None of us can anticipate all of our expenses. Every stage of life brings a whole new set of unanticipated needs. Even after identifying every outflow you think you might have, there will still be significant unexpected costs. For this reason, we recommend constantly budgeting for financial surprises in an Unknown Budget.
That being said, there are several large expenses which can be anticipated and prepared for even though they are irregular and the timing of them unpredictable.
In 2015, the PEW Charitable Trust analyzed the frequency and impact of household financial shocks . Among households surveyed, 24% stated that, “Someone in the household suffered an illness or injury requiring a trip to the hospital” during the past 12 months.
Trips to the hospital are a common upset to family finances. Even though they are common, they are always unexpected.
The last trip to the hospital either of us remember was when Megan’s husband hit his leg with a hatchet during their year without health insurance.
This is the financial shock of a trip to the hospital. It is upsetting, expensive, and unexpected.
Health insurance is an important part of protecting yourself because if your medical bills become excessively large, you will go bankrupt rather than die. In this way, health insurance is more like wealth insurance. That being said, even if you need to visit the hospital, having health insurance may still be more expensive than paying the costs out of pocket. Even Megan’s family emergency room visit resulted in lower out-of-pocket costs than would have been guaranteed paying the premiums. The so-called Affordable Care Act (ACA) has been one of the primary factors in causing this huge rise in the cost of health insurance.
In David’s demographic, the average non-subsidized premiums are $790 per person or $1,580 per couple per month. Paying $18,960 a year while still having a $6,000 out-of-pocket deductible means that until your health care costs reach $25,000 you would be better off self-insuring. The $18,960 in premiums are only providing insurance for the catastrophic event that is going to cost more than $25,000. Health insurance premiums are not going to cover normal hospital visits. A normal emergency room visit might cost you $10,000.
Although Megan’s family has had years they have forgone health insurance because of the cost, David’s family has a grandfathered high deductible health insurance policy accompanied by a Health Savings Account (HSA). He has this insurance specifically because he has plenty of money and is choosing to insure against this catastrophic possibility. Even though his insurance was one of the few grandfathered policies unburdened by the ACA legislation, his costs have still risen sharply. Alas, the odd unintended consequence of the ACA has been to make health insurance less affordable to middle class Americans.
Even with health insurance, a small hospital visit that hits your deductible will still require that you budget money to pay for your share.
One way of thinking about your household’s healthcare spending is to know that health spending accounted for 17.9 percent of the nation’s Gross Domestic Product (GDP). If health spending is 17.9 percent of spending in the United States, then perhaps you should budget for it being 17.9 percent of your spending. So if your family’s standard of living is $50,000 a year, you might want to set aside $8,950 (17.9%) for out-of-pocket health care costs.
If the thought that you should be setting aside nearly $9,000 a year for the possibility of a healthcare event seems unlikely and unnecessary, you should understand why these healthcare events can blindside other families.
You can budget for health care events. You will think you are saving too much until you have a health care event and then you will think you may not have saved enough.
If you are under age 65 and have HSA-compatible insurance, you should fund your HSA for the maximum. An HSA is a rare type of account where you can get a tax deduction when you put the money in and then still pay no tax when you take the money out for qualified medical expenses. Those expenses include Medicare Part B premiums, dental care, vision, and co-payments. Then, after age 65, you are allowed to take money out of your HSA for any reason, although withdrawals for non-qualified medical expenses are subject to income tax. In this regard, at its worst, your HSA acts like a traditional IRA, receiving an income tax deduction on the way in and being subject to income tax on the way out.
Now in 2019, the HSA contribution limits for a family plan where both spouses are over 55 years old is $7,000 plus two $1,000 catch-up provisions. So long as this $9,000 is split between both individuals HSA accounts, that is the maximum which you can contribute to your HSA.
As you build up your HSA balance, you can invest the amount over your insurance deductible. This allows you to both cover a health care event and still benefit from having the money that you don’t use invested and growing.
Saving for potential medical events is wise and prudent, but what should you do if you are reading this article because you have already had a medical event?
If you have failed to save any money for a health care event, here are some strategies that you can try to lesson the financial impact:
If you have no insurance, some charges may be reduced. Make it clear to everyone that you cannot afford to pay. There are often payment plans that can be set up or reduced charges.
Health care providers err on the side of over billing. You should review everything carefully and err on the side of challenging it. It will take many phone calls to get mistakes resolved. Err on the side of disputing and challenging anything you believe is incorrect.
If you still can’t pay, tell them what you can pay monthly and set up a payment plan, hopefully with a reduced amount.
A medical event is often the point at which unprepared families get into credit card debt. Avoid this if you can. A single unpaid hospital bill will impact your credit less than massive credit card debt which compounds at 18% interest and causes you to declare bankruptcy. Keep the unpaid portion of your bills entirely with the hospital where the interest rate will be lower and where there will only be a single item on your credit record.
And if you keep negotiating with them and making payments it may, hopefully, stay off of your credit history.
The hospital’s only leverage is threatening to send your case to a collection agency. Your leverage is the threat that you will stop paying. You both win if you keep paying, and they don’t send it to a collection agency. That’s how you may be able to set up a payment schedule, and they may accept it and waive the interest.
Using a GoFundMe-type of campaign to raise money from your friends or church members can be effective, but many of the most effective techniques are the same ones used by scam artists such as exaggerating the dire nature of your need and playing on people’s emotions. Personally, I lean toward the first responsibility you have to take care of yourself and your family so as not to burden other people’s finances. Preparing financially in advance is better than pleading for financial assistance in reaction.
Having said that, there are cases where your family’s medical needs overwhelm your ability to cope and people around you would be more than willing to help. In that case, I recommend a radical honesty of opening up your finances and financial decisions publicly. If your finances are truly dire those who donate money to help you will expect that you are not engaging in luxuries that they themselves think extravagant. They will question your priorities if you are in need of money and yet still spending as though you have plenty. And what people think is extravagant you may think is required spending.
Before you ask others to help you financially make sure you have also trimmed your own budget to the bare essentials. You may even want to talk about how much seeming extravagances cost publicly if they were deals or gifts.
If you are trying to budget for emergency room visits, try to save 17.9% of your spending in your unknown budget for medical bills, with as much of that as possible in your HSA. If you can’t save that, try to save more than your deductible annually as a smaller goal.
Photo by Zhen Hu on Unsplash