Better Planning Needed for Health Expenses

Even if health reforms are enacted, medical expenses remain the largest uncontrolled item for many.

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Health-care costs are the dominant cause of personal bankruptcies, according to a recent study based on detailed 2007 records and extensive interviews with people who filed for bankruptcy that year. The study was released for maximum impact amidst the Congressional debate over health-care reform, and it has been repeatedly cited as proof that the system needs fixing. While that may be a valuable outcome of the research, its underlying message will not be altered any time soon by reform efforts: health-care expenses are the largest uncontrollable expense that Americans face, and insurance does not make the problem go away. For seniors and those nearing traditional retirement age, setting aside funds for future health-care expenses simply must assume greater importance in financial plans.

[See 4 Tips for Investing in Your Physical Wealth.]

More than 62 percent of personal bankruptcies in 2007 were related to medical expenses -- up nearly 50 percent from 2001 -- according to "Medical Bankruptcy in the United States, 2007." Its authors, academics David U. Himmelstein, Deborah Thorne, Elizabeth Warren, and Steffie Woolhandler, said their work represented the first-ever national random survey of bankruptcy filers. The results were summarized in the American Journal of Medicine.

"Most medical debtors were well educated, owned homes, and had middle-class occupations," the authors said, adding that nearly 80 percent of 2007 medical bankruptcies involved people who had health insurance at the time their medical problems began (60.3 percent with private insurance as their primary coverage, 10.2 percent with Medicare, 5.4 percent with Medicaid, and 2 percent with Veterans Affairs coverage).

[See also Low CPI Creates Medicare Winners and Losers.]

Tougher bankruptcy rules were enacted several years ago; filings peaked in 2005 and then declined, the authors said. "Since then, filings have increased each quarter. They are likely to exceed one million households in 2008, representing about 2.7 million people." According to Automated Access to Court Electronic Records, which tracks bankruptcies, personal filings have soared past the 6,000 per-day rate and may total 1.5 million this year.

In addition to being under-insured when their medical problems began, the 2007 study found that many people with private insurance coverage lost it after becoming ill. "Nationally, a quarter of firms cancel coverage immediately when an employee suffers a disabling illness; another quarter do so within a year," the study said.

In planning for future medical expenses, the study said:

Out-of-pocket medical costs averaged $17,943 for all medically bankrupt families: $26,971 for uninsured patients, $17,749 for those with private insurance at the outset, $14,633 for those with Medicaid, $12,021 for those with Medicare, and $6,545 for those with Veterans Affairs/military coverage. For patients who initially had private coverage but lost it, the family’s out-of-pocket expenses averaged $22,568.

Hospital costs were the largest out-of-pocket expense for nearly half of the people filing for bankruptcy, followed by prescription drugs (19 percent), doctor's bills (15 percent), and premiums (4 percent). Drugs were the major expense for patients with pulmonary, cardiac, or psychiatric illnesses. For a group of the most common medical conditions, the study found the highest out-of-pocket expenses were for non-stroke neurological illnesses such as multiple sclerosis ($34,167, expressed as a mean of expenses), followed by diabetes ($26,971), injuries ($25,096), stroke ($23,380), mental illnesses ($23,178), and heart disease ($21,955).