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High Deductible Health Plans (HDHP)

Saving against the possibility of future medical expenses is a wise precaution for anyone, particularly as the costs of quality health care continue to steadily rise. In 2003, as part of a wide-ranging plan to reform Medicare, the U.S. government created the Health Savings Account (HSA), a tax-sheltered medical plan into which eligible citizens can:

  • Contribute funds
  • Make tax-free investments
  • Eventually withdraw contributed money to meet whatever health expenses may arise.

To qualify for a Health Savings Account, one must first be covered by a High Deductible Health Plan (HDHP).

HDHP Basics

The High Deductible Health Plan is a policy in which the insured pays large out-of-pocket expenses for simple health services but is covered for the bulk of expenses pertaining to emergencies and complex medical procedures. A portion of all premium payments to HDHP plans are credited to the insured’s HSA account, and these contributions can be used to pay deductibles as desired (alternatively, one can pay for deductibles out-of-pocket and allow one’s HSA savings to grow).

HDHP policies are purchased from third party providers in just the same way as are standard insurance policies, and allow eligibility for HSA benefits so long as the insured is neither enrolled in Medicare nor claimed by another as a dependent.

High Deductibles, Low Premiums

Standard HDHP plans have minimum deductibles of $1,050 for personal coverage and $2,200 for family coverage, rates which are relatively high in comparison to other plans (the maximum deductibles are $5,000 and $10,000, respectively). However, high deductible plans tend to offer low premium rates and a large proportion of liability coverage (often 100%) once the deductible is met. For this reason, HDHPs (and HSAs) are best suited for individuals and families who do not anticipate frequent medical expenses but who wish to insure themselves against unexpected medical emergencies.

Some have criticized the HDHP-HSA plan, arguing that the high deductibles place a large financial obligation for simple personal care on the individual, which may in turn encourage them to forego low-cost treatment, forcing them to undergo major medical procedures at a later point. Fortunately, many basic preventive care services under HDHP plans are available under first-dollar coverage, which waives the high deductible in lieu of a co-payment.

HRA: An Alternative Plan

Holders of HDHPs who are not eligible for an HSA will qualify instead for a Health Reimbursement Arrangement (HRA). The HRA is essentially a limited version of the HSA, which is solely funded through contributions to the HDHP made by an employer. Upon acquisition of an HDHP, the policy providers will automatically determine whether the insured is eligible for an HSA or HRA and enroll them accordingly. Just as with an HSA, an HRA account receives portions of premium payments (in this case, contributed by the employer), which are then set aside for future use.

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