Health can destroy wealth.
Just in the past year, Americans borrowed an estimated $88 billion to cover health-care costs, according to a recent survey from West Health and Gallup. What’s more, 45% of Americans are concerned that a big health event could cause bankruptcy.
They’re right to be concerned. More than two in three bankruptcies are caused by medical problems, either from bills, income loss due to illness, or both, according to data released this year in the American Journal of Public Health. It looked at more than 900 Americans who filed for personal bankruptcy between 2013 and 2016.
Other surveys come to a similar conclusion, noting that medical issues are the No. 1 cause of bankruptcies.
In fact, it’s mostly people who are middle class and have insurance who are filing for bankruptcy, David Himmelstein, the lead author of the study, tells MarketWatch.
“Unless you’re Bill Gates, you’re just one serious illness away from bankruptcy,” Himmelstein, a distinguished professor at the City University of New York’s Hunter College and lecturer at Harvard Medical School, said in a statement.
“For middle-class Americans, health insurance offers little protection,” he added. “Most of us have policies with so many loopholes, co-payments and deductibles that illness can put you in the poorhouse. And even the best job-based health insurance often vanishes when prolonged illness causes job loss — just when families need it most.”
Consider this: In 2018, the average cost of health care for the typical American family of four covered by an average employer-sponsored PPO plan was $28,166, according to the Milliman Medical Index. Every month, this rises roughly $100, the index found.
So imagine how high these costs might go if you had a bad accident or prolonged illness that meant you couldn’t work, resulting in loss of your job and the insurance that came with it. “That’s the triple whammy,” Himmelstein said.
Medical issues are all too common. Indeed, 44% of Americans got hit with a medical expense they didn’t expect in the year prior. And for too many, it’s devastating: 530,000 families go bankrupt each year because of medical issues, the American Journal of Public Health revealed.
And yet, far too few people have money saved to handle these issues. Four in 10 Americans don’t have the savings to cover an unexpected $400 expense, according to Federal Reserve data released in 2018 — and more than 1 in 4 skipped necessary medical care in 2017 simply because they can’t afford the cost. What’s more, research shows that flexible spending accounts are underutilized.
Why do we have so little savings for medical costs? “It comes down to human nature — a combination of being focused on other things that seem more urgent, and flat out being in denial that something will happen to them,” says certified financial planner Bobbi Rebell, host of the Financial Grownup podcast and co-host of the Money in the Morning podcast.
Plus, she adds that “very few people take the time to actually comb through their insurance policies and look for the details of coverage each year” so they may be unaware of what’s not covered. For others, it’s simply “high cost of living and low salaries,” says Kimberly Foss, president and founder of Empyrion Wealth.
Rebell recommends saving at least your out-of-pocket maximum. “That maximum out of pocket is your worst case scenario. After that the insurance company should pick up 100%,” she says. Of course, you could also lose your job and insurance, so it’s always a good idea to sock away even more.
Foss recommends that everyone “should all aim to have about six months’ living expenses in savings.”
If you’re nearing retirement, prepare for big medical bills before your last day on the job. Fidelity data show that the average couple will need $280,000 in today’s dollars for medical expenses in retirement; that does not include long-term care.
This story was originally published in February 2019 and has been updated.