Healthcare

Are out-of-pocket health care costs a burden for most people? 

Politicians and pundits like to pontificate about the burden of health care costs and especially out-of-pocket costs. But is it a wide-spread problem? Not as much as you may think.

Chances are that you will go for many years spending very little on health care and even if you have a bad year, for most people it will not be an annual occurrence. This is especially true for the pre-Medicare population. Look at the information below. In any given year half the population has very little or no health care expenses.

The Agency for Healthcare Research and Quality (AHRQ) has updated its estimate of the concentration of medical expenditures, previously reported as of 1996. In 2012:

Total medical spending was $1.35 trillion;

One percent of people accounted for 22.7 percent of total health expenditures, with an annual mean expenditure of $97,956;

Five percent of people accounted for 50.0 percent of the total, with an annual mean expenditure of $43,058;

Ten percent of people accounted for 66.0 of the total, with a mean annual expenditure of $28,468;

Fifty percent of people accounted for 97.7 percent of the total; and

Fifty percent of the people accounted for only 2.3 percent of the total.

Source: health policy blog

Of course there are exceptions. Individuals with chronic conditions will have ongoing out-of-pocket costs. However, in my decades managing health plans, I found that many people overestimate their health care financial risk and as a result pay for more health insurance than they need. A monthly premium is a guaranteed expenses. Trading a lower premium for possible higher self-paid expenses is a risk that can be managed by most people and often to their advantage.

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4 replies »

  1. “Trading a lower premium for possible higher self-paid expenses is a risk that can be managed by most people and often to their advantage.” Yes, that’s true if you have a crystal ball, ESP, or a reliable next-door fortune teller.

    How does one manage the risk of a car accident you do not know will happen? How do you manage the risk of a child developing cancer or diabetes?

    Looking backward at known health statistics indicating you have a one in 50,000 chance of developing a debilitating disease does not help the one who discovered she has one.

    Among the problems in the cost of health care, having too much coverage ranks near the bottom.

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    • Your point of view is not unusual and yes, there is a risk but that risk is basically a one year deal as you can change coverage annually. Remember, what’s at risk is a few thousand dollars at most in a year and for that trade off you are saving premiums. Over insurance is a costly mistake for most people. My supplemental coverage for Medicare does not pay anything until $1750 in Medicare ded and co-pays have been incurred, but my premium including prescription coverage for both my wife and I is only $160 a month after employer contribution. I could, but have no reason to get better coverage at much greater cost in premium. In other words my family annual out of pocket risk is $3500 a year.

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  2. As I understand it, insurance is to take away the element of risk. I can budget for know premiums but I cannot budget for what may not happen and nobody knows what the true medical cost might be. So I guess I am over insured but if I have a large medical expense I still could lose my savings as I am currently insured. Long term care is out of reach for me too.

    But this got me thinking. How much should I budget for medical expenses (all inclusive). My online research found that I should budget 3% for insurance, co-pays, OTC meds, everything. This also led me to investigate what the medium income was in the US and that is $53,657. So according to Credit Counselling Society (whoever they are) I should only spend $1,610 per year on my medical.

    I am spending closer to 10% and I am the top of the wage scale where I work (I only pay 20% of the total premiums, the company pays the other 80%). The bottom entry level wages still pay the same amount as I do so I am guessing it costs them 20% or more of their annual income. If they are paying for medical then I understand why they are not saving money or why they do not have insurance.

    Here is a chart from the Credit Counselling Society. I am not suggesting this is correct but if this is what they are telling people no wonder they are behind. Also note that the total ranges from 100% to 133%, so just imagine where people have to reduce cost. I did find the low end percentages were very close to what I pay and I have no mortgage or car loans (except for medical I and almost 3.5x that amount). Since I have no debt that is going into savings.

    • Housing: 35%
    mortgage / taxes / strata / rent/ insurance / hydro
    • Utilities: 5%
    phone / cell phone / gas / cable / internet
    • Food: 10 – 20%
    groceries / personal care / baby needs
    • Transportation: 15 – 20%
    bus / taxi / fuel / insurance / maintenance / parking
    • Clothing: 3 – 5%
    for all members of the family
    • Medical: 3%
    health care premiums / specialists / over-the-counter
    • Personal & Discretionary: 5 – 10%
    entertainment / recreation / education / tobacco/alcohol / eating out / gaming / hair cuts / hobbies
    • Savings: 5 – 10%
    Plan to save money for expenses that don’t occur every month, as well as for your future. Then you’ll have a little extra available when you need it.
    • Debt Payments: 5 – 15%
    Many people find that their budget is quite tight because their monthly debt payments are closer to 25% of their net income

    My point is here that a $6k out of pocket expense is a 11% hit and that will destroy this persons budget for a long time to come and even prolong saving anything for future years.

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  3. The problem was, is, continues to be the fact that too many Americans can’t come up with funds to pay their out of pocket expenses – as they have no savings. Some significant percentage of the 53% who will have some/lots of out of pocket expenses have no available cash to cover the cost!

    See: http://www.federalreserve.gov/2015-report-economic-well-being-us-households-201605.pdf
    where, on Page 1, it says:

    ” Forty-six percent of adults say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money….”

    $400!

    So, “trading a lower premium for possible higher self-paid expenses is a risk that can be managed by most people and often to their advantage” is a bridge too far if you lack the discipline to save for expenses that will certainly come, someday.

    There are alternatives to encourage saving … but, few employers are willing to be aggressive enough to minimize the gaps in preparedness among their workers.

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