The Pros and Cons of High-Deductible Health Plans

What is a high-deductible health plan?

A high-deductible health plan, or HDHP, is a tax-advantaged combination of traditional health insurance and an HRA or HSA (health reimbursement account or health savings account). As its name suggests, its deductible (the amount one must pay out of pocket before the insurer starts paying) is higher than average. However – and this is why HDHPs have become so popular – the monthly premium is lower.

The federal government determines the deductibles required for health plans to qualify as HDHPs. For 2024, the IRS announced that HDHP annual deductibles would fall between $1,600 and $8,050 for individuals and between $3,200 and $16,100 for families. In addition to paying the monthly premium, employees with these plans have to pay for their healthcare out of pocket up to the amount of the deductible before insurance will assist. Alternatively, they may be able to negotiate with their healthcare provider to reduce the cost or structure a payment plan.

HDHPs with HSAs

A key component of many HDHPs is a health savings account (HSA). These pretax savings accounts that employees contribute to can help offset the costs associated with high deductibles and copays, and are usable for a wide spectrum of healthcare expenses.

Offering an HSA along with an HDHP helps ease the employee’s financial burden, especially if the business also contributes a monthly or annual amount to the account. Employers should supply employees with resources on how to best use their HSAs to offset their healthcare costs.

The pros of HDHPs

Both employers and employees can benefit from HDHPs. Below are some of the advantages of these plans.

Lower premiums

Higher deductibles usually mean lower premiums for small businesses trying to find ways to cut costs and save. In 2023, the average annual premium for an employer-sponsored family coverage plan was $23,968. Premiums for HDHPs are typically on the lower end, with the average annual cost for family coverage of HDHPs about $22,344.

Ideal for infrequent medical visits

HDHPs are generally good options for young and single employees who are more likely to be healthy and don’t need coverage for spouses and dependents. Because they utilize fewer medical services, these employees can avoid the downsides of higher deductibles (see below) and enjoy the benefits of cost savings.

Affordable basic services

While the deductible for an HDHP is generally high, many HDHPs offer basic preventive services, such as annual checkups, vaccines and generic prescriptions, at little to no cost. This can encourage employees to be proactive about their health and schedule routine wellness visits.

The cons of HDHPs

HDHPs are a boon to small businesses everywhere due to their lower premiums, resulting in immediate savings for both employers and employees. However, it’s important to also consider the drawbacks to these plans.

High deductibles

Problems can arise when employees are faced with inevitable, costly healthcare expenses and need to pay much more out of pocket due to their high deductible before insurance kicks in. This can lead to financial strain and potential barriers to accessing necessary medical care.

Costly for ongoing visits

HDHPs are generally not recommended for those who suffer from chronic health conditions, as well as families with children who require frequent doctor visits. Unexpected medical emergencies can also be costly for employees on HDHPs.

Potential to discourage frequent care

A high deductible can make it difficult for employees to immediately pay their medical expenses, resulting in stress and frustration. Worse, employees may avoid recommended medical care and delay essential procedures because they can’t or don’t want to pay the high deductible. This can result in bad health outcomes, which can lead to lost time at work. 

The difference between HDHP and PPO plans

Preferred provider organizations (PPOs) are another common type of health plan, but they differ in many ways from HDHPs. High-deductible health plans typically have lower monthly premiums but higher deductibles. On the other hand, PPOs generally have higher premiums but lower deductibles, providing more immediate insurance coverage but higher monthly costs. 

PPOs typically allow individuals to see specialists and receive care without needing referrals from a primary care provider, giving employees greater autonomy in making healthcare decisions. In contrast, HDHPs often require referrals for specialist visits, although they encourage visits for preventive care. Ultimately, both types of plans provide coverage for medical expenses. Choosing what’s best for your staff hinges on their healthcare needs, financial considerations, and the level of flexibility you want to provide employees in selecting their providers.

Educate your employees so they can make the best decisions when utilizing the insurance options you provide. If you have a larger organization with a lot of employees, then it’s best to offer an HDHP alongside a PPO and then help your employees make the best choice on the type of health insurance program that’s right for them.

What you need to know when offering HDHPs

While offering an HDHP to employees will likely result in savings for your business, it essentially pushes the costs onto the employee, especially if they’re faced with a serious medical situation. However, many proponents of HDHPs argue that they’re generally beneficial to both businesses and their team members. They just place more responsibility on the employee to make smarter healthcare decisions.

“High-deductible health plans do shift some of the increasing cost of health insurance onto employees,” said Matthew Struck, a small business owner and the founder of Struck & Co. Woodcraft. “The business owner saves on their premium because the employee pays the first few thousand dollars in expenses. The hope is that the employee has skin in the game and uses their insurance wiser. Price shopping for services is an example of this.”  

It’s recommended that businesses that offer HDHPs also offer education to employees on how to be better healthcare consumers. Many employees typically select medical practices without much research, going to whoever’s near them or to the same provider repeatedly without checking to see if there are better options.

“Unfortunately, the lack of pricing transparency in the market makes this dynamic almost unachievable with most plans,” Struck said. “If employers want to help their employees with resources to choose medical providers with cost-effective, high-value care, they should place their coverage with an insurer or administrator that can provide these types of services.”  

How to find the right HDHP (or other health insurance plan)

Health insurance options are often complex to navigate and understand. That can be worrisome. What if you sign up for a plan that causes more problems than it solves? To avoid this issue, you can work with an HR outsourcing company. 

HR outsourcing firms specialize in, among other things, employee benefits administration, including health insurance. These vendors can lead you to the right plans for your workforce. You can read our list of the best HR outsourcing companies to find the right fit.

Of course, outsourcing this HR task is another cost to factor into your payroll budget. If you can’t afford to work with a third-party advisor but are required to offer employee health insurance, just search for plans yourself while keeping all the above information in mind. With the right amount of patience and knowledge, you can offer health insurance to your employees without too much hassle.

Choosing healthy options for everyone

HDHPs are an appealing health insurance option if you’re looking to balance costs with comprehensive healthcare coverage for your employees. If you decide HDHPs work well for your company’s and employees’ needs, be sure to explain the details of these plans to your team. By prioritizing everyone’s well-being and providing them with the necessary information and support, you can help ensure HDHPs are a positive addition to your company’s benefits package.

Shayna Waltower and Max Freedman contributed to this article. Source interview was conducted for a previous version of this article.