Borrowing to pay for basic health care needs is fast becoming a way of life for many Americans and mounting medical debt may be threatening to bankrupt more families. A CreditCards.com poll found that nearly two out of three Americans say they or their family could face hard financial times if they experience a serious illness.
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The poll, created by CreditCards.com and conducted by GfK Roper Public Affairs & Media, surveyed 1,004 American adults in random telephone interviews Jan. 18-20, 2008. The results shine light on a growing problem facing the country, health care advocates say. Far too many people — even those with health insurance coverage — could not cope financially with a medical emergency. Many don’t even realize their precarious situation until it’s too late.
“The insurance available to many people is this Swiss cheese coverage,” says Dr. Steffie Woolhandler, co-author of a 2005 Harvard University study that found nearly half of all personal bankruptcies filed in 2001 stemmed from medical debts.
“Unfortunately for many people, they only discover after they get sick that they’re not covered and facing financial ruin,” says Mark Rukavina, executive director of The Access Project, a Massachusetts-based nonprofit organization that sponsors a medical debt resolution program to help consumers negotiate out of mountainous medical bills.
False sense of security
Out-of-pocket health care costs — those not covered by health insurance — have been rising in recent years. Experts warn that many families today may be lulled into a false sense of security if they have employer-sponsored health insurance. Increasingly, this coverage requires consumers to pay a greater share of the cost. This may mean higher co-pays for doctors’ office visits, higher monthly premium payments or $1,000 or more in deductibles.
How are families coping with these costs? Banks, health insurance companies and credit card issuers have stepped up marketing efforts to offer financing methods for cash-strapped families in need of medical care, but who are unable to afford their share of the health care costs. Special health care debit cards, gift cards, credit cards and installment loans — which feature lower or 0 percent interest rates and “friendlier” terms — are being launched to fill the gap. (See Borrowing to pay for health care.)
The CreditCards.com survey found:
• If hit with medical bills greater than $1,000, nearly half (49 percent) of Americans say they would tap savings or checking accounts to pay their debts. There were stark differences, however, between wealthier respondents earning $75,000 or more a year and their lower-paid counterparts. Only a quarter (26 percent) of those making less than $20,000 a year would pay medical bills with savings — perhaps because they are less able to save while struggling to pay basic living costs. Two-thirds of the wealthier respondents had savings to buttress medical expenses.
• More than a third of respondents (38 percent) would resort to some form of borrowing to pay medical debts, either through an installment payment plan (10 percent), a credit card (9 percent), borrowing from friends or relatives (8 percent), a short-term loan from a bank or credit union (8 percent) or borrowing from 401(k) retirement accounts (3 percent).
• Only 3 percent say their health insurance will cover the expense; another 8 percent have no clue how they would pay the medical bill.
• When asked if they know how much their current health policy’s annual deductible is for medical expenses, four in 10 (40 percent) say they know the amount while half (50 percent) don’t know. The rest say they don’t have a deductible.
• Nearly two-thirds of Americans (62 percent) agree that either they or their family would face a financial hardship if they experienced a serious illness. Women (66 percent) and lower income families earning less than $30,000 (73 percent) are even more likely to feel this way.
The results “point out loud and clear that people feel insecure about their health insurance protection,” says Rukavina.
Costly dog bite
Even a minor illness can put you in financial trouble. Ask Gary Gimble. The 63-year-old mink farmer from rural Minnesota was bitten by a dog in December 2006. “It was fine for a while, then all of a sudden I wasn’t feeling well,” Gimble says. The injury became infected and developed an abscess.
|Medical complications from a dog bite cost Gary Gimble, 63, of Minnesota, nearly $3,000 in out-of-pocket costs. He put some of it on a credit card. |
Photo by Heather M. Gray
“The whole thing cost about $6,000 to $7,000,” says Gimble, whose out-of-pocket costs included a $1,500 deductible plus 20 percent of the bill (about $1,100) and the full cost of antibiotics (“a few hundred dollars”), which were not covered by his health insurance policy.
Gimble, who is self-employed, has health insurance through Blue Cross and Blue Shield. He pays $560 a month in premiums — $6,720 a year.
“I didn’t have the money to pay for it,” recalls Gimble, who says farming has high operating costs and unsteady income. He paid a little here and there on the bill, but struggled with the payments. “I got it down to $1,800 that I owed the hospital. I was paying a little each month.” For four straight months, the hospital’s accounting office called about payments. “They said, ‘How much of a payment can you make?’ They kept saying put it on my credit card. They wanted that money if they could get it.”
Finally, after they threatened to send his account to a collection agency, Gimble says he gave in and put the remaining $300 on a MasterCard with a 17.9 percent annual interest rate. “I didn’t want it to go to a collection agency. That’s not only humiliating, that’s not good for your credit.”
“I wound up paying 17.9 percent interest on top of the medical bill,” he says. “I didn’t have any money. It’s like strangling a person if you don’t have a good income.”
Health care credit cards
Specialty health care credit and debit cards launched in 2007 are “an early indication of the direction the whole market will head,” predicts Ben Slen, director of product strategies for Humana Inc., a health insurance company that started a Visa health credit card in October 2007 with Republic Bank. The card, available only through an employer-sponsored health plan, carries 0 percent financing for health-related expenses and requires borrowers to repay the charges in six months through automatic payroll deductions.
“We’re looking at other financial services products, creative ways to solve health care out-of-pocket problems for consumers,” Slen says.” There will be a growing need to have health care financing products for consumers.”
Critics, however, say credit card issuers — which have come under fire for hiking interest rates and other industry tactics — should be a last resort for families. Even easy-credit terms that force repayment in six months or other short-term installment loans may not be reasonable for families facing medical crises, says Jose Garcia, senior policy analyst for Demos, a nonpartisan public policy research and advocacy group. “Let’s say you have cancer treatment and you have a bill of $2,000. I don’t think six months is a reasonable amount of time to repay the money.”
Demos co-published “Borrowing to Stay Healthy: How Credit Card Debt is Related to Medical Expenses.” The January 2007 report detailed some of the problems that can arise when patients put medical debt on standard credit cards, chiefly, that it becomes invisible when lumped in with other purchases and is subject to penalty fees and interest rate hikes.
‘A horrible thing’
“I think it’s a horrible thing,” Garcia says of the burgeoning trend toward health care credit cards. “The market has created tools to benefit economically from our health … This is a growing business and big banks are talking about getting in.”
Garcia contends the quest for profits — not altruism — is driving the movement. He cites projections from the federal Centers for Medicare & Medicaid Services that out-of-pocket health care expenses will rise to nearly $300 billion by 2009 — up from $265 billion in 2007. Providing health care credit cards could be a significant source of revenue for banks and other institutions entering the market.
Says Garcia: “The main issue here is, how can we fortify our health care system so people don’t have to resort to credit to cover medical expenses?”
There’s no question that portions of the American health care system are broken and in need of repair. All the major candidates for president have proposals for “fixing” health care, which now leaves an estimated 45 million to 47 million Americans uninsured. The problem is that just having insurance isn’t enough anymore, health policy analysts say.
The 2005 Harvard bankruptcy study noted that three out of four of the people citing medical reasons for bankruptcy had health insurance at the start of their illnesses. Woolhandler, the study’s co-author, says the research team is preparing a follow-up study that examines 2007 bankruptcy filings. Those results may paint an even bleaker picture because U.S. bankruptcy laws were revised in 2005 — shortly after the first Harvard study’s publication.
“The law has made it much more expensive to file for bankruptcy,” Woolhandler says. “It seems likely that people would be struggling much longer with debt and amassing higher debt before they can file for bankruptcy.”
At GreenPath Inc. in Farmington Hills, Mich., one out of five clients currently enrolled in the nonprofit counseling agency’s debt management programs cite medical debt as part of their financial woes. In 2007, just under 7 percent of its nearly 120,000 clients had health-related financial difficulties.
The recent housing slump and looming economic recession likely haven’t improved the medical debt outlook, health industry observers say.
$50,000 in credit card debt
Pam Maloney, a 47-year-old Massachusetts mother, says she never considered bankruptcy, but cashed out the entire value of her retirement account to pay off $50,000 in credit card debts.
Maloney knows firsthand how fragile that health insurance parasol can be. She and her two children live off of her husband’s income from an information technology job. They have full health insurance from Massachusetts provider Harvard Pilgrim Health Care. The family’s problems started nearly eight years ago when the Maloneys discovered that their son, now 10, has autism — a developmental disorder that causes difficulty socializing and communicating.
The best health insurance didn’t prevent the Maloneys from amassing nearly $50,000 in credit card debt. “We ended up with incredible bills,” Maloney recalls. “It just snowballed into this huge thing.”
More debt than income
The family of four paid $245 a month (nearly $2,900 a year) in health insurance premiums and had no deductible on the policy. Out-of-pocket costs were $20 for office visits to in-network doctors; prescription drugs ranged from $10 to $40, depending on whether they were generic or brand name.
Co-pays for office visits for occupational, physical and speech therapists, pediatricians, neurologists and other specialists and a battery of prescription medications to treat his condition accounted for a lot of the debt. At the height of their problems, the family’s income fell $180 short of their $4,400 a month debt obligations. They had three credit cards — one from Bank of America and two from Chase. One of the Chase cards had a 29 percent annual interest rate and a $390 a month payment — hiked after they logged more than a few late payments.
Pam Maloney says she wrote checks to pay the co-pays and her husband got cash advances from credit cards to make ends meet. They cashed in equity in their home, downsized to a smaller house, got a second mortgage and she pulled $50,000 from her Individual Retirement Account to pay down the debt.
Pride and embarrassment kept her from asking family members for loans, she says. “They had no idea how far in debt we were, no idea. It was the big secret.”
She sought debt counseling from The Access Project and from a financial planner at her local bank branch.
“Today, we’ve paid off everybody except one credit card that gives us 2 percent interest. We will never have a credit card again,” Maloney says. Her son, who has mild autism, is thriving. “Where he is today is phenomenal and it’s because of what we did.”
Hospitals changing routines
Around the country, hospitals are beginning to feel the pinch of the rising health costs and many are beginning to change the way they do business, says Carmela Coyle, senior vice president for policy at the American Hospital Association (AHA) in Chicago. The industry group represents about 5,000 hospitals, health care systems and networks across the country.
According to the AHA, bad debts and charity care (referred to as uncompensated care in the industry) nearly doubled in the 10 years between 1996 and 2006 — from $18 billion to $31.2 billion. Says Coyle: “We see that problem getting worse before it gets better.”
“With more employers and insurers who are actually requiring employees pay more of the costs, there are more and more costs that are really left to the hospital to work out payment for with the individual patients,” Coyle says.
Some hospitals are now moving toward collecting deductibles at the time of treatment rather than waiting weeks later to bill patients, Coyle says. Others are making financing mechanisms, including credit cards, available to help patients pay their medical debts.
“I see wording on just about every hospital, doctor and ambulance bill that comes my way that says you can pay this with a credit card,” says Andrew Cohen, a counselor at The Access Project medical debt counseling service.
Payment crops up earlier
Another hospital trend: shifting staff resources to address the growing volume of patients with outstanding balances and adding more financial services counselors who discuss costs and ability to pay for services before treatment. Five years ago, those kind of discussions were primarily back end functions — after care was rendered, says Suzanne Lestina, manager of patient financial services for the Healthcare Finance Management Association, a trade group of finance and accounting managers for hospitals and medical providers.
Patients having more knowledge on the front end is a positive development for consumerism, Lestina says. “You would never purchase a washer and dryer without knowing what the cost is or put up with Sears saying ‘We’ll tell you when we deliver it.’ ”
Upfront discussions may prompt patients to return to their doctors with questions about alternative treatments that are less expensive, Lestina says.
Consumer advocates argue that patients and their family members are being asked to make decisions about complex financial matters at times of crises, when they may be under tremendous stress.
“It’s not the best time to be making a financial decision,” says Rukavina from The Access Project. “It’s especially not the best time to make a financial decision when you really need to pay attention to the fine details. It’s a highly pressured situation. Most people come to regret those decisions.”
He adds: “We talk to people who are on cancer treatment and these are very emotional situations and people’s primary concern is on getting treatment and on healing. It’s not on making a financial decision. When you go to a bank to talk about a mortgage, that’s a financial decision.”
Lestina, the health finance association spokeswoman, counters: “There is never a good time to tell a patient that they have a $10,000 bill. The question is then when is it at least the best time. We believe the best time is when they still have an opportunity to participate in the decision-making process.”
She adds: “What kind of mental and physical state am I going to be in after the service is provided when I get a $10,000 bill because nobody talked to me ahead of time?”
Budgeting for the unexpected
Unlike many purchases consumers make over their lifetimes, medical expenses from sudden illness can be unexpected. Both the Harvard and Demos studies make note of the connection between illness and income loss. Financial planners recommend families have short-term disability coverage — which pays part of your salary while you are sick and unable to work — as a hedge against financial ruin.
“It’s important for people to plan for the expected and the unexpected,” says Karen Riedel, a product development vice president for AFLAC, a health insurance company specializing in supplemental insurance coverage that picks up where typical major medical plans end. That includes short-term disability, cancer plans that cover transportation and lodging if you must travel for treatment, and hospital plans that cover in- and out-patient procedures and diagnostic testing.
Says Riedel: “Most U.S. workers do not have the recommended three months’ savings in their bank accounts. When there is a loss of employment, there is a financial impact.”
|Michael Burdette, police officer|
Michael Burdette, a police officer in Union City, Ga., is thankful he had supplemental insurance in 2005. He was hit by a vehicle while on an off-duty assignment directing traffic near an expressway construction site.
Blue Cross and Blue Shield medical insurance “covered some of the ambulance bill, but it didn’t cover all of it,” Burdette says. He lost three weeks of work and ran out of paid sick leave time while recuperating from the accident. AFLAC’s supplemental coverage saved him. Short-term disability checks of 60 percent of his salary helped keep him afloat financially while he was out of work, he says.
“If you’ve never gone to the hospital or you’ve never had some event like that happen to you, you assume that your major medical plan will cover you,” Riedel says.
Solutions and protections
What can or should be done to help families? Garcia, from the Demos public policy group, says regulators should look at reining in the banking industry — perhaps by putting limits on the amount that interest rates can increase for medical debt.
Another solution might be requiring that medical-related debts are flagged or treated differently by credit reporting agencies as a consumer protection measure — and to keep as many families as possible from sliding into bankruptcy after an illness.
Should a person facing a medical crisis be expected to understand a complex financial transaction? Will they sign anything under emotional duress to secure adequate care for a loved one?
Tell us your story
How are you coping with medical bills, high deductibles and debt? E-mail us at editors@CreditCards.com.
Adds Garcia: “It has such repercussions on people’s lives and the impact is so large that there should be some protections around this type of debt.”
See related: Health care credit cards rise to fill insurance gap, 15 tips for paying high medical bills, Compare health care credit options, CreditCards.com poll results: Credit and health care costs, ‘MedFICO’ score: Good medicine or bad?, Study: 79 million struggling to pay medical bills and debt, No credit card, no medical service?, Blog: Americans worried about health care, Bankruptcies near record levels as economy sours