When considering health insurance policies for your organization, you’ve probably wondered if it’s better to have a low deductible health plan (LDHP) or a high deductible health plan (HDHP). While HDHPs have higher deductibles than LDHPs, as the name implies, there are benefits for taking on the risk.
HDHPs come with big savings for employers and employees, especially if you maximize them. According to a KFF Employer Health Benefits Survey, 22% of large employers choose HDHPs with added savings options, such as a health savings account (HSA) or a health reimbursement arrangement (HRA).
What is a high deductible health plan?
Compared to a traditional LDHP, an HDHP has lower monthly premiums, but requires your employees to pay a higher annual deductible and more towards out-of-pocket medical care until their insurance coverage kicks in for the remaining costs.
However, there’s a standard criteria that qualifies a health plan to be considered an HDHP.
According to the Internal Revenue Service, an HDHP is currently defined as the following:
- Any health insurance plan carrying a deductible of at least $1,400 for an individual or $2,800 for family coverage
- Total out-of-pocket expenses for the year can’t exceed $7,050 for an individual or $14,100 for family coverage, including deductibles, copayments, and coinsurance
HDHPs are great for those who want to save money while maintaining coverage for unforeseen emergencies and health events. Employees may only be on the hook for premiums and the occasional medical expense.
According to the Affordable Care Act, all HDHPs bought through the federal health insurance marketplace must contain certain preventive care coverage at an in-network provider no matter how much of your deductible you've paid.
The preventive care services that HDHPs may cover include:
- Annual physicals
- Routine prenatal care and well-child care
- Screening services for things like cancer, heart disease, pediatric conditions, and vision and hearing disorders
- Tobacco cessation programs
- Obesity weight-loss programs
Many employers choose to pair an HDHP with a tax-advantaged fund like an HSA or an HRA to offer additional savings to their employees. Both HSAs and HRAs can help employees pay for qualified medical expenses tax-free.
Offering an HSA or HRA along with an HDHP helps ease an employee's financial burden, especially if the business makes contributions to the account. It’s important to note that with HSAs, you must have an HSA-qualified HDHP to make employer HSA contributions to your employees’ savings account.
HDHPs can be great for your organization and employees, but the deductible can seem daunting. But think about it like this—in exchange for the high deductible, you’ll pay lower premiums and you can choose to implement an HSA to help your employees save on medical costs.
Benefits of an HDHP
If you’re sold on an HDHP, then it’s time to look at its benefits. Switching to an HDHP is a great way to mitigate the rising cost of premiums year-over-year. Higher deductibles mean lower premiums for small businesses trying to find ways to save on medical costs.
Overall advantages of HDHPs include:
- A lower monthly premium than LDHPs
- Access to a larger network of providers, as with HMOs
- People who rarely use their health benefits may save money
- Out-of-pocket expenses aren’t the market rate, but the negotiated rate between the healthcare provider and insurance company
- Can integrate with tax-advantaged funds like HSAs and HRAs
If you have a workforce that is generally healthy, an HDHP may be the best type of health insurance plan you can get. HDHPs make good insurance plans for young and single employees who don’t have any existing medical conditions and don't need coverage for spouses and dependents.
Downsides of an HDHP
HDHPs are great for small businesses because of the lower premiums, resulting in significant savings. The problems arise when employees face costly healthcare expenses and need to pay much more out-of-pocket before their insurance coverage is available.
In a KFF survey, half of U.S. adults said they put off or skipped some sort of healthcare in the past year because of the cost. Therefore, some people with an HDHP might not get necessary medical help because they can’t pay for it, and they haven't met their deductible yet.
If an employee faces a costly medical situation, they must be able to pay the amount before their insurance kicks in. This can be difficult to stomach for employees.
Overall disadvantages of HDHPs include:
- Deductible can be very high for individuals and families
- Those who manage chronic illnesses have high out-of-pocket expenses
- Most healthcare expenses, other than preventive care services, are entirely out-of-pocket until the deductible is reached
- Some employees may avoid care for fear of the high medical costs
Because of these concerns, HDHPs typically don’t provide enough coverage for those who suffer from a chronic condition, as well as families with children who require frequent doctor visits. If this is the general makeup of your workforce, an HDHP may not be the best choice.
What does a higher deductible health plan cost?
Many factors contribute to the price of your HDHP premiums, such as state and federal laws, where you live, and the type of plans available, which are not within your control.
When choosing an insurance plan, it’s a good idea to think about your employees’ total potential healthcare costs, not just the premium. Considering this, you can start to see if selecting a higher deductible health plan would be the best bang for your buck.
Of course it’s impossible to predict the exact amount of total medical services your employees may need in a given year. But you can still consider healthcare cost averages, the diversity and general health affairs of your workforce, inflation prices, your health benefit budget, and other controlling factors before you pick the HDHP that’s right for your business.
How to supplement your high deductible plan
At this point, you may be wondering how to offset some of the costs that come along with an HDHP. No matter how you look at it, despite its low monthly premium, the challenge with an HDHP is how expensive healthcare can become when you need it.
Let’s take a closer look at each of these benefits below so you can better understand how they work for employers.
If you’re looking to lower overall healthcare costs and lessen the high deductible impact of your HDHP, an integrated HRA, also known as a group coverage HRA (GCHRA), can help.
Integrated HRAs are so named because they are integrated with a traditional group health insurance plan. This type of HRA is used to supplement the group insurance health plan by reimbursing employees tax-free for qualified out-of-pocket medical expenses that are not fully covered by their health plan.
Examples of eligible expenses include copays, co-insurance, and expenses paid before the deductible is met.
Overall advantages of an integrated HRA include:
- You can keep your HDHP but provide extra benefits through reimbursement
- You can attract potential employees and retain key talent with a more attractive HDHP supplemented benefit
- You can customize this health benefit by setting unique cost-sharing options, like requiring and explanation of benefits and setting employee classes
GCHRAs are typically used with HDHPs for more significant cost savings, but they can also work with any group health plan, including an LDHP. What’s more, the employer can set the employees’ monthly reimbursement allowance up to an unlimited amount, so whatever you decide can be budget-friendly for your organization.
Integrated HRAs are a great option for employers looking to keep their HDHP for the lower premium while keeping the employee’s single health coverage the same, if not better by enabling reimbursement capabilities.
Over the past few years, there's been a lot of new information coming out about the many benefits of health stipends and how they can supplement your HDHP.
With a health stipend, employees receive a fixed, taxable stipend to purchase out-of-pocket healthcare expenses that meet their needs. This extra money can help pay towards items needed that insurance wouldn’t yet cover until their HDHP’s deductible has been met.
The employer's monthly contributions are typically added to the employees’ paycheck as wages on a recurring basis. Similar to an integrated HRA, your contributions to your employees are unlimited, so you can pick an amount that works for your budget and your employees.
Overall advantages of a health insurance stipend include:
- Bridge the gap between items that aren’t included in the group health insurance plan
- There are fewer compliance or regulation considerations with the IRS, HIPAA, or ERISA
- They are simple and easy to manage through automatic payroll additions
The flexibility of health stipends is what is propelling them into recent popularity. And because they work with any group plan, you reap the benefits of low HDHP premiums while giving your employees added funds to pay for additional medical care and services.
HDHPs have been gaining popularity as an alternative to a traditional plan among employers and employees. While there’s no doubt that they can offer huge savings and lower premium costs, they may not always be the right fit for your business on their own.
If you have a diverse organization and want to expand your HDHP, it's best to offer it alongside an integrated HRA or a health stipend. If you’re ready to implement one of these benefits for your company, contact a PeopleKeep personalized benefits advisor, and we’ll get you started right away.
This article was originally published on May 28, 2020. It was last updated on March 21, 2021.