Catastrophic Health Insurance Vs HDHP—Not the Same Thing

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Not all catastrophic plans are qualified HDHPs, and not all HDHPs are catastrophic plans. Image © Andy Ryan/Stone collection/Getty Images

Since Catastrophic health plans have really high deductibles, they must be high deductible health plans, right?

Wrong!

If you make this mistake, you could find yourself in a financial mess. Qualified high deductible health plans are not the same thing as the catastrophic health insurance plans created by the Affordable Care Act and sold on state and federal health insurance exchanges.

What's a catastrophic health plan vs HDHP can be confusing because the meaning of the term catastrophic health insurance has changed thanks to the Affordable Care Act.

In the past, catastrophic health insurance was an informal term loosely meaning any kind of health plan with a really high deductible.

However, the Affordable Care Act created a category of individual and family health insurance plans called catastrophic health insurance. These new, “official” catastrophic health insurance plans are sold on state and federal health insurance exchanges and have very specific defining characteristics. HDHPs and catastrophic plans aren’t the same thing anymore.

Catastrophic Health Plan vs HDHP—How They Differ

1) Only HDHPs Can Be Used With Health Savings Accounts

A qualified HDHP is designed to be used together with a health savings account, or HSA. Neither you nor your employer can contribute to an HSA unless it’s linked to a qualified HDHP. Since not all catastrophic plans are qualified HDHPs, don’t assume that you’ll be able to link a catastrophic plan to an HSA.

You’ll only be allowed to link a catastrophic plan to an HSA if that plan is also a qualified HDHP.

2) Out-Of-Pocket Maximums Are Different

Out-of-pocket maximums are different for HDHPs than for catastrophic health plans. For example, in 2015, the individual out-of-pocket maximum can’t exceed $6,450 for qualified HDHPs; whereas, for catastrophic plans the figure is $6,600.

Federal regulations limit how high the out-of-pocket maximum can be for different types of health plans. The Treasury Department regulates the out-of-pocket maximum for qualified HDHPs, adjusting it each year based on the consumer price index. The Department of Health and Human Services regulates the out-of-pocket maximum for the catastrophic health plans, adjusting it yearly based on how much average health insurance premiums have changed.

3) Minimum Deductible Amounts Are Different

Catastrophic plans must have a deductible that’s equal to the highest allowable out-of-pocket maximum. In other words, the deductible and the out-of-pocket maximum are the same. If the deductible is lower than the highest allowable out-of-pocket maximum, the health plan won’t qualify as a catastrophic plan. For 2015, the out-of-pocket maximum and deductible are $6,600 for an individual catastrophic plan.

Qualified HDHPs may have lower deductibles than catastrophic plans. The Treasury Department sets the minimum allowable deductible for HDHPs each year, and an HDHP may have a deductible anywhere between that minimum and the out-of-pocket maximum.

The minimum allowable deductible for 2015 is $1,300 for an individual HDHP plan.

4) Only Catastrophic Plans Restrict Enrollment

Anyone can buy an HDHP, but only those who meet eligibility criteria can buy a catastrophic health insurance plan. That’s right; government rules forbid insurers to sell catastrophic plans to some people. Learn who’s eligible and who’s not in “Do You Qualify for Catastrophic health Insurance?

5) Health Insurance Subsidies Can’t Be Used for Catastrophic Plans

Do you qualify for a health insurance subsidy to lower the cost of your monthly health insurance premiums? Be careful when you’re shopping for health insurance; you won’t be allowed to use that subsidy to buy a catastrophic health plan. However, if your state’s health insurance exchange offers a bronze, silver, gold, or platinum HDHP, you can use your premium tax credit health insurance subsidy to buy it.

What Does This Mean for Me?

When you're shopping for health insurance, make sure you understand whether the plan you're looking at is a qualified HDHP, a catastrophic plan, or both. If the plan is a qualified HDHP, the plan's literature must either say it's a "qualifying high deductible health plan", or that it complies with IRC 223 (the U.S. law that regulates HSAs). If you don't see those terms, it's not a qualified HDHP.

If you're planning on making contributions to a tax-advantaged HSA, you'll have to buy a qualified HDHP. If you accidentally buy a catastrophic plan that isn't an HDHP and you contribute to your HSA, you'll face financial penalties.

While both plan types have high deductibles, the deductibles for HDHPs are usually a bit lower than deductibles for catastrophic plans. Although this means HDHP coverage will kick in and start paying sooner than catastrophic coverage will, most healthy people won't have coverage kick in for either type of plan because they won't use enough health care services in a single year to meet the deductible.

Since both HDHPs and catastrophic plans are usually HMOs, PPOs, EPOs, or POS plans, you'll benefit from the in-network discounts these plans have negotiated with doctors, pharmacies, urgent care centers, and labs even if you never meet the full deductible. As a health plan subscriber, as long as you stay in-network, you only pay the discounted rate even if your coverage hasn't kicked in and begun to pay yet.

Whether you're thinking of an HDHP or a catastrophic plan, if you can't afford to pay the deductible if disaster strikes, you'll be in trouble. While an HDHP linked to an HSA provides a way to save for your deductible, you'll still need to be disciplined enough to put the money into the HSA each month. Since a catastrophic health plan isn't linked to an HSA, you need to come up with a different plan to pay your deductible. Read "How To Budget for a Health Insurance Deductible" for help.

Sources:

HHS 2015 Health Policy Standards Fact Sheet. http://www.cms.gov/Newsroom/MediaReleaseDatabase/Fact-sheets/2014-Fact-sheets-items/2014-03-05-2.html 

IRS Revenue Procedure 2014-30. http://www.irs.gov/pub/irs-drop/rp-14-30.pdf  A

Final Rule: Patient Protection and Affordable Care Act; Health Insurance Market Rules; Rate Review. https://www.federalregister.gov/articles/2013/02/27/2013-04335/patient-protection-and-affordable-care-act-health-insurance-market-rules-rate-review#p-272 

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