Should You Save for a Potential Health Care Crisis?
Between paying off past college debts, keeping up with the present cost of living and making sure to save for future retirement, the average American worker has their paycheck being pulled in a lot of different directions all at once.
If you have some form of health insurance coverage and are still relatively young and healthy, you may not even be thinking of medical costs as yet another thing you need to be putting your money towards. But accidents will happen, often when you’re least expecting them, and when they do, the price can be steep.
Rising healthcare costs
Due to a combination of factors, including high prescription drug prices and bloated administrative costs, the United States has the most expensive health care in the world, despite having fewer doctor visits per capita than similarly high-income nations in Europe. The number of uninsured Americans has risen recently, totaling 12.2 percent of adults at the start of 2018. And even if you are insured, you’re likely not immune to the threat of costly medical bills, since studies show roughly half of all people with employer-provided coverage have a deductible of $1,000 or more, and as noted by Forbes contributor John C. Goodman, current regulations allow deductibles as high as $7,150 for an individual, and double that for a family.
Add to this the fact that 44 percent of Americans claim they don’t have enough money in savings to cover an emergency expense of $400 without borrowing, and it’s easy to see why medical debt is the leading cause of bankruptcy in this country. Serious, chronic illnesses are the biggest drain on one’s financial resources, especially since they limit a person’s ability to make any income while sick or recuperating. But even the hospital bill for a one-time incident like a broken bone can do damage to one’s bank account that will take longer to heal than the physical fracture.
A recent report from the Federal Reserve found that 23 percent of adults in the U.S. had to pay a major, unexpected out-of-pocket medical expense. At one in four, there’s more than a slim chance that you could have to pay a medical bill you weren’t counting on, and if you haven’t financially planned for such an emergency, you could easily become part of an even direr statistic.
Health Savings Accounts and Medical Savings Accounts
A Health Savings Account, or HSA, is a type of savings account available to people who have a High Deductible Health Plan (HDHP), which is currently classified as any plan that carries a deductible of at least $1,350 for an individual or $2,700 for a family.
HSAs allow you to set aside a certain amount of pre-tax income (up to $3,450 per year for an individual and up to $6,900 for a family), which can then be used to pay for deductibles, copayments, coinsurance and several other items and procedures, including acupuncture, contact lenses and more.
You can also elect not to use the money in your HSA, allowing it to continue to grow tax-free while you simply pay out-of-pocket for any medical expenses that you can afford. Up until a certain age, you can only make withdrawals for medical expenses, but after you hit 65, you’re allowed to use the money for anything you want. For this reason, many people use HSAs as a type of retirement account, since it’s a way of saving income that you never have to pay tax on, and that can be used for any purpose from age 65 on.
Medical Savings Accounts, or MSAs, are basically HSAs for small businesses and self-employed individuals. Contributions to an MSA can be made by either an employer or an individual, but not by both during the same year.
Even if you have a low-deductible plan and are not eligible for an HSA or MSA, it’s still never a bad idea to set aside some money for the possibility of an emergency room visit or other unanticipated medical expense.
A high-yield savings account in which you store cash for unforeseen costs is called an emergency fund, and a good rule of thumb is to try and save up at least enough money to cover three to four months of living expenses. Doing so should help you avoid having to borrow money to pay for an unscheduled trip to the ER, and staying away from high-interest loans is the best way to keep from falling into a debt spiral.
An emergency fund will also prove an invaluable resource in the event that you lose your job - an event which, if you have employer-provided healthcare, could also be viewed as a type of unexpected medical expense. Laid-off workers are able to continue their employer-provided coverage for up to 18 months under the Consolidated Omnibus Budget Reconciliation Act, or COBRA, but they have to pay the entire premium plus a 2 percent administrative fee. It’s also possible to buy a plan through the Health Insurance Marketplace, but those aren’t exactly free, either, and going without coverage could force you to pay a penalty (not to mention put you at enormous risk if you’re hurt or sick while going without coverage).
Medical emergencies can turn your life upside down in a whole host of ways. But with the proper planning and preparation, you can limit the damage that such a health threat can do to your financial well-being. To set up an emergency fund, or any other type of savings account, speak with a Trustmark financial services representative today.