Why People with Good Health Insurance Go into Medical Debt

Personal finance experts are always telling you that you must have health insurance to avoid a financial catastrophe. And we’re not wrong: Health insurance does keep more money in your pocket and get you access to better care, compared with going uninsured. (See How Health Insurance Helps Manage Financial Risk.)

But our simple advice ignores a terrible problem: Many people who do have health insurance – good health insurance, at that – still find themselves in medical debt. In fact, “Most people who experience difficulty paying medical bills have health insurance,” the Kaiser Family Foundation (KFF) reports. And a 2014 report from the Consumer Financial Protection Bureau showed that 43 million Americans have overdue medical bills on their credit reports, with half of all overdue debt on credit reports coming from medical bills.

What makes a health insurance policy good? There is no universal answer.

A good health insurance policy for you might be a terrible one for your best friend or for the guy who sits in the cubicle next to you at work. You might have a chronic health condition, for example, that makes a policy with a low deductible, broad network and 90/10 coinsurance worth the high monthly premiums.

Your coworker might be a semiprofessional cyclist who hasn’t gotten so much as a cold in the past five years; the ideal policy for him asks for the lowest possible monthly premiums while providing catastrophic coverage if he should get, say, a cancer diagnosis. (See How Catastrophic Health Insurance Works and Is Catastrophic Health Insurance Right For You?)

So let’s assume you have a policy that’s good for you. How might you still end up with tons of medical debt?

NerdWallet’s 2017 American Household Credit Card Debt Study found that over the past decade, median household income has grown by 20% while medical costs have increased by 34% – more than any other major spending category.

Indeed, almost one-third of Americans reported having trouble paying medical bills in a 2016–17 KFF survey, and NerdWallet estimates that nearly 27 million Americans could be putting medical bills on credit cards. High credit card interest rates can then cause medical debt to grow quickly and make it harder to pay off.

With hidden, sky-high prices – not to mention busy schedules and a general aversion to doctors and hospitals – many people decide to cut corners on healthcare. They don’t take their medicine as prescribed, which means they may fail to get better or not keep a chronic condition under control. They skip annual checkups and don’t catch problems while they’re minor and inexpensive to treat. Then they end up with bigger, more expensive problems that they can’t ignore and are stuck paying huge bills. (See 20 Ways to Save on Medical Bills.)

The bad news of a negative medical diagnosis may be just the beginning of your problems. Let’s say you’re 29 years old and have a $7,150 annual deductible, the highest allowed for 2017. You have in-network coinsurance of 80% and out-of-network coinsurance of 50%.

When you start getting hammered with bills for doctor’s visits, screenings, prescriptions and treatments, the first $7,150 of that comes straight out of your pocket.

Your annual out-of-pocket maximum (thank goodness for those) is also $7,150 for marketplace plans in 2017, thanks to the Affordable Care Act.  If you have a family plan, the out-of-pocket maximum is a less-manageable $14,300. If you have an employer plan, your limits may differ.

Your treatment will probably not fall neatly within a single calendar year. When the new year arrives, you have to pay that deductible and work your way up to the out-of-pocket maximum all over again. At that point, you may have switched to a lower-deductible plan, which will help, but it will be offset somewhat by the higher premiums you’ll pay for that plan.

Kevin Gallegos is vice president of Phoenix operations for Freedom Financial Network, a family of companies that empowers people to improve their finances. He shared the story of one of the company’s clients, a retired couple in the Dallas area who were on Medicare and had supplemental insurance when the husband was diagnosed with cancer. Neither insurance plan paid in full for the treatment he was prescribed.

“Their cost was close to $1,000 each month,” Gallegos says. “Over a couple of years, combined with other health-related expenses that were not covered, they were $30,000 in debt when he passed away. The wife has since moved to rural Nebraska, where living costs are lower and she can live in a home owned by a relative.”

Jeff Finn is a partner with Dynamic Worksite Solutions, in Katy, Texas, providing customized benefits programs for companies and brokers. He says that when it comes to cancer treatment, it’s generally experimental treatments that won’t be covered. Traditional and FDA-approved treatments will be covered, but some may come with annual limits.

As discussed above, annual out-of-pocket maximums can keep your health spending down in a year when you need lots of care.

But out-of-network maximums can be significantly higher than in-network ones. Your out-of-pocket maximum for out-of-network care might be double your in-network one.

And try as you might to make sure you only receive in-network care, it’s easy to get slipped an out-of-network bill. You might have surgery at your local in-network hospital, but get a bill from an out-of-network assistant surgeon. You might visit your in-network primary care doctor but get an out-of-network bill from the lab she used for your blood work. (See 3 Big Medical Costs and How to Protect Against Them.) Or you may have a rare condition and need to see an out-of-network specialist who has expertise in treating it.

If you have trouble with huge bills you weren’t expecting, a medical-billing advocate may be able to help. Ruth Linden, the founder and president of Tree of Life Health Advocates in San Francisco, said she recently negotiated on behalf of an out-of-work client in Texas to cut a large, unpaid physical therapy bill in half and set up a manageable payment plan.

In addition, Gallegos points out that many policies limit the number of physical therapy visits per calendar year, but the doctor may recommend more than that number to get the patient back to functioning fully. However, any visits beyond the policy’s limit will come out of the patient’s pocket.

Then there’s another set of hidden costs: If you need frequent treatments for a health condition, your transportation costs will increase. Your childcare costs may increase, too, and your income may decrease if your illness interferes with work. If you’ve been caring for an aging parent, you might have to pay someone to care for mom or dad. You might need to hire a home health aide for your own care. If you’re too exhausted to cook, your food bill might go up. If you’re too exhausted to clean, you might find yourself hiring a housekeeper.

Other hidden costs that Finn pointed out are travel to specialty facilities, lodging, and lost income for a supporting spouse or partner.

You can have good health insurance and still end up in medical debt when providers can’t or won’t give you prices before you agree to potentially expensive but necessary procedures.

Suppose you badly slice your finger in a kitchen accident. You visit the emergency room for stitches. Who knows how much the bill will be until you get it in the mail at least a month later? Good luck asking someone at the front desk to give you a cost estimate when you check in, because they don’t know what procedures you’ll need until a doctor or nurse sees you, at which point you will have at least incurred a bill for an ER visit. The  ER visit alone could cost anywhere from $533 to $3,000, according to the preliminary findings of a Vox study.

Visiting the ER may actually be a mistake in some circumstances.

“The emergency room is excellent for life-threatening emergencies,” Fox says. “But an urgent-care facility can treat most illnesses, burns, sprains and some fractures at a lower cost. For situations like flu or strep, a retail or urgent-care clinic might offer fast care at a low cost. Many of these clinics accept health insurance.”

What happens a few days after you get stitched up in the ER? Let’s say you visit a specialist about your nerve pain and numbness and learn that you need hand surgery to repair the nerve you severed. The hospital where you’ll be having the surgery can’t seem to tell you up front how much it will cost.

Finn says medical pricing is so opaque because the providers and insurance carriers have it set up that way. They have nondisclosure agreements so that neither party can reveal the provider’s billed rates or the insurance company’s discounts off those rates. Consumers also can’t get a straight answer about costs because the provider needs to know who the insurance company is and how the specific plan is designed in terms of deductibles and coinsurance. And patients are usually dealing with multiple providers for a procedure, such as a hospital or surgical facility, the surgeon, the anesthetist and others.

Sometimes pricing is opaque because doctors don’t know which services you will need before you receive care, similar to how a mechanic may not know how much it will cost to fix your car until he starts running diagnostics, says Sean McSweeney, founder and president of Apache Health, a medical-billing company serving physician practices, diagnostic testing facilities, hospitals and surgery centers nationwide. When it comes to surgery pricing, it should be easier to get pricing up front. “Most surgery groups are adept at getting pre-authorizations prior to the surgery, which include the CPT codes they are requesting be paid,” he says.

CPT codes are the five-digit billing numbers developed by the American Medical Association that are assigned to each medical service a patient receives. Insurers use these numbers to determine reimbursement rates. All healthcare practices use the same CPT codes.

To learn the cost of a procedure up front, Sean Fox, co-president of Freedom Debt Relief, a Phoenix-based company that has helped 450,000 Americans get out of debt, suggests asking for the billing manager and/or surgery coordinator. These positions have different titles at different practices, so it can take some work to get connected with the right person, he notes, adding, “It also can be very worthwhile to take the time and effort to get a second opinion on both cost and care.” 

These are just a few of the reasons why people with good health insurance can go into medical debt. Bad luck, denied claims, non-formulary prescriptions, huge cost discrepancies from one facility to another, chronic conditions and the astronomical price of COBRA premiums when you get laid off can also contribute. Even with an awareness of these problems in our current healthcare system, you may not be able to stay out of medical debt. But knowing how so many people find themselves in this situation may give you information that helps you at least reduce the extent of medical debt if it ever happens to you.

Finn says that for someone determined to stay out of debt, even the best planning won’t cover everything – especially in emergency situations. But the best things to do are be an educated consumer and take care of yourself.

“As educated consumers they will know what questions to ask and how to get the lowest cost and highest quality care possible,” Finn says. “By simply taking care of themselves, they not only reduce the amount of healthcare they will need over their lifetime, but when they do need care, the severity is likely to be reduced greatly.”

(For further reading, see When Health Insurance Doesn’t Cover Your Bills and What to Do When You Can't Pay Your Medical Debts.)