Unexpected Financial Disasters: Medical Emergencies

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We have been discussing financial emergencies and how to prepare for and handle unexpected expenses. Perhaps the most common financial disaster in the United States is also much more than just a financial emergency. We are talking about significant medical events, which can wreak havoc on your financial situation along with creating physical and emotional hardship.
The Medical Debt Problem
It is estimated that Americans have more than $140 billion dollars in medical debt. Medical debt is also the most common type of debt in collections. In fact, more medical debt is in collections than all other categories of debt combined (including credit cards and auto loans)!

Why is medical debt such a significant issue? For starters, medical bills are simply more expensive than what many people can pay upfront. The United States Census Bureau reports that 19 percent of households cannot afford to pay for medical bills right away. Insurance coverage, or lack thereof, is another contributing factor. The Census Bureau also reported that “16.2% of households with health insurance coverage for all members all year (fully insured) had medical debt compared to 30.8% of those that were not fully insured.” Insurance is an important factor in how much medical debt a household takes on, as households with full insurance will generally take on lower amounts of medical debt than households without full coverage.

Of course, income and overall financial stability also play a major role. In the Census Bureau report, households with negative or zero net worth, households unable to pay their rent or mortgage, and households with income below the poverty threshold were most likely to have “high medical debt,” which was defined as debt greater than 20 percent of the household’s annual income.
Preparing for an Emergency
The statistics about medical debt indicate that there is some truth to the old saying that “an ounce of prevention is worth a pound of cure.” By putting yourself in the best financial position possible, you will be better poised to weather the storm of an unexpected medical emergency. Of course, this may not mean that you can avoid debt entirely. We aren’t suggesting that medical debt can be easily dismissed and avoided with a few simple steps, and we certainly aren’t suggesting that having medical debt means you have been financially irresponsible. The reality is that medical bills are a major American financial issue that many politicians, sociologists, consumer advocates and others are trying to solve. There are many situations in which you can do everything right from a personal finance perspective and still end up with a huge medical bill that you cannot pay.

That said, it is always a good idea to implement a few basic personal finance strategies. These are all-around smart financial habits, and they can help minimize or avoid medical debt issues in many cases.

Again, these are very simple strategies and are all about putting yourself in the best financial position possible so that you can pay unexpected bills (medical or otherwise):

  1. Budget and Cut expenses. Develop a written budget so that you know exactly what your financial obligations are each month and so that you can identify expenses that are not necessary. To the extent possible, cut unnecessary expenses from your monthly spending, which will increase your savings rate instantly.
  2. Build an Emergency Fund. Try to set aside money from each paycheck and build a “cushion” or emergency fund of at least six months’ worth of expenses.
  3. Increase your Income. This is the most difficult step, but consider ways you might increase your income. This could mean applying for a promotion or new job, or taking on a side hustle or extra part-time job. It may even be as simple as selling belongings that you no longer need or use. The idea is simply to increase income in order to increase savings and your ability to weather a financial storm.
  4. Evaluate insurance options carefully. If you have health insurance through an employer, or otherwise, be sure to review your options carefully. When you have multiple options, you will want to consider which plan is the right fit for your needs. In some cases, it is better to have insurance with higher monthly payments (premiums) that covers a high percentage of your bills. In other cases, it might make sense to choose a plan with a lower premium and to set more money aside yourself as a reserve for potential medical bills. The process of reviewing plans can be confusing. Consider asking a knowledgeable relative, friend, co-worker, or human resources representative to review with you and answer any questions you may have.

Handling a Medical Emergency
We have discussed some of the ways you can prepare for the unexpected, but what do you do when a medical emergency strikes? In a true emergency situation, you won’t have the advantage of time. This means that you won’t be able to “shop around” for a procedure to compare pricing, or otherwise prepare for your medical care. In this sense, you will be at the mercy of the circumstances, which is why the steps above are so important since they will put you in the best position possible.

Typically, in an emergency situation, you will go to the hospital, have a procedure or other form of medical care, and be given a bill all before you can bat an eye or have any conversations about the costs of financial impacts.

Once you are billed, you can consider how to move forward. There are two main steps you need to take: review/negotiate and make payments.
Unfortunately, many people don’t think to review their medical bills carefully or to negotiate the amount they owe. This step is very important and could result in a major price difference. You will want to start by reviewing your medical bills in detail. Make sure that you receive itemized bills that list every single charge. If you have insurance, compare this carefully against the explanation of benefits (EOB) that your insurer will send you. Make sure you understand what insurance is covering and why they aren’t covering other expenses. Make sure everything you were charged for is correct and was actually a part of your medical care. Do not hesitate to call your insurer to ask specific questions about the bill, and you can call the provider directly, too.

Once you are certain that you know what you owe and what it is for, there is often still more room to negotiate. You may be able to offer the provider a lump sum at a discount. Alternatively, you can inquire about a payment plan that allows you to repay the bills in full over a long period of time. The terms of this plan may be even better if you can provide proof of financial hardship. Be sure to ask whether the medical provider has a formal financial assistance program, and see if you can qualify.
Ideally, the negotiation process would lead to a good outcome: you could lower your bill to a reasonable amount and enter an affordable payment plan. If that is not coming to fruition, it may be a good time to contact a credit counselor to discuss your options and make a plan for moving forward. You will generally want to avoid putting the medical debt on a credit card if at all possible. There are credit cards designed specifically for medical bills, but even those are not always a great option since they often accrue significant interest after a low-interest introductory period and can lead you into a cycle of credit card debt.

Taking out a personal loan or other debt may not be avoidable in some cases, but you will want to explore every other option first.
Bottom Line
Medical debt is a major problem for millions of Americans, and a medical emergency will probably affect each and every person at some point. Start thinking about how to prepare for the unexpected. Luckily, the steps to prepare for medical bills are essentially the same steps that will put you in a generally solid financial position. If you can take those steps, you will be better poised to handle a medical emergency.

When a medical emergency strikes, remember to carefully review your bills and work closely with your insurance and medical care providers to ensure accuracy. From there, you will hopefully have your choice of multiple repayment options. Remember that taking on additional debt should be a last resort.
If you are already dealing with medical debt, or need help planning for a financial emergency, remember that credit counseling can be an invaluable resource. You can speak with an NFCC-certified credit counselor today to learn more about how they can help.