To state the obvious, health care in the United States is expensive, and likely will only get more expensive in the future.
That means it’s important to have your ducks in a row when it comes to health insurance as well as having money set aside to cover inevitable health care bills.
I want to be clear: health expenses will happen. It’s not a matter of if, it’s a matter of when.
I have a simple solution for making sure you have enough money for health care: assume that you will hit your out of pocket max.
Quick Note: If you have large medical bills and do not have the money to pay them, consider looking into a loan from Prosper (affiliate link) or a loan from CareCredit (not an affiliate link).
If you assume you will hit your out-of-pocket max you will:
- Be more motivated to put money aside for health expenses
- Have the ability to remove cost from your medical decisions
- Have a secondary emergency fund for unexpected health care expenses
Some may say that this is an overly pessimistic view. After all, aren’t there millions of people who go through each year with little or no medical expenses?
While it’s true that the number of people who max out their insurance is likely a small percentage of the entire pool, I think the benefits of assuming you will max our your insurance outweigh the negatives. Worst case scenario you have a nice “secondary” emergency fund in case you do end up unexpectedly having to stay in the hospital overnight or have a surgery that you didn’t think you’d need.
Think about it: if you follow this approach you will either max out your insurance and have the money to cover your medical bills or you may have little or no medical bills and have a healthy emergency fund. Sounds good to me!
I recently wrote about how important it is for millennials to start saving for retirement. The reason getting started is so important is because of the habits that are formed when you save for retirement.
Similar to how it is a good idea to have money automatically taken out of your paycheck for retirement savings, it’s also important to have some money taken out each month and put into a designated health care savings account, such as an HSA.
If you have an HSA with your health insurance plan and are not contributing already, you are missing out on some huge tax advantages. If the tax advantages alone don’t convince you to contribute, here’s a list of 8 reasons you should be contributing to an HSA.
While an HSA is the ideal way to save for health care expenses, I realize that some people do not have an HSA as part of their insurance plan. If you fall into this category you should still be setting aside money for medical bills. Again, I would recommend trying to save enough to cover your out of pocket max. If you need to, start with a low amount like $50 a month. But make sure you start somewhere.
Remember, it’s not a matter of if health care bills will come up, it’s a matter of when. Oftentimes the biggest bills are completely unexpected and even unpreventable. Make sure you have enough money to cover your health care bills.
Am I being too conservative by saying you should have enough money to cover your out-of-pocket maximum? Have you thought about what you would do if you were hit with a large hospital/surgery/pharmacy bill?
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When I got hospitalized last June, I had a large hospital bill, thankfully my health insurance covered it all. I can say that my insurance really do help me a lot, right now, I still have lots of medicines to take daily for my maintenance and I get a little discount because I’m using a loyalty card from one pharmacy.
Clarisse @ Make Money Your Way I’m glad that your insurance covered your hospital bill – that’s what they are there for. Loyalty cards and stuff like that can be very useful as well.
Being from Canada, I don’t have to worry about paying for normal medical expenses. In fact, we do not see the cost of a doctor visit or hospital visit, which I think is a problem. Canadians should see the costs of these services that are paid for by our taxes. I’m sure we’d grumble about how large they are and whether they are worth it as well. I’ve often wondered how you in the US feel when you are presented with your doctors bill, even if it can be covered by your HSA or other insurance. Do you say to yourself $X.xx for what!? LOL Just curious.
Great post. Smart encouragement. Having slowly built an emergency fund over a period of 5 years, one of the categories was emergency medical. The amount was calculated by adding our deductible amount to our co-insurance amount x 2 (total family members who have to reach the deductible before we’re all covered 100%). This calculation equaled our maximum out of pocket for a year. In the following 20 years, we’ve only had one year when anything close to that amount was needed, but what a comfort knowing that it is there.
Medical bills can be very scary. I agree with you- It’s definitely smart to prepare for the worst. I think we willprobably start setting aside more money for these expenses when we get more serious about starting a family. Even with insurance, health care is really expensive!
Not a bad way to approach this DC. Although I have a very messy health care choice with work, so it isn’t as simple. If I assumed I would hit the deductible every year then I would be better off paying a higher premium than going the HSA route. But if I assumed I will occasionally hit the deductible (like every other year maybe) then I am in the same position going the route I am financially. Being my open enrollment is October 1st I have gone through everything to make sure including the tax benefits as paying for a premium through an employer is all pretax, while paying outside there isn’t a tax break. What a PITA!
Oh man, so true. My sister just had an emergency stint with her daughter which landed her in the hospital for 3 days. Not something she expected after arriving from vacation but her daughter caught a serious bacteria and was very ill. Thankfully, she has health insurance but I’m not sure if she’ll have to pay any out of pocket. You just never know when a medical emergency will hit you.
I just qualified for medicaid which starts this month. I have no idea what the coverage is like, but I’ve definitely been making sure I have something in the emergency fund just in case.
“Remember, it’s not a matter of if health care bills will come up, it’s a matter of when. Oftentimes the biggest bills are completely unexpected and even unpreventable” – so true, DC. People get complacent because they can go for years without ever hitting their out-of-pocket max. This is another reason why medical emergencies are a huge cause of debt and bankruptcies. And I agree, the worst case scenario of saving for your out-of-pocket maximum if you have more money saved, which is never a bad thing!
We are a big believer in planning ahead and saving up the maximum out of pocket if you can. The reason? We’ve had the unexpected happen more than once. For example, this year we had a 6,000 dollar out of pocket max with our new HSA plan, and we set it up to save that amount. Not even 2 months into the year our son was admitted for an unexpected medical issue and spent 2 days in the hospital. Then, my wife had some miscellaneous health issues that ended up costing quite a bit – and there we are maxed out – 6k in expenses only a few months into the year.
That’s not the first time we’ve had that happen – a few years ago my wife had a life threatening blood clot and we paid out the max – and our insurance paid out over 250k in expenses. Thankfully we had good insurance and a good emergency fund saved.
Plan ahead for the unexpected!
I would agree with having enough on hand to cover your max out of pocket medical costs. Medical bills are a huge reason people go into debt. I can’t tell you how many people I’ve talked to who blew it off because they “never get sick.l
I agree with having enough set aside to cover the max out of pocket DC. We are just waiting for the enrollment period to open so we can search for a less expensive health plan. DH and I are both self-employed and living in NY so the cost makes me want to barf at times…
debt debs I think sometimes there can be sticker shock, but that’s typically only when you don’t go to the doctor often. Having medical issues the past few years I really am kind of numb to the expenses and have benefited greatly from insurance.
I think you’re right about Canadians needing to see the expenses. I can only imagine that they don’t see controlling medical costs as a priority, because they are unaware of what things actually cost.
SteveEconomides Wow, only once in 20 years? That’s a great run. The HSA is great because it really is a retirement account AND emergency fund. I’m all about maxing it out.
BudgetforMore If you have an HSA I’d recommend maxing it out ASAP. There’s just too much upside to NOT max it out. But if you don’t have an HSA I can understand your reasons for waiting a bit. Either way it sounds like you realize that medical bills can be pretty dang costly.
FranklyFrugalFI Very interesting. There is only an HSA option at my employer, but I’m not complaining. I think HSA plans have so many benefits that it’s hard to not be happy with them.
Practical Cents I would imagine that her insurance was maxed out after a 3-day stay. In fact, even an overnight stay at the hospital could easily max out your health insurance. I’m glad her daughter recovered, that can be a scary experience.
brokeandbeau I don’t know much about Medicaid either, but I imagine you won’t be on the hook for much at all. Again, I’d have to look into it (another blog topic??). You’re smart for getting an emergency fund, though.
ShannonRyan Medical costs are very unpredictable. I know I went to the doctor once one year and then maxed out my insurance the next two years due to surgeries. There was no way I could have predicted those two surgeries or the never-ending number of doctor appointments. People definitely get complacent when it comes to health care.
moneymatters I remember you mentioning your wife’s 250k medical bill and I’m not surprised you are a big advocate of health insurance and setting aside money for medical bills. I also plan on seeing my E.N.T. and making sure I don’t need another surgery, because if I do I want to get it in this year (we are almost maxed out).
Eyesonthedollar It’s really sad and unfortunate that so many people have the “I never get sick” attitude. There are medical issues that happen to people who haven’t been sick in the past and are totally unpredictable. I can’t help but plead with people to save for medical emergencies!
Kassandra @ More Than Just Money Ah I hear you about the high costs for the self-employed. The fact is that most employers contribute much more to health insurance than employees think. So once you take that out of the equation the cost of health insurance seems nearly unbearable.
DC @ Young Adult Money SteveEconomides Only once in 20 years and that was with 5 kids at home. It was 2 years ago, youngest daughter tore her ACL – had 4 surgeries in one year – ouch.
I agree with your out of pocket maximum statement. I just feel like the worst things always happen and the only way that you can be fully prepared for the worst, is to actually prepare for it. I advise clients to balance this with contributions to the HSA account. It’s a great hedge for potential healthcare snafus.
SteveEconomides DC @ Young Adult Money That’s even more incredible that you did it with 5 kids! Thanks for subsidizing the rest of us ; ) just kidding (kind of)
blonde_finance I’m so happy to hear that you recommend people contribute to their HSA. I think a lot of people (at least my age) don’t understand it or haven’t even heard of it.
As we get closer to the enrollment for our health insurance for 2015, we need to start saving into an HSA for our daughter’s braces. She needs them, and now that we are no longer paying into our debt management plan we have the ability to make it happen. Ugh…orthodontic treatment is EXPENSIVE!
DebtChronicles I can’t even imagine how expensive it is now. I know when I got mine – about 14-15 years ago – it was super expensive. I don’t think orthdontic costs are going down anytime soon! At least you can pay pre-tax through your HSA.
We try to have, at all times, the amount of our deductible in case it comes down to having to pay it.