Friday, January 13, 2017
Majority of Americans are one medical emergency away from financial ruin
In the United States, Wanda Battle, a registered nurse for four decades, was recently hit with a $100,000 medical bill. She has visited her local emergency room on more than one occasion due to severe migraines and mini-strokes. Battle managed to reduce her latest hospital bill to $32,000 based on her relatively low income, but still faces $650 monthly payments for a previous $22,000 medical bill. “There were times I couldn’t work,” says Battle, 61. “I have not held a job that is continuous.” She has had choppy health care coverage during her career. “One agency told me I hadn’t worked enough hours to qualify for health insurance. But I worked three 12-hour shifts per week in that job.”
Although her case is particularly unfortunate — she did not take out Obamacare — she is not alone in facing the prospect of a disastrous financial situation after a hospital bill. A majority of Americans (59%) don’t have enough available cash to pay for $1,000 emergency room bill or even a $500 car repair, according to the results of annual survey released Thursday by the personal finance site Bankrate.com Indeed, some studies have suggested that medical bills are the No. 1 cause of personal bankruptcies and, early Thursday morning, the Republican-controlled Senate narrowly passed a budget resolution to repeal the Affordable Care.Act.
“It’s not a matter of if, but when an unexpected expense will pop up,” says Jill Cornfield, a retirement analyst on Bankrate.com. Half of those surveyed said they actually knew someone who faced a surprise expense of $500 or more in the last year. The good news: The number of those who say they could not afford to meet that unexpected expenses is down from 62% two years ago. When faced with an unexpected expense, 41% who said they would dip into their savings, one-fifth would finance the expense on a credit card, another one-fifth would reduce spending on other things like groceries and entertainment, and 11% said they would borrow from family or friends.
While savings predictably increase with income and education, almost half of the highest-income households — those earning $75,000 per year — and college graduates don’t have enough to pay for these unexpected expenses. However, 47% of those aged 18 to 29 said they would use their savings to cover such a burden, up from 33% in 2014. (Princeton Survey Research Associates International conducted a survey for Bankrate of a nationally representative sample of 1,000 adults, half over land lines and half over cellphone.)
“A key consideration regarding household finances and overall economic well-being is the ability to withstand financial disruptions, according to a separate 2016 report released by the U.S. Federal Reserve, which surveyed nearly 9,000 adults. Many individuals who experienced a financial hardship in the prior year indicated that they drew down savings, undertook some form of borrowing, or both. Some 20.5% of those who reported a financial hardship and earn less than $40,000 per year did just that. (The percentage was 11% for those earning between $40,000 and $100,000 and 9.3% for those earning over $100,000 per year.)
When asked if they have set aside an emergency or rainy day fund that would cover three months of expenses, nearly half of respondents (47%) indicate that they do, while just one-third said that they did not, the U.S. Federal Reserve survey found. These figures are virtually unchanged from two years ago when the Fed last carried out that survey. However, an additional 21% said they could use their main source of income — either a job or government benefits — to cover their expenses for three months by either borrowing money, using non-liquid savings accounts like retirement funds, selling assets, or borrowing from friends/family.
Why aren’t more people saving for a rainy day? Millions of Americans are already struggling with student loans ($1.42 trillion and counting), house and auto bills, and other debts. Central bankers hiked their short-term interest rate target for the second time in a decade last month by another quarter percentage point to 0.75% from 0.50%, which is still an historically small return for savings left in bank accounts. In fact, personal savings rates as a percentage of disposable income dropped to 5.8% in the third quarter of 2016 from a recent peak of 9.2% in the fourth quarter of 2012, according to the U.S. Federal Reserve Bank of St. Louis.
In the meantime, Battle says her first priority is to pay her $3,000 property taxes. She chose not to take out insurance with the Affordable Care Act, which has a maximum out-of-pocket limit of $7,150 for an individual plan and $14,300 for a family plan for 2017. Tennessee has been described as “ground Zero” for premium increases in Obamacare. Last year, the state insurance commissioner, Julie Mix McPeak, approved premium increases of up to 62%. Battle sees the irony in a registered nurse being faced with financial crisis because of unforeseen medical expenses. “I’ve taken care of people for 40 years,” Battle says. “I’ll be dead before these medical bills are paid.”