The ABCs of HDHPs

High-deductible health plans (HDHPs), often called account-based plans, come in several flavors. Standard HDHPs are simply high-deductible plans. Consumers pay lower premiums in exchange for paying more of the initial cost, a higher portion of each medical bill, or both. In 2008, the IRS tax-free threshold was $1,100 for individual coverage and $2,200 for family coverage.

A consumer-directed health plan (CDHP) is an HDHP with a special tax-favored savings account to pay for medical expenses. With CDHPs, consumers make tax-free deposits into health savings accounts (HSAs) that accompany HDHPs. Balances accumulate year to year, earning tax-free interest. Health reimbursement arrangements (HRAs) are often used by employers to help shape their benefit packages and to provide incentives for prevention and wellness. With HSAs, people make their deposits and own the balances. With HRAs, companies make the deposits, roll over from year to year and usually keep the balances when the employee leaves the company.

The typical CDHP member is more likely to be young, single, higher-income, healthier and better-educated than those on traditional plans are. The plans are also popular with healthy employees over 55 who consider HSAs a tax-free retirement investment account. The average household income for people with HSAs was $139,000 in 2008, compared with $57,000 for all other taxpayers. They are less likely to smoke or be obese, and more likely to exercise and be involved in a workplace health-promotion program than traditional-plan enrollees.

People who are sick or have an ill family member are less likely to choose account-based insurance. Some fear that, if many healthier people switch to CDHPs, traditional plans may become more expensive because they include a higher percentage of people with chronic conditions.

Regardless of the arrangement, HDHPs are more like true insurance by covering unforeseen, high-cost events while the consumer pays for low-cost health expenses that are more predictable and amenable to a household budget.