As you shop for health insurance you may be confronted with a huge list of acronyms and new terms. You might be wondering, what is a high deductible health plan (HDHP)? Can an HDHP be a PPO? And most importantly, how do you decide what is the right option for your healthcare needs?
HDHP stands for high deductible health plan. At a high level, it is easily defined by its name. They are types of health plans that have higher deductibles and lower monthly premiums than traditional health insurance plans. An individual with a HDHP pays for health care costs up to the deductible before any kind of insurance kicks in (though preventative care is excluded from this definition).
Each HDHP has its own nuances, so it is important to understand the limits and requirements of the plans you are considering.
IRS requirements for HDHPs
The IRS decides the minimum deductible for a health plan to be qualified as high deductible. They also decide on the maximum out-of-pocket costs for HDHPs, and often update these requirements yearly.
HSAs and HDHPs
Besides lower premiums, a big advantage of an HDHP is that you may open and contribute to a health savings account (HSA) when you have an HDHP.
HSAs are tax-advantaged accounts that let you save money for qualified medical expenses and for retirement. They are considered to be triple tax-advantaged because they offer three big tax benefits:
You can contribute money tax-free. If you contribute via payroll then the funds will be taken pre-tax. If you contribute on your own then the contributions will be tax deductible.
Your money grows tax-free. You won’t be taxed on interest and dividends as your HSA grows over time. You can also invest your HSA if you would like.
You can use the money tax-free for qualified medical expenses. This makes HSAs a great way to save money for planned medical procedures or unexpected medical expenses that may come up. Before the age of 65, if you use your HSA funds on non-qualified expenses, you will be subject to taxes and penalties. After you reach the age of 65 you can use HSA funds for any expenses, and they will only be subject to regular taxes, just like an IRA.
PPO stands for preferred provider organization. PPO plans are a type of health insurance that offers a choice of healthcare providers within a certain network. PPOs have been around a long time, and many people think of them as “traditional” health plans. In the past, they almost always had low or no deductibles and more expensive premiums. But right now there are many PPOs out there that don’t totally fit that description, due to the rising cost of healthcare.
Advantages of a PPO
The big advantage of a PPO is the freedom to choose the doctor and hospital you want to go to, without needing a referral from your primary care physician. Often PPOs have a variety of providers who are considered to be in-network, which gives people the flexibility to choose the right person for them. And even if a provider is out-of-network, a PPO will still likely cover a portion of your doctor visits or other care.
Yes, an HDHP can be a PPO
The short answer is yes. An HDHP can be a PPO.
The long answer is that a HDHP can be any type of health plan, depending on its rules and network of providers. This can seem confusing, because many articles compare HDHPs and PPOs directly, using terms like “HDHP vs. PPO.” But comparing HDHPs and PPOs is like comparing apples and oranges.
As long as a plan meets IRS requirements, it can be considered an HDHP. HDHPs can be part of PPO networks, therefore they can be PPOs. But they don’t have to be, they could be a different type of health plan as well, such as a health maintenance organization (HMO).
Why compare PPOs and HDHPs?
Many people want to compare PPOs and HDHPs because they want to compare costs as they shop for health benefits. PPOs are often considered to be “traditional” health insurance plans. So it may be a comparison between a higher deductible/lower premium plan and a lower deductible/higher premium plan. But that isn’t always the case.
In recent years, the differences in cost and coverage between traditional health plans and HDHPs have narrowed. This has been influenced by rising healthcare costs. So while in the past the comparison between traditional PPOs and HDHPs (be they PPOs or not) may have been more straightforward, nowadays the line is blurred. That is why it is so important to identify your needs when it comes to a health plan, understand exactly what an insurance company is offering, then choose the one that meets your goals the best.
The bottom line
Healthcare plans are all about the fine print, and they are constantly changing. What was true last year, might not be true this year. It pays to be an informed shopper when comparing health plan options.
Start with knowing your budget and how you typically use health insurance. Then dig into the details of the plans you’re comparing. Don’t take a look at a high deductible or a certain provider network and think you know everything about a plan. It pays to consider all facets of the plans available and how they would work with your anticipated needs. Then make an informed decision, whether that is a PPO, HMO, HDHP, or something else. Then enjoy your new health plan!
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.