualified expense.

Who should choose an LDHP?

Individuals

Anyone who

  • Has chronic condition that requires regular doctor’s visits or expensive prescription medication(s),
  • Is planning to get pregnant or have major reparative surgery,
  • Leads an active lifestyle with many opportunities for injuries,
  • Or otherwise will be using their health benefits on a regular basis would most likely benefit from an LDHP.

If you’re in one of these scenarios, you could rack up thousands of dollars worth of medical bills in a single plan year. Having an LDHP would save you money over the course of the year because the extra money you’re paying in premiums would be far less than the difference in deductibles and out-of-pocket maximums with an HDHP.

If you can afford the extra money in premiums each month, many people choose an LDHP for the greater predictability of their health care expenses this type of plan allows. For many people, it’s easier to pay a little bit more every month instead of a huge bill all at once. A recent Bankrate study found that only 41% of Americans would be able to pay an unexpected expense of $1,000 out of their savings, with the rest having to put it on a credit card, take out a personal loan, or borrow from friends and family. The same study asked if people had incurred an unexpected expense in the past year and, if so, how much the largest one totaled. 71% of respondents had an expense of $1,000 or more. If you’re one of those who don’t have the funds to pay a big expense upfront and don’t want to incur financing fees from loans or credit cards, choosing an LDHP may be your best option.

Employers

If you’re one of the lucky employers with a large per-employee health care budget and want to make sure your employees pay little to nothing out of their own pockets, first of all, congratulations! Second, your organization should consider offering an LDHP. The lower—or in some cases nonexistent—deductibles, as well as lower out-of-pocket maximums, mean that your insurance carrier will be picking up most of the bill if your employees incur any expenses.

This type of plan is also great for your employees if they tend to be higher users of their health care plans. The premiums are higher, but you’ll be making sure your employees aren’t left in financial ruin should they get an unfavorable diagnosis or be prescribed medication that costs hundreds of dollars per dose.

While this type of plan is the most desirable from an employee’s perspective, it’s often unattainable due to budget–especially for smaller organizations. If you can swing it, expect a line around the block whenever you have a job posting.

Summary

In general, high users of their health plan will want to opt for an LDHP to keep their total out-of-pocket expenses in check while low users will want to opt for an HDHP to save money on premiums. Budgetary factors definitely play into the equation, so remember that even if you’d prefer an LDHP but can’t afford it, an HDHP is better than going uninsured. Some HDHPs allow you to open an HSA, and both HDHPs and LDHPs can be paired with a group coverage HRA by an employer.

Comparison Chart

 

HDHP

LDHP

Premium

Lower than LDHP to account for increased financial risk

Higher than HDHP to account for reduced financial risk

Deductible
  • Individual: at least $1,400

  • Family: at least $2,800

  • Individual: less than $1,400

  • Family: less than $2,800

Out-of-pocket maximum limit
  • Individual: $6,900

  • Family: $13,800

N/A

Coinsurance

Depends on the plan, but generally higher than LDHP

Depends on the plan, but generally lower than HDHP

HSA-compatible?

Yes, as long as the plan meets IRS guidelines

No

Group coverage HRA-compatible?

Yes

Yes

Individuals should consider if
  • You are young and healthy

  • You expect to be a low user of your health plan

  • You want to open an HSA

  • You can’t afford the premiums on an LDHP

  • You are older or in poor health

  • You expect to be a high user of your health plan

  • You want to limit your exposure to huge medical bills

Employers should consider if
  • Your employees are young and healthy

  • You can’t afford premiums on an LDHP

  • You can’t afford premiums on an LDHP

  • You want to save on premiums and supplement your plan with an HSA or group coverage HRA

  • Your employees are older or have major health conditions

  • You have a large per-employee health benefits budget

  • You have a large per-employee health benefits budget

  • You’re trying to keep employee out-of-pocket costs as low as possible

Learn how an HRA works for employers in our latest webinar
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