What is a High-Deductible Health Plan (HDHP)? A Complete Guide

If you’ve ever felt a wave of confusion looking at your health insurance options, you’re not alone. Terms like “deductible,” “premium,” and “out-of-pocket maximum” can feel like a different language. One of the most common and often misunderstood options is the High-Deductible Health Plan, or HDHP.

Perhaps you chose an HDHP for its lower monthly cost, or perhaps it was the only option your employer offered. Whatever the reason, understanding how these plans work is crucial in taking control of your healthcare spending. This guide will break down what you need to know about HDHPs in simple, straightforward terms, so you can navigate your health and your wallet with confidence.

What Exactly is a High-Deductible Health Plan (HDHP)?

At its core, an HDHP is a health insurance plan that trades a lower monthly payment (the premium) for a higher upfront cost (the deductible). The “deductible” is the amount of money you pay for your medical care before your insurance company begins to share the costs.

To be officially classified as an HDHP by the Internal Revenue Service, a plan must meet certain minimum deductible amounts and maximum out-of-pocket limits, which are updated annually. For example, in 2023, a plan needed a minimum deductible of at least $1,500 for an individual or $3,000 for a family to qualify as an HDHP. The total yearly out-of-pocket expenses—which include your deductible, copayments, and coinsurance—could not be more than $7,500 for an individual or $15,000 for a family.¹ These numbers ensure that while your initial costs are high, there’s a cap to protect you from truly catastrophic expenses.

How It Works: The Three Phases of Your Healthcare Year

Thinking about your HDHP in three distinct phases can make it much easier to understand.

Phase 1: You Pay (The Deductible Phase)

When the plan year begins, you are responsible for 100% of your medical costs until you meet your deductible. This includes doctors visits, lab tests, and, importantly, prescription drugs. The one major exception is preventive care. Under the Affordable Care Act (ACA), most HDHPs are required to cover in-network preventive services, like annual physicals, routine screenings, and immunizations at 100%, even before you’ve met your deductible.²

Phase 2: You and Your Plan Share (The Coinsurance Phase)

Once you have paid enough out-of-pocket to meet your deductible, you enter the coinsurance phase. During this phase, you and your insurance plan share the cost of your care. A common split is 80/20: Your insurance plan agrees to pay 80% of the cost, and you pay the remaining 20%. You’ll continue to share costs this way for every covered service.

Phase 3: Your Plan Pays 100% (The Out-of-Pocket Maximum)

Every dollar you spend on your deductible and coinsurance counts toward your annual out-of-pocket maximum. This is the absolute most you will have to pay for covered, in-network care in a year. In-network care means you agree to see physicians contracted with your insurance plan, not physicians of your choosing. Once you hit this limit, your insurance plan pays 100% of all covered medical costs for the rest of the plan year. This is a crucial safety net that protects you from boundless medical bills in the case of a major illness or catastrophic injury.

The Big Question: Is an HDHP Right for You?

HDHPs can be a great financial tool for some, but they aren’t the right fit for everyone.

Potential Pros:

• Lower Monthly Premiums: The most immediate benefit is a smaller monthly bill for your health insurance coverage.
• Access to a Health Savings Account (HSA): HDHPs are the only type of plan that allows you to contribute to a powerful, tax-advantaged Health Savings Account. More on that below.
• Good for the Healthy and Prepared: If you are generally healthy, rarely need medical care beyond preventive checkups, and have enough savings to cover the deductible in an emergency, an HDHP can save you money over traditional insurance plans.

Potential Cons:

• Significant Financial Risk: The high deductible means an unexpected surgery or a new diagnosis can lead to a large bill that is often due immediately. In some extreme cases, these bills can lead to bankruptcy.
• Discourages Care: Studies show that some people with HDHPs delay or avoid necessary medical care or prescriptions because they are worried about the upfront cost.³ This can lead to poor health outcomes and higher costs down the road.
• Challenging for Chronic Conditions: If you or your family have a chronic condition that requires regular doctor visits and medications, you will likely hit your deductible quickly each year. This potentially makes a traditional plan with a lower deductible a more cost-effective option.⁴

Your Secret Weapon: The Health Savings Account (HSA)

The single biggest advantage of an HDHP is eligibility for a Health Savings Account (HSA). An HSA is a special savings account that you own. It allows for an additional financial benefit called the “triple tax advantage”⁵::

1. Contributions are Tax-Deductible: The money you put into your HSA reduces your taxable income for the year.
2. The Money Grows Tax-Free: Any interest or investment earnings your HSA balance generates are not taxed.
3. Withdrawals are Tax-Free: You can use the money to pay for qualified medical expenses, including deductibles, copays, prescriptions, dental, and vision care, completely tax-free.

Unlike other accounts, the money in your HSA is yours to keep forever. It rolls over year after year and stays with you even if you change jobs or insurance plans. Many people use it as both a healthcare fund and a long-term retirement savings plan.

HSA vs. FSA: Don’t Get Them Confused

It’s easy to mix up an HSA with another common workplace benefit: the Flexible Spending Account (FSA). While both let you use pre-tax money for healthcare costs, they have crucial differences. Having a clear understanding of both plans will help you determine which is right for you. Below is a table to help you differentiate the two plans.

Table 2: HSA vs. FSA: Key Differences at a Glance⁵

Conclusion

Understanding your HDHP is critical to being proactive about your health care costs. During the initial “deductible phase,” you are a cash-paying customer for most of your prescriptions and health care. Every dollar you spend comes directly from your own pocket until the deductible amount is met. Pretax Health Savings Accounts can act as an emergency pool of funds for medical needs and other health care costs, and can make your HDHP a more desirable option.

By searching for your medication on LowerMyRx before you go to the pharmacy, you can find significant discounts that lower your out-of-pocket spending. Saving money on each prescription helps you preserve the funds in your HSA for other medical needs and makes the journey toward meeting your deductible less of a financial burden. Understanding an HDHP may help lower the cost of medical care for some, and LowerMyRx allows you to save more of your hard-earned dollars with every prescription.

References

1. Internal Revenue Service. Rev. Proc. 2023-23. May 16, 2023. Accessed July 29, 2025. https://www.irs.gov/pub/irs-rev-proc/rp-23-23.pdf
2. The Kaiser Family Foundation. Preventive Services Covered by Private Health Plans under the Affordable Care Act. August 20, 2015. Accessed July 29, 2025. https://www.kff.org/health-reform/fact-sheet/preventive-services-covered-by-private-health-plans/
3. Reddy SR, Ross-Degnan D, Zaslavsky AM, Soumerai SB, Wharam JF. Impact of a high-deductible health plan on outpatient visits and associated diagnostic tests. Med Care. 2014;52(1):86-92.
4. Jiang DH, Mundell BF, Shah ND, McCoy RG. Impact of High Deductible Health Plans on Diabetes Care Quality and Outcomes: Systematic Review. Endocr Pract. 2021;27(11):1156-1164.
5. Internal Revenue Service. Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans. For use in preparing 2023 returns. Accessed July 29, 2025. https://www.irs.gov/publications/p969
6. Mazurenko O, Buntin MJB, Menachemi N. High-Deductible Health Plans and Prevention. Annu Rev Public Health. 2019;40:411-421.
7. Abdus S. The role of plan choice in health care utilization of high-deductible plan enrollees. Health Serv Res. 2020;55(1):119-127.

This is for informational purposes only. For advice, consult an insurance or healthcare professional.