Credit Card Debt Management

It is no secret that medical costs are skyrocketing.

In fact, those costs are escalating faster than the rate of inflation and wage increase in the United States. Healthcare now makes up 16 percent of America’s Gross Domestic Product, a nearly three percent increase over the last seven years, according to a study published in January.

The solution for astronomical healthcare costs? You guessed it – credit cards.

“Borrowing to Stay Healthy,” the January study conducted by Demos and The Access Project, is a fascinating read that names medical debt as one of the leading causes of credit card debt in the United States.

In a telephone survey of 1,150 households with income levels between 50 percent and 120 percent of the local median, the study found that 29 percent of respondents felt medical expenses had contributed to their credit card debt.

This percentage will probably increase as health service providers in more states begin partnering with financial service companies to offer patients lines of credit, according to a January article in The Boston Globe. This is a convenient way for patients to cover the often-mandatory upfront costs for elective procedures, while enabling health service providers to avoid expensive and time-consuming medical billing and debt collection practices. The Globe reports that these credit lines typically offer patients a choice between low monthly repayment plans with interest or higher monthly repayment plans without interest.

The Demos study, however, expresses concern that the practice will “transform the patient/provider relationship into a debtor/creditor relationship,” and that patients may feel pressured to accept the credit lines without fully understanding the terms.

An article written by Steve Case in 2004, shortly after federal legislation authorized Health Savings Accounts, touted the health insurance option as a viable way to put consumers back in the driver’s seat of healthcare.

HSAs are essentially savings accounts stocked with tax-free money, earning tax-free interest, solely for the purpose of medical spending. These plans come with much lower monthly premiums and the money rolls over year-to-year, which Forbes calls “the antithesis” of use-it-or-lose-it Flex Spending Accounts offered by many employers.

There are two catches:
• HSAs are high-deductible, up to $2,600/person & $5,150/family.
• The HSAs must be stocked. The Demos study states that most families in high-deductible plans take advantage of the low monthly premium, but do not open and fund HSAs.

From a psychological point of view, fear of loss of insurance coverage may be a stronger catalyst for action than the need to proactively stock a “rainy day fund” for healthcare needs. In other words, families may find it easier to live on smaller paychecks or scrape together money to make higher monthly premiums for more comprehensive, lower-deductible insurance coverage since it is a tangible they stand to lose. The need to stock an HSA for that X-Ray they may or may not need some day probably won’t weigh as heavily when it’s time to allocate monthly household spending.

Of course, Forbes has a solution for that, too. The company gives its employees $2,000 each year to stock the HSA. If medical expenses exceed that and the employee’s financial obligation, then regular health insurance helps with the remaining tab.

“Our premiums last year went up only a fraction of the national average,” Forbes writes. “Now that employees will have ‘skin in the game,’ employers rightly figure that those dollars will be spent more carefully, more wisely. For instance, why get an MRI when, in certain situations, an X-Ray would be just as good?”

For employees at companies somewhat less generous than Forbes, HSAs can now be stocked with lines of credit. The essential fact is that medical expenses are inevitable and high-deducible, low-premium plans aren’t necessarily all they’re cracked up to be – with or without an HSA.

The Demos study points out that “92 percent of people in high-deductible plans spent more than 5 percent of income on out-of-pocket expenses and premiums, while 34 percent of those with comprehensive insurance did so.”

The study recommends methods other than HSAs to alleviate the possible consequences of rising dependence on credit cards for medical debts.

These include:

• Tax-deductible interest on medical debt, just like with mortgages.

• Set standards mandating adequate insurance coverage for employees

• Keep employee cost-sharing level proportional to household income.

• Do not report delinquent medical debt to credit bureaus

• “More oversight” in a “deregulated … burgeoning industry.” Ah, another topic for another day.