People planning for retirement, along with financial professionals who do retirement planning, should incorporate the risk of medical bankruptcies into contingencies as the Trump administration moves to shift more of the costs of medical treatment to individuals as part of their new conservative policy regime.
Bankruptcies due to medical costs are widely cited as being the greatest cause of all bankruptcies. According to the American Journal of Medicine blog, in 2009, 62% of all bankruptcies had some medical cause.
Of those who went bankrupt, the average medical bill was about $18,000, the site said. This broke down to about $27,000 for people without health insurance and $18,000 for those with private health insurance.
Yet with the passage of the Affordable Care Act, the percentage of people declaring bankruptcies has not declined significantly. The possible reasons:
- Health care in the U.S. is the most expensive in the world, but the average American between 32 and 37 has just $500 in savings, while people aged 56 to 61 have $17,000 in savings. Another 2016 study by GOBankingRates survey, found that 69% of Americans had under $1,000 in their savings accounts. Even worse, 34% have no savings at all. So depending on the illness and related medical and drug expenses, combined with lost income it is not difficult to see a scenario in which a family could be wiped out with a significant medical bill. I remember one divorced woman I interviewed who had a six-figure income, but was changing jobs. In this interim period, she was uninsured and she also had the misfortune to have a son who broke his leg and had complications. The resulting medical bills sustained over that weekend wiped out her savings.
- A 2016 New York Times and Kaiser Family Foundation study found that 20% of those under age 65 had trouble paying their medical bills in 2015. In contrast, 53% of people without insurance said they had trouble paying their medical bills over the past year.
- Wage stagnation also plays a role when it comes to paying any significant bill. While the good news is that the median incomes grew faster in 2015 than at any point on record—up 5.5% over 2014–according to a report from the Census Bureau, medical costs have risen faster than wages. And while that is good news, from a longer perspective, median incomes in 2015 were still lower than they were in 2007.
- Confusion about insurance plans, being under-insured for major illnesses, inadequate work coverage, and health plans that cherry-pick what they cover are all other reasons. If Republicans want to revoke the coverage now available from pre-existing conditions now covered by the Affordable Care Act, it could open the gates to more huge bills that individuals must shoulder, thus increasing the risk of bankruptcy.
- Lack of competition among private health care insurance companies, HMOs and PPOs to provide competitive rates and coverage. In the confirmation hearings for the Secretary of Health and Human Services, the discussion barely centered on how insurance companies are essentially anti-competitive and are ruled by their actuarial tables to avoid high-cost risks (meaning people), while collecting the largest premiums possible.
Uncertain Times and a Bad Omen Ahead
While the Trump Administration is focused on revoking the Affordable Care Act, they have no
comprehensive replacement even after saying they would revoke it six years ago when it was passed. Still, promises from the Republicans that they could do everything from replacing select portions of the Affordable Care Act to privatizing Social Security and Medicare, while turning over key portions of the health care programs to the states, which certainly do not have the funds to pay for it, all adds to this huge risk. And it looks like all of this will happen even though many Republicans call themselves “compassionate conservatives.”
All this leaves the biggest source of personal bankruptcies at center stage as the uncertainty continues. Anyone planning for retirement, including financial planners, should work this risk scenario into their planning. Letting it go unnoticed is a very risky move in a very uncertain financial time.