It's important to set aside money for emergency medical situations, besides just investing in health insurance.
In general, you should have three to six months' worth of living costs saved.
If you have insurance, you should have your out-of-pocket maximum saved.
According to the Federal Reserve Board, 22% of adults incurred a major unexpected medical emergency in 2019, with the expense ranging from $1,000 to $1,999.
A CDC study also shows that the average medical cost of all fatal injuries is about $6,880 per emergency department patient and $41,570 per hospitalized patient.
"You can never predict when emergency medical situations are going to happen, and it's important to have money set aside to cover those costs," says Carolyn McClanahan, MD, certified financial planner and founder of Life Planning Partners, Inc.
Here are some tips to save for medical emergencies, where you should keep your savings, and what to do if you haven't saved up for an emergency fund.
How much should you save for surprise medical costs?
Your emergency fund should be enough to cover all your living expenses for three to six months, but if that's too overwhelming, $1000 is a good starting point and you can gradually increase it over time.
Experts recommend that your target savings amount for emergency medical expenses should be equal to your health insurance's out-of-pocket maximum, no matter if you have individual or family coverage. If your health plan is compliant with the Affordable Care Act (ACA), your out-of-pocket maximum won't exceed $8,550 for individuals and $17,100 for families in 2021.
Your "out-of-pocket maximum" is the amount you pay before your plan pays 100% of your covered medical costs for the rest of the medical year, which is indicated in your health insurance. Copayments, deductibles, and coinsurance typically count toward this amount, but it varies per plan. Prescription drug costs that you have to pay may be included, but again it varies. Keep in mind that your out-of-pocket maximum doesn't include your monthly installment payment for insurance or "premiums."
"For example, if your maximum out-of-pocket is $4000, you should have $4000 in a savings account just in case you have a serious medical issue and need to use that money," says McClanahan.
According to Ken Waltzer, MD, MPH, certified financial planner, and co-founder and managing partner of KCS Wealth Advisory, "each person should look at their health plan and consider their own health status and healthcare preferences to get an idea of what kind of expenses they might incur."
If you receive care from physicians, hospitals, or facilities that aren't part of your health insurance company's network (aka "out-of-network providers") or use services that aren't covered by your plan, medical insurance might not be enough to cover your expenses and you should set a higher emergency fund. Sometimes there can be surprise bills from subcontracted providers or for emergency care, even when you try to stay in-network.
If the healthcare provider has a contract with your insurance company that they'll accept reimbursement without additional billing to members, regardless of their charges, they are considered an "in-network provider." However, if they have no such agreement, they are an "out-of-network provider" and their charges are not controlled; they may balance bill members to pursue more payment.
According to McClanahan, you should also increase your target amount if you have a chronic disease because you're more likely to hit your maximum out-of-pocket expenses due to ongoing care.
What kind of account should you put your medical emergency fund into?
"Put it in the highest-earning account that does not fluctuate in value or have risk of default. Thus, a high-yielding, FDIC-insured savings account makes the most sense," says Waltzer. Compared to the 0.05% national average interest rate on savings accounts, high-yield savings accounts have a significantly higher interest rate with about 0.40% to 0.60%.
The Federal Deposit Insurance Corporation (FDIC) is a US government agency that safeguards your deposits against bank failure or theft, so if you have an FDIC-insured account, your money is protected when the bank fails.
McClanahan recommends setting up a Health Savings Account (HSA) if you're eligible because the money that you put in the account are tax-deductible and the withdrawals for eligible medical expenses are tax-free. If you're 55 or older, you can contribute extra funds.
The Health Savings Account (HSA) is a type of savings account available to those who have a High Deductible Health Plan (HDHP). When you evaluate health plans, you can check if they are "HSA-eligible."
"Unfortunately, if you don't make a lot of money, it can be hard to save for an emergency fund, but even if you start putting aside even just $5 a week into a savings account, that adds up over time," says McClanahan.
What happens if you don't have emergency savings?
If you don't have savings set aside for a medical emergency, you might have to rely on credit cards or loans, pull money from other savings such as college or retirement funds, or borrow money from other people.
In 2019, 25% of adults skipped medical care because they were unable to afford it. However, this is not advisable because you have other options to relieve the weight of medical bills, such as:
Check the bill for errors. If you find any discrepancies in your itemized invoice, inform your doctor's billing manager, the hospital, or your insurance provider right away. You can question the charges to pursue a new and accurate bill. Ask for the detail, not just a summary of the amount due.
Negotiate a lower payment. You can contact the billing department of your healthcare provider to negotiate a reduced amount. Most hospitals have charity care or financial assistance programs for individuals who cannot afford to pay for medical treatment. Income records are requested to verify eligibility.
Negotiate the payment terms. If you can't negotiate a lower payment, try discussing the payment terms, like paying a smaller amount for an extended period, having a discounted amount if you pay sooner, or agreeing on a zero-interest payment plan.
Check if you qualify for Medicaid. Medicaid is a joint federal and state program that can help pay medical costs for low-income individuals. It is administered differently in each state. You can visit the federal Medicaid website or your state's Medicaid site to get more information and see if you qualify.
Get in touch with a medical bill advocate. Consider hiring a medical billing advocate if you're overwhelmed with the whole process. Advocates can analyze your bill to spot errors, negotiate lower payment to settle your bill, or follow up with your insurance company to ensure your coverage is maximized.. They understand the system and will work on your behalf to reduce your medical bills. Advocates are typically paid on an hourly basis or for a percentage of the money that they save you.
Improving financial knowledge alone isn't enough to help households build an emergency fund. Individuals should consider financial counseling to gain financial confidence, identify ways to reduce expenses, maximize the use of existing resources, and increase income.
Your target savings amount for emergency medical expenses should be equal to your health insurance's maximum out-of-pocket costs. It's best to put your emergency fund on a high-yield savings account, but you don't necessarily have to separate it from your other savings.
If you don't have emergency funds, you might be forced to take out loans, tap into long-term savings, or go into debt. There are resources such as monthly payment plans and medical debt relief agencies that can help you shoulder the burden of financial costs.
You can consult a health insurance broker to review your health insurance policy and determine the amount that you should be saving, or a financial planner to help you save, says Waltzer.
You can also take Consumer Financial Protection Bureau's quiz to get a sense of your financial wellbeing and see how you can improve it.
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