What are high-deductible health insurance plans, and when do they make sense?

Open enrollment — the window during which you can sign up for health insurance or make adjustments to your current plan — starts Nov. 1. With it, there comes a whole lot of jargon to wade through before you can make some very financially consequential decisions. One term you might come across is a high-deductible health plan, or HDHP.

In recent years, there has been a "growth of high deductible plans, which offer lower monthly premiums but require consumers to pay most initial medical costs out of pocket before the plan's coverage kicks in," said The Washington Post. That is likely because at first glance, these plan's "cheaper premiums may look like a bargain" — but you will "risk paying much more" if you have "unexpected illnesses or failed to budget well for more routine care." Read on to learn the possible risks and rewards of choosing a HDHP.

What is a high-deductible health plan?

Effectively, a high-deductible health plan "requires you to pay a higher amount for medical care out of pocket before your insurance starts covering eligible costs" compared to a traditional health plan, said NerdWallet.

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The amount you must pay out-of-pocket before insurance kicks in is known as your deductible, and there are certain limits a plan must meet to be considered an HDHP. According to IRS rules, an HDHP is a "health insurance plan with a deductible of at least $1,600 for individual coverage, or at least $3,200 for a family plan in 2024," said Investopedia.

Still, just as with traditional health plans, "HDHPs cover 100% of your preventive care," as well as "other medical expenses," said Experian.

What are the risks of high-deductible plans?

"The big drawback to choosing an HDHP is having potentially high out-of-pocket expenses for the year," said Investopedia. "HDHP plan participants could face out-of-pocket costs of up to $8,050 for individual coverage or $16,100 for a family plan in 2024."

Another drawback is that the high cost of initial care associated with an HDHP may "lead to worse health outcomes," as some people "avoid going to the doctor because of the cost," said Experian. Even if people do eventually go, they "might hold off on elective treatments and screenings until later in the year, after they rack up other health expenses to reach their deductible," said the Post. This is an approach that can be "especially risky for those who have chronic conditions such as heart disease and diabetes, potentially leading to missed opportunities for earlier intervention."

Do high-deductible health plans have any benefits?

Some people opt for HDHPs, and that is because they do offer a few benefits. For one, "in exchange for that higher deductible, you typically pay a lower premium," said USA Today. As for how much lower, Kaiser Family Foundation "reports that the average worker contribution for an HDHP plan with a health savings account in 2021 was $95 a month for an individual plan and $393 for families, versus premium contributions of $110 and $525, respectively, for plans with lower deductibles."

Another upside is access to an HSA, or health savings account. These accounts "let you set aside money on a pre-tax basis to pay for qualified health care expenses, including your deductible, coinsurance and many other health services," said USA Today. Plus, said Experian, "your funds can grow tax-free, and you can withdraw them on a tax-free basis as long as it's for qualified medical expenses," which "could save you hundreds of dollars."

When does a high-deductible health plan make sense?

When considering an HDHP, it's important to take your "medical history and current physical health and your budget" into account, said Experian.

For instance, said Experian, opting for a plan with a high deductible "might make sense" if you are "young, healthy, and single with no dependents," you "rarely visit the doctor," or "your financial situation is in good shape," allowing you to "to pay your medical expenses" and "make significant contributions to an HSA." Additionally, it can help if "your employer makes contributions to your HSA at a level that covers most, if not all, of your plan's deductible."

Just keep in mind, said Investopedia, that "whether an HDHP will save you money always depends on the details of the specific plans available to you and your expected medical expenses for the year."