PPOs, HSAs, and in-network coinsurance - oh my!

Navigating your health insurance can feel like you’re wandering down a yellow brick road of acronyms and convoluted policies. If you’re feeling lost, don’t be so hard on yourself. Nearly 9 out of 10 adults say that they would support policies that would require insurance to be simpler and easier to understand (such as clearer explanation of benefits and updated provider directories), while half of insured adults have difficulty understanding their insurance.

However, healthcare is a significant part of our monthly expenses, so it's vital to understand your options in order to choose the best healthcare plan for your needs. In this blog post, we’ll be unpacking high-deductible health plans (HDHPs), one of the most common types of health insurance in the United States. Here’s what you need to know about this type of health coverage.

What is an HDHP?

A HDHP is a health insurance plan which has a higher deductible and lower monthly premiums. A deductible is the amount you pay for your medical care before your insurance company starts to pay for it, and a premium is the amount you pay every month (or each year) to keep your insurance active. As of 2022, the IRS defines an HDHP as any plan with an annual deductible of at least $1,400 for an individual or $2,800 for a family.

HDHPs are sometimes referred to as health savings account (HSA)-eligible plans, because you can pair your HDHP with a savings plan such as a health savings account (HSA), which allows you to put pre-tax dollars aside to put towards health care expenses. Of course, the challenge is actually shopping around and finding real, actionable prices for care. That’s where we come in at Sesame.

How does a HDHP work?

Having a HDHP essentially means that you’re paying out-of-pocket costs (like doctor visits and prescriptions) upfront until you reach your deductible and your insurance coverage kicks in. However, even if you haven’t met your deductible, preventive care like screenings and immunizations are still covered at no cost.

HDHPs also come with an out-of-pocket maximum (the most that you’ll pay in a year for covered services from your plan’s in-network providers). Once you meet your out of pocket max, your insurance will pay for all covered services in full. In 2023, the out-of-pocket limit couldn’t be more than $9,100 for an individual and $18,200 for a family.

In theory, HDHPs can actually give consumers more control over healthcare costs because they incentivize you to shop around for the best price, while monthly premiums stay low.

What is the difference between HDHP and HSA?

An HDHP is a type of health insurance plan, whereas a HSA is a tax-advantaged savings account meant to help you cover out-of-pocket expenses. The IRS allows those enrolled in an HDHP to contribute to an HSA. Put simply, you can put money in an HSA before taxes are taken out, and then you can use that money to pay for qualified medical expenses, such as co-pays, doctor’s appointments, and more.

Let’s walk through a real-life example: Let’s say you contribute $300 a month to your HSA. That means that you’ll have placed $3,600 into your account by the end of the year. Now, let’s say that your federal tax rate is 15% (this varies by income level) and that your state tax rate is 5%. By the end of the year, you’ll have avoided paying about $540 in federal taxes, and another $180 in state taxes, by placing your pre-tax dollars into an HSA. That’s a combined savings of $720 that you can now allocate towards your health expenses.

It’s important to note that HSAs do have limits on how much money you can place in them - for 2024, the max on HSA contributions is $4,150 per year for self-only coverage and $8,300 per year for family coverage.

Why would someone get a high-deductible health plan?

Many choose HDHPs because of the lower monthly premiums. For individuals who are generally healthy and don't anticipate major medical costs in the upcoming plan year, an HDHP might make financial sense. Additionally, those who want to take advantage of the tax benefits offered by an HSA might opt for an HDHP.

On the other hand, an HDHP may not make as much sense if you have a lot of medical expenses, such as a chronic condition that requires regular visits to a specialist or necessitates high-priced prescription drugs.

What are the benefits of HDHPs?

HDHPs can be very appealing for relatively healthy individuals who don't anticipate frequent medical visits, since it enables them to save money both in the present through reduced premiums and for the future through an HSA. Some advantages of HDHPs include:

• Lower Monthly Premiums: HDHPs often offer lower monthly premiums than traditional plans.
  
• HSA Eligibility: Enrolling in an HDHP allows you to open an HSA, letting you set aside money tax-free for health care expenses.
  
• Preventive Care: Many HDHPs cover preventive services, like screenings, even before you meet your deductible.
  
• Tax Advantages: HSA contributions are tax-deductible, grow tax-free, and can be withdrawn tax-free for qualified medical expenses.
  
  

What are the cons of HDHPs?

While HDHPs offer benefits like lower monthly premiums and potential tax advantages, they might not be the best fit for everyone. Some disadvantages of HDHPs include:

• Upfront Costs: With an HDHP, you'll likely face higher out-of-pocket costs before your insurance coverage kicks in. This means you could end up paying more upfront for medical services and prescriptions.
  
• Unexpected Medical Costs: If an unexpected health issue arises, you could find yourself paying a significant amount out-of-pocket before reaching your deductible. This could strain your finances, especially if you haven't saved up enough in an HSA.
  
• In-Network Restrictions: Just like other health plans, if you go outside of your HDHP’s network providers, you might face higher out-of-pocket expenses.
  
  

When considering an HDHP, it's essential to assess your medical needs, potential health care costs and financial situation. Before making a decision, you can utilize resources like healthcare.gov or speak with a healthcare professional to determine the best health coverage for you. Whether it's an HDHP, traditional PPO, HMO, or another plan, the key is to ensure it suits your unique needs and circumstances.

Cash-pay marketplaces like Sesame can also be a great way to save money on healthcare expenses, especially if you’re on an HDHP plan. This type of model offers clear pricing and direct, transparent relationships between patients and providers, and shopping around enables you to find the best care at the lowest price. You can also access online doctors, specialists, labs, prescriptions and more at a fraction of the cost of traditional healthcare, since third-party fees from insurance are eliminated from the equation. By taking control of your healthcare choices and costs, you can not only achieve considerable savings but also cultivate a healthcare experience that prioritizes your personal health needs and financial capacities.

Sources:

• Karen Pollitz, Kaye Pestaina, Alex Montero, Lunna Lopes, Isabelle Valdes, Ashley Kirzinger, and Mollyann Brodie. KFF Survey of Consumer Experiences with Health Insurance (Feb. 21-Mar.14, 2023). KFF.org.
  
• Out-of-pocket maximum/limit. Healthcare.gov.
  
• Understanding HSA-eligible plans. Healthcare.gov.
  
• What are the benefits of an HSA?. IRS.gov.