Wednesday, July 01, 2009

Insured But Bankrupt Anyway

The New York Times is reporting that huge numbers of people who are facing bankruptcy over medical bills actually had insurance. This should not come as any particular surprise. There are a number of factors which contribute to the high rate of bankruptcies associated with medical bills. One is indeed a lack of health insurance on the part of a large number of Americans. This is a serious problem and one that needs to be addressed. But it is not the subject of my post.

The crux of the problem is that most Americans don't understand medical insurance, including what it is for. If you ask the average American if he files a claim against his car insurance when he has a flat tire or needs a routine oil change he would laugh at you. Likewise presumably most of us don't file a claim against our home insurance when the toilet backs up. We may swear a little as we run for the plunger, but we deal with it ourselves.

That's because we understand that our car insurance and homeowners insurance is for serious emergencies. A collision or fire or some other event that inflicts a high dollar bill on us. Why then do Americans feel that we need to call our insurance company to deal with routine maintenance or minor dings on... US?

Large numbers of people who have insurance either from work or purchased on their own tend to look for policies that will provide some coverage for routine medical expenses like the occasional doctors visit or a possible trip to the ER because someone gets stupid with a hammer and smashes a couple of fingers (been there and done that). But these same policies usually leave the buyer inadequately insured against the real danger to their finances and health.

That is not the flue or the measles or a smashed finger. It is the catastrophic medical crisis.

Being honest, most Americans who are stably employed could cover routine medical bills themselves if they set aside a little money in a rainy day fund. If you have around $5-10,000 in a bank account somewhere that is understood to be untouchable except for medical expenses then the average family could get the insurance they really need, which is major medical.

The vast majority of insurance policies held by Americans provide some coverage for the routine things and also some coverage for hospitalization and emergency medical care, a lot of which is unnecessary and merely adds to the cost of the policy. The only two things most Americans need to pay attention to on their insurance policy is the percentage of major medical expenses covered (hospitalization etc.) and total maximum lifetime payout amount.

The typical policy today covers around 70-80% of hospitalization bills. But that is frankly inadequate. The bare minimum needed to protect yourself from potential financial ruin is 100% coverage for major medical with a lifetime payout maximum of at least $3 million.

Consider a case from my own family. On March 30th of this year my step-mother collapsed while visiting her natural son in Florida. She was taken by ambulance to the local hospital which quickly diagnosed a massive stroke. Following protocols she was airlifted to a nearby regional medical center which specializes in neuro-medicine. She had emergency brain surgery performed on her that night. She spent the next 3 weeks in intensive care. And she is STILL in the hospital today, though not in ICU. I don’t know what her medical bills are but I would be surprised if they were not well north of a million dollars. Fortunately for her she is a retired teacher with excellent health benefits.

But a person whose insurance covers routine doctors visits but only 70-80% of hospitalization would be wiped out by this kind of event. Far too many Americans base their insurance needs on covering small minor expenses without considering what would happen if there were a serious medical crisis with very steep bills.

I can cover a few thousand dollars in bills from a quick trip to the ER if I needed to or even could arrange a payment plan if I was short on cash. But a high five or six figure medical bill would I suspect push me and most ordinary Americans over the financial cliff.

I believe the solution is for Americans to steer clear of the types of insurance that are most common today. They should save $5-$10k (depending on family situation) to cover ordinary expenses and low level medical emergencies. If the money is not needed then they are ahead of the game with money stashed and collecting interest. They should then purchase a major medical policy that will insure excellent care and protect them from financial ruin in the event of an extreme medical crisis. These policies are offered by most insurance companies with high deductibles of $3000 to $5000 (again you pay for the routine things) but they cover 100% after the deductible. They also have the added advantage of being generally less expensive than the ‘cover a little of everything’ policies most people buy because the insurance companies know they are not likely to have to pay out.

If many Americans are being bankrupted by staggering medical bills, I suspect it is in part a result of poor planning and bad spending habits.

In fairness many, indeed probably most Americans get their insurance from their employer. In some cases they have no real choice in polices and employer offered medical insurance rarely covers more than 80% of hospital bills these days.

In these cases the individual needs to consider his/her options.

There are essentially two ways to deal with the inadequate major medical coverage typical of employer provided insurance. The first is to opt out of the employer provided plan and buy the major medical policy on their own. The second, and usually the better choice, is to purchase a supplemental policy solely to cover any major medical expenses not covered by the employer’s insurance. As with catastrophic health plans, these policies are available from many providers and are usually quite inexpensive since they would only kick in in the event of a catastrophic medical crisis and then only to cover the 20-30% not covered by the employer provided policy.

But again for the math challenged, 20-30% of a six or seven figure medical bill is pretty substantial. A lot of families could not cover that on their own.


David Dickens said...

I'd like to go farther than this. My son fought cancer for 3 years. Kaiser covered possibly hundreds of thousands of dollars. I know for a fact (because I talked to an uninsured person) that one surgery my son had would have been more than the entire value of the townhome I had at the time. God bless Kaiser.

In addition I have an employeer that offers generous (an understatement) benefits for people taking care of sick children. Even when I ran out of sick leave, others were allowed to donate sick leave for me. God bless Pepperdine.

The problem is, even with all that help I was strapped and barely making it. Driving into Los Angeles with a child that might need a wheelchair requires an adequate vehicle to accommodate that (and the gas and the risk of accident on the LA freeways). You have to eat when and where you can when you are at the hospital for DAYS at a time. That costs more than you'd spend at home.

You need all sorts of odd things (like home remodeling) to deal with the changing needs of your sick family member. I suppose I could have gone to the library more and the bookstore less, but you aren't thinking about that when you are wondering what you'll do with yourself for hours while you watch your son be tortured in a hospital bed.

Even with all the charitable donations we STILL barely made it through the 3 years without significant debt, but then our HOA raised rates and the van-payment became too much and we had to move because our budget was over loaded.

In effect, we lost our home. But I'm lucky (we moved into a mobile home and are fine now).

I saw single-parents in the waiting room who spent much more than three years in the system. I have NO idea how a single person could handle all that, much less hold down a job while doing it and get enough hours to qualify for health benefits.

And if you lose your job you lose your benefits. What then? 2 years into cancer treatment... you just can't go anymore? And no one will cover your child because it's an existing condition?

I think catastrophic (not major, that's not a strong enough word) health care should probably be paid for by the states to cover all these extremes (which are relatively rare until the last 6 months of life). Then folks can buy "payment plan" medical insurance for all the ordinary stuff.

I hate what I just wrote, but I know what I went through in an ideal, even blessed circumstance. The rules of capitalism just don't apply to catastrophic health problems. you just get smacked down by the invisible hand.

It took everyone I knew (and many more I did not know) to turn our upside down world back right side up (they can't bring my son back, but you know what I mean). And I still nearly drowned. If there were some reasonable action I could expect people to take to prepare for such things, I would demand the market require it of them. But apart from being independently wealthy there is simply nothing anyone can do, so what's the point of having the market punish them?

Reactionary said...


I for one really appreciate your comment. Thanks be to God, I have not suffered the death of my child, and your post puts a lot of things in perspective for me. May God comfort you and rest the soul of your beloved son.

I think we would all agree that there is a real problem when such unfortunate and awful events result in financial ruin for the family. But I do not believe that the secular, centralized government of the US has the solution.

We live in tragic times.

John (Ad Orientem) said...

I am not a fan of government involvement in anything. That said, there are things that we need the government to do because there is no viable alternative. I hate the idea of government run medical insurance. But I have yet to hear an alternative from those who are opposed to it.

We are the only country in the developed world where medical care is based almost exclusively on the finances of the sick person or their family. That is barbaric in the 21st century.

I don't want socialized medicine. Some sort of hybrid system that guarantees everyone coverage seems to be the best way to go. But the current health care system in the United States is not merely flawed, it is profoundly immoral.

May your son's memory be eternal.


Anonymous said...

Could you fefine "socialized medicine" This term has been used so often and it's never defined.

Please carefully examine the systems of health care in Europe.