When Do Medical Costs Become Too Costly for Most Families?

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Medical expenses can quickly put financial strain on a family. According to one CNN report, 60% of personal bankruptcies were caused by mounting medical bills. Although some families sock away money for a rainy day, medical care in the thousands can wipe out a family’s savings in an instant.

At what point do healthcare expenses become too much for a family to bear? One recent study suggests that families struggle to pay once their expenses reach 3.5% of their income. However, that study—conducted jointly between TransUnion Healthcare and the North Shore LIJ Health System—has a rather particular definition of expenses. Let’s take a look at what that study says.

First, it’s important to note that this study used the ratio of “patient responsibility balance” (PRB) to adjusted gross income. The study then observed the threshold at which patient payments began to taper off. (In other words, the point at which patients couldn’t pay their hospital bills.) PRB essentially refers to a patient’s out of pocket expenses, hence the name.  So while the study refers to a particular kind of expenses, PRB is not necessarily representative of every dime a family spends on healthcare. Other expenses could include premiums, co-pays and prescription costs.

Next, we need to note that the study uses adjusted gross income (AGI). AGI is an IRS term that describes the amount of money you made during the year, with a few adjustments. (These adjustments include subtractions for tuition, alimony, and certain retirement account contributions.) For example, let’s say a particular family in the study left the hospital with a $4,000 bill. We’ll also say that this family grosses $60,000 per year and contributes $10,000 to qualifying retirement accounts. The study would calculate their expenses as a percentage of AGI by dividing $4,000 by $50,000 ($60,000 – $10,000) to arrive at 8%.

While 3.5% may not seem like much, remember that this calculation solely considers the patient’s responsibility. Three and a half percent of our example family’s AGI is $1,750. That’s a sizable chunk of that family’s after tax income, and probably amounts to one or several pay checks. Now imagine being hit with that expense unexpectedly, and you can see why families might strain to make payments.

Incidentally, the IRS has its own idea of what amounts to too much in medical expenses: they’ll let you deduct medical and dental expenses that exceed 7.5% of your AGI. While this percent is much higher, our government has a very different idea of “expenses.” For IRS purposes, your expenses include fees to practitioners, hospital service payments, prescription drug costs, costs of weight-loss programs for specific diseases diagnosed by a physician, eye care, hearing aids, guide dogs for the blind or deaf, and even transportation costs primarily for medical care. The IRS even includes the costs of transportation and attendance at conferences related to a patient’s chronic disease. It also includes premiums.

For anyone wondering what this means for you, here are a few key takeaway tips. Do your best to put some money away each payday. Everybody needs an emergency fund, and unexpected medical costs are just one reason why. Next, review your own coverage to make sure that you have all the coverage you need and that you’re not paying for services you don’t use or need. If your employer provides your insurance, review the plans they make available. If you buy your own insurance, always make sure to check your coverage every once in a while. Review what you have and what competitors charge for similar coverage. This will help you keep your peace of mind, and much of your money in your pocket.

Published or Updated: February 16, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

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