Gap Insurance for Healthcare? Look for More of It in 2024

What is gap insurance in healthcare?

Gap insurance, also called supplemental health coverage, is additional group health insurance paired with an HDHP. The gap plan helps cover employees’ out-of-pocket costs, including deductibles and copays.

A gap insurance plan is part of a company’s employee benefits package. You can structure gap plans in various ways. However, they typically cover deductibles, copayments, coinsurance expenses, prescription drug costs and other healthcare-related expenses.

Gap insurance may also cover nonmedical expenses, including living expenses during a hospital stay or while recovering at home from an illness or accident. Other gap plans might include income replacement for claims periods when individuals can’t work.

Combining gap insurance with an HDHP can be a cost-effective alternative to offering a low-deductible health insurance plan.

What is an HDHP?

An HDHP is a health insurance plan with a deductible of at least $1,400 for an individual and $2,800 for a family. In reality, the deductibles can go much higher.

According to the Kaiser Family Foundation, in 2023, about 29 percent of covered workers were enrolled in an HDHP. Also, 30 percent of businesses that offer health benefits offer some kind of HDHP.

Why would an employer choose an HDHP?

Employers typically opt for an HDHP to lower their insurance costs while still offering health insurance. To some degree, HDHPs have been effective in slowing premium rate increases. Implementing an HDHP shifts costs to employees, who must pay deductibles and copays out of pocket.

What are the benefits of gap insurance?

Gap insurance in healthcare comes with several benefits for employers and employees, including the following:

• Gap insurance lowers employees’ out-of-pocket costs. Offering gap insurance is a way to ease your employees’ financial burden. With gap insurance alongside an HDHP, employees pay less for their healthcare expenses.
• Gap insurance strengthens an employee benefits package. Introducing gap insurance and other creative benefits during the hiring process can impress potential recruits. It’s a benefit that shows your business cares and can be part of a strategy for attracting and retaining quality employees.
• Gap insurance is an alternative to a health savings account (HSA). With gap insurance, employees have lower out-of-pocket costs compared to funding an HSA (more on HSAs below).
• Gap insurance isn’t an expense for employers. While employers can offer to pay the gap insurance premiums, they don’t necessarily have to incur any costs with gap insurance. Employers can offer it as a supplemental benefit to employees, who pay for it themselves.

What are the downsides of gap insurance?

While gap insurance is an excellent choice for many companies, it isn’t ideal for every business and every team. Gap insurance coverage also varies widely; be sure to read the fine print so you understand what’s covered.

Some of the downsides of gap insurance include the following:

• Gap insurance doesn’t cover every expense. Gap insurance may not cover specific out-of-pocket expenses, such as lab work, X-rays or mental health treatment.
• Preexisting conditions may be an issue with gap insurance. Depending on your specific policy, an employee may be refused coverage because of preexisting conditions.
• Gap insurance may have additional fees. Employees may be responsible for paying some deductibles, copays and other fees.

How does gap insurance compare to an HSA?

HSAs offer some of the same benefits as gap insurance; they’re intended to help relieve the burden of out-of-pocket medical expenses. However, employees can’t contribute to an HSA and use a gap plan simultaneously (even though a business can theoretically offer both). Here’s how HSAs and gap insurance compare:

• HSA costs: Contribution limits for HSAs in 2024 are $4,150 for an individual and $8,300 for a family; there’s an additional “catch-up” contribution of $1,000 for those ages 55 or older. The 2025 limits will be $4,300 for individuals and $8,550 for families. These accounts accumulate tax-free and can be rolled over. However, employers don’t typically fund HSAs (though they can if they prefer). Employees must contribute to build up their balances.
• Gap insurance costs: Many gap medical insurance policies cost less than $50 per month. Some employers pay the premiums, but even if they don’t, these policies are likely affordable for employees.
• HSA coverage: HSAs can be used for a wide range of qualified medical expenses, offering more flexibility in how funds are spent.
• Gap insurance coverage: Gap insurance is specifically designed to cover gaps in HDHPs. It primarily assists with deductibles and out-of-pocket maximums.

Should employers provide gap insurance?

Your workforce’s needs and your business’s budget will determine if gap insurance is worthwhile. If you’re offering an HDHP to your team for health insurance, you’re already saving money on premiums. If getting a gap plan doesn’t exceed the savings of having an HDHP, it could be an excellent option for your team.

Consider the following questions to determine if your business should provide gap insurance:

• Do you offer an HDHP? If so, gap insurance can help your employees cover costs and make healthcare more affordable.
• Are you concerned about employees facing significant out-of-pocket costs? If so, offering gap insurance can provide financial relief and encourage employees to seek necessary healthcare without worrying about high costs.
• Do you have employees with high-risk health conditions? If so, providing gap insurance can ensure any gaps left by your HDHP are filled. Employees with chronic conditions or those more likely to need healthcare will be better served.
• Are you concerned about attracting and retaining top talent? If so, offering gap insurance is a well-regarded perk that could encourage employee loyalty and help your business stand out to job seekers.
• Is giving your employees peace of mind a priority? If so, gap insurance can help mitigate your team’s financial concerns and show them you care about their health and security.
• Have you decided against offering HSAs? If managing an HSA is too cumbersome and costly — or your workforce isn’t fully engaging in the HSA — offering gap insurance is a great alternative. It provides extra coverage and is a straightforward offering.
• Can you afford gap insurance? If paying gap insurance premiums is in your budget and doesn’t affect your overall employee benefits offerings, it’s likely worth providing. (Additionally, you can offer gap insurance and have your employees pay their premiums.)

Note that gap insurance coverage varies widely. Employers and employees must read the details of the gap insurance plan to fully understand what’s covered and what isn’t. For example, the gap policy may exclude specific tests and procedures or even preexisting conditions, so it’s crucial for everyone to understand what they’re getting.

Gap insurance can be part of an attractive benefits package

For some companies, combining an HDHP with gap insurance may be a financial lifesaver. For others, it’s a way to save on the cornerstone benefit of healthcare coverage within the framework of an overall robust benefits package.

Ideally, money that traditionally would have gone toward premium payments can fund packages that include a richer set of options, including dental and vision plans and corporate wellness programs. With options like these, companies can provide a more attractive and flexible benefits package. Plus, it will come at less than the costs they’d incur if they took full responsibility for the premiums of more high-priced health plans with lower deductibles. Gap insurance can help make HDHPs more feasible (and even more desirable).