A growing focus of our practice in recent years is on asset protection planning for individuals to protect against medical expense related liability risks.

Medical expenses resulting from an illness or injury represent a serious threat to your home and savings.

Risks to Insured As Well As Uninsured

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. A client seriously injured in an automobile accident spent several months in ICU and recovery. 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.

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.”

How Patients Protect Themselves

The high level of financial risk posed by an unpredictable medical event is now leading patients to take steps to protect their savings from this threat. For instance, I met with Mr. and Mrs. X last week, a couple in their early 50s. They have about $300,000 of equity in their home and $200,000 in savings. Mr. X is self-employed and Mrs. X 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 planning is to protect their savings from large, unexpected bills at any point in the future.  Asset protection can often shield savings from these events, but the planning must be completed before the fact.