Protect Assets From Unexpected Medical Expenses

What Happens if You Can’t Pay Your Medical Bills?

 How To Protect Assets to Avoid Losing Everything

An issue of increasing importance in the legal community addresses the question of how to protect accumulated savings from medical expense related liability risks.  Stated simply, a brief stay in the hospital can cost tens of thousands of dollars. A serious injury or illness lasting weeks or months has the potential to bankrupt all but the wealthiest hedge fund managers. Is there any advance planning you can you do to protect what you own from unexpected medical bills?

Even the Insured are at Risk

Lifetime Caps and Co-Payments

The potential financial disaster is clear if you’re uninsured. A trip to the hospital or any extended treatment can cause thousands or hundreds of thousands of dollars in medical bills (assuming you can obtain treatment at all). If the physician or the hospital does not arrange a payment plan before the treatment begins, it will, most likely, pursue collection reasonably soon after. Depending on the law of your state, the assets which can be seized include your home and savings and other personal property.

What continues to be less well understood is that even for those who are lucky enough to be insured under private plans or employer sponsored plans, the financial risk remains significant. I recently spoke with a woman who had been seriously injured in an automobile accident and spent several months in the ICU recovery units of the hospital.. Total medical bills exceeded $1 million and, unknown to her, her private health plan had a lifetime cap of $500,000. The hospital was suing to collect the $500,000 uncovered balance of its fees. That’s about what she had in savings and equity in her home so everything was at risk.

Denial of Claims

The lifetime cap as well as substantial co-payment responsibilities is only one part of the problem. What happens if your insurer simply refuses to pay your medical bill? Does this ever happen?

According to a recently released study by the California Nurses Association, California’s largest insurers denied 13.1 million claims in just the first three quarters of 2010. That amounted to 26% of all claims submitted. For example, of these insurers, PacifiCare denied 43.9%–Cigna 39.6% and Anthem Blue Cross-27.3%.

“These rejection rates demonstrate one reason medical bills are a prime source of personal bankruptcies as doctors and hospitals will push patients and their families to make up what the insurer denies,” said CNA/NNU Co-President DeAnn McEwen. The data, new findings by the Institute of Health and Socio-Economic Policy, the CNA/NNU research arm, is based on data from the California Department of Managed Care.

What happens if you receive medical treatment which runs into the tens or hundreds of thousands and your insurer denies the claim? Who pays the doctor and the hospital?  Unless you were lucky or savvy enough to negotiate your agreement in advance, your provider will require that you guarantee full payment of the costs incurred, less any amount actually reimbursed by your insurer. Meaning, you’re on the hook for whatever your insurance company fails to pay. Of course you can fight it out and ultimately sue your insurance company but lawsuits take a long time and plenty of money that most people can’t afford.  That’s exactly what the insurer is counting on and why it’s more profitable to deny claims and defend the occasional litigation. The strategy of resisting a high proportion of claims is an essential and integral part of the business model of the health insurers.

When Patients Can’t Pay

What happens when a large medical bill can’t be paid?  Usually the outcome is a lawsuit filed by the hospital or collection agency with a judgment and a lien filed against the patient’s home and accounts. In most states, a percentage of the debtor’s employment earnings can be garnished. Generally, before this point is reached, the patient files a personal bankruptcy to stop the wage garnishment and wipe out the medical bills and other accumulated debts. But that requires that he give up all of his assets including savings accounts, real estate and equity in his home.  These assets, except those that are specifically exempt, are turned over to the Court and divided among the creditors.

According to a study by Harvard University, about half of the 1.5 million annual bankruptcy filings are caused by illness and medical bills. And surprisingly, three fourths of those had health insurance at the start of the illness which triggered the filing. “Unless you’re Bill Gates, you’re just one serious illness away from bankruptcy”, said Dr. David

Himmelstein – the study’s lead author and an associate professor of medicine. “Most of the medically bankrupt were average Americans who happened to get sick.”  

Protecting Assets From Medical Expenses

The high level of financial risk posed by an unpredictable medical event is now leading many individuals to take steps to protect their savings from this threat. For instance, I recently met with a couple in their early 50s. They have about $300,000 of equity in their home and $200,000 in savings. The husband is self-employed and the wife works for a small company. Both are covered under her group plan, but, with rising costs, the company might cut back or terminate the plan sometime soon. Individual policies may be available at that point but the cost and extent of the coverage is unknown.  The goal of their legal planning is to protect their savings from large, unexpected bills at any point in the future. 

Exemption Planning

This type of advance planning can often be accomplished through a variety of legal strategies. For example, many states exempt certain assets from collection and proper planning encourages the use of these exemptions. The homestead exemption protects a certain amount of equity in a principal residence from a creditor. This exemption is specified by the law of the state that you live in and typically ranges from $50,000 to $200,000 and may even be unlimited in some states such as Florida and Texas. Protecting a portion of your savings through the homestead exemption may be one valuable planning option for protecting funds.

Retirement Plans can also be used to hold exempt assets, free from any creditor claims. These Retirement Plans may take a variety of forms such as employer sponsored Defined Benefit or Profit Sharing Plans, a 401 (k) or even a Private Retirement Plan designed specifically for you as a single employee. Again the law of the state governs the types of Retirement Plans which can legally protect savings from potential claims but this is another planning vehicle which is worth investigating.

Trusts and Estate Planning

Certain types of trusts and entities, such as family limited partnerships and limited liability companies, may also offer protection from future liability risks if established as a part of your overall estate plan or business structure. Many of these strategies are utilized by attorneys specializing in asset protection matters and are discussed in detail in the Legal Guide to Asset Protection Planning.

The key point to remember is that asset protection can often shield savings from unexpected events, but the planning must be completed well before any obligation or debt has been incurred. Your local attorney may be able to provide sound guidance and assistance with your advance planning to limit the medical expense risk and other unforeseen liabilities which may jeopardize your savings.