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Updated Oct 30, 2023

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

Help your employees cover out-of-pocket expenses.

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Kimberlee Leonard, Senior Analyst & Expert on Business Operations
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Health insurance is usually the core of any business’s employee benefits package. However, amid escalating health insurance costs, companies are grappling with how to provide this critical benefit without breaking the bank.

As a result, many have shifted at least part of the cost burden to employees, often by offering a high-deductible health plan (HDHP). With an HDHP, employees are responsible for predictable, anticipated costs well under the deductible, including prescriptions and copays for routine care. They’ll also have to deal with unexpected costs associated with a sudden illness or accident.

With high deductibles and potentially massive out-of-pocket expenses, many employers want to “fill the gap” to help their staff mitigate healthcare costs.

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, but they typically cover deductibles, copayments, coinsurance expenses, prescription drug costs and other healthcare-related expenses.

Gap insurance may also cover non-medical 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?

The IRS defines an HDHP as 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 2021, the percentage of those under 65 with private health insurance who participated in an HDHP stood at 31%. This represents an increase from 2010, when the comparable figure was 25.3%.

As of 2020, employees spent on average more than $7,464 for single coverage and $22,643 for family coverage, according to the Kaiser Family Foundation.  

Why would an employer choose an HDHP?

Employers lower their costs when they offer HDHPs to their employees. 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. Offering gap insurance is a way to ease this financial burden.

TipBottom line
As an additional employee fringe benefit, consider paying the gap insurance premium costs. If this isn't financially possible, you can still offer gap insurance and let employees opt in and pay their premiums. 

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. With gap insurance alongside an HDHP, employees pay less for their healthcare expenses.
  • Gap insurance strengthens an employee benefits package. Gap insurance may be an instrumental element to introduce during the hiring process. With gap insurance, employers can offer an extra benefit that attracts and retains 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 everyone. 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, you may be refused coverage because of preexisting conditions.
  • Gap insurance may have additional fees. Within a gap plan, you may also have to pay deductibles, copays and other fees.
Did You Know?Did you know
Gap insurance is also an option in commercial auto insurance. It pays the difference between the depreciated value of the car and what you owe.

How does gap insurance compare to an HSA?

A health savings account (HSA) offers some of the same benefits as gap insurance, helping to relieve the burden of out-of-pocket medical expenses. You can’t have both a gap plan and an HSA plan simultaneously. If you had to choose, an HSA is an easy frontrunner for individuals because contributions accumulate tax-free and can be rolled over. Additionally, everything categorized as a qualified medical expense will be covered under an HSA, while gap insurance won’t cover everything.

Employers can fund all or part of an HSA (contribution maximums for 2021 are $3,600 for an individual, $7,200 for a family, and a catch-up contribution of $1,000 for those age 55 or older). However, HSA funding typically comes directly from the individual – and not everyone can afford $500 or more per month.

Alternatively, even people on a strict budget can generally afford to spend roughly $50 each month for gap insurance to cover them against their HDHP deductible.

If an employer is going all in, it’s less expensive to provide an HDHP plus gap insurance than it is to provide an HDHP and a fully funded HSA.

TipBottom line
Get anonymous employee feedback to determine whether your team prefers a gap insurance policy or an HSA. This could provide vital insights into employees' needs.

Should employers provide gap insurance?

As an employer, you may be wondering if you should provide gap insurance. Remember that sticking with an HDHP can save money on your health insurance benefits compared to other health plans. These savings could be up to 20% of your costs.

If you’re concerned about the gap insurance costs, consider offering gap insurance as a supplement to employees who pay for the policy. If the policy costs an employee $500 annually, it’s still less than paying the plan’s high deductible and copays. Employees with ongoing medical issues will still save money if they opt in to the gap coverage.

However, employers and employees must read the gap insurance plan’s details to fully understand what’s covered and what isn’t. The gap policy may exclude specific tests and procedures. In some cases, the policy may exclude preexisting conditions, so it’s crucial for employees to understand what they’re getting.

TipBottom line
If you're evaluating health insurance plans for your business, read our reviews of the best business employee benefits and insurance plans to compare features, prices and providers.

Gap insurance can be part of an attractive benefits package

For some companies, combining an HDHP with gap insurance may be a financial lifesaver. But, more frequently than not, it’s a way to save on the cornerstone benefit of healthcare coverage within the framework of an overall stronger 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 for 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).

David Reid contributed to the reporting and writing in this article.

author image
Kimberlee Leonard, Senior Analyst & Expert on Business Operations
Kimberlee Leonard is an insurance expert who guides business owners through the complicated world of business insurance. A former State Farm agency owner herself, Leonard started her decades-long career as a financial consultant advising on investment strategies before switching her focus to insurance and risk mitigation for businesses. Leonard has developed insurance primers on everything from small business insurance costs to specific policies, such as excess liability insurance. She has also reviewed business software tools, analyzed employee retirement plan providers and continues to share insights on financial topics as they relate to business. Leonard's work has been published in Forbes, U.S. News and World Report, Fortune, Newsweek and other respected outlets.
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