When medical emergency leads to financial shock, and what we can do about it
Last week I wrote about my experience with financial shocks: after falling from my bike and knocking out my two front teeth, I found myself burdened by a $6,000 medical bill. My health insurance provider refused to cover the accident, which it viewed as elective treatment. Figuring out how to piece together the money to pay this bill was deeply unsettling.
The following post takes up the specific case of medical emergencies like the one I experienced, which are far more common than might be expected. One the one hand, households struggle to put income towards savings; on the other hand, medical emergencies are pervasive — one in five Americans age 18 and over will visit the emergency room each year. As a result, millions of Americans find themselves in situations like mine: unable to pay for unplanned emergency expenses that wipe out whatever meager savings they had managed to squirrel away. I’ll conclude with a review of what my startup, PayShield, is doing to help people who experience medical and other types of financial emergencies.
Our story begins with a man we’ll call Mike. Mike is in his 50’s and makes about $30,000 per year as an installer of office furniture. He lives in Kentucky about an hour from the bigger cities in the state, in an area where the cost of living is fairly low. Thus his income goes pretty far, but with two kids to support, he has little left over to put towards savings each month.
Recently, Mike’s ailing, elderly mother had a medical emergency and had to spend the night in the hospital. Much of the expense was covered by insurance, but he still needed to come up with $1,000 — $1,000 he did not have.
Surely Mike could find $1,000. Between credit cards and his meager savings, he should be able to piece together the needed money. But Mike already carried a credit card balance. And he had his own children and their needs to think about too.
According to the Report on the Economic Well-Being of U.S. Households in 2016 by the Federal Reserve, about one in four Americans experienced a major unplanned medical expense in the last year. The median expense was $1,000; the average was $2,500.
It would not be atypical for Mike to carry medical debt from earlier emergencies too: almost one in four adults do. If Mike’s mother has a chronic condition, he’s probably helping her to make payments.
When I began researching the topic of medical debt, my first thought went to health insurance. Isn’t the whole point of insurance to prevent relatively rare, catastrophic events from destroying one’s finances? In fact, the expansion of private health insurance and Medicaid, following passage of the Affordable Care Act, has been tied to decreasing shares of people carrying both medical and nonmedical debt, lower bankruptcy rates, and lower total debt past due. Although this is good news, 70 percent of adults with medical debt incurred all of their debt during periods they were covered by health insurance. Clearly, health insurance alone is not enough to help people when they experience a shock: 24 percent of adults age 18 to 65 — so excluding older Americans, who have more medical expenses — carried past due medical debt in 2015.
Medical emergencies are just one source of financial shocks. Yet medical emergencies are relatively common. At the same time, 44 percent of Americans report being unable to come up with $400 in the case of an emergency. Some respondents said they would either borrow or sell something they own to come up with the money, but many report that amount was simply an expense they could not handle.
What approaches would these Americans take to pay for this expense? 45 percent would charge their credit cards and pay off the expense over time. Eight percent would turn to a bank loan. 5 percent would use a payday loan. All of these methods are expensive and result in significant excess interest payments: at an annualized rate, borrowers pay anywhere from 16 percent for charging their credit cards, to 400 percent for taking out payday loans.
So what did Mike do? He went to his employer, a small business, to ask for help. Recognizing the value that Mike has created for the business over the years, his boss was willing to help him by fronting the money and deducting the difference from his paycheck over several months until the debt was repaid.
Offering a benefit of this type is the exception, not the norm. Just 15 percent of employers offer loans for emergency situations or disaster assistance, and from my own conversations with employers, I learned that the scope of these loans is limited usually to major weather events like hurricanes and earthquakes. Only 7 percent of employers allow loans for non-emergencies.
In my interviews with small and large business owners, I noticed that the agreement that Mike reached with his employers doesn’t scale well. It is much more difficult for large employers to administer what is largely an ad hoc need. And most employers are not in the lending business — they lack the expertise to systematize an emergency line of credit in-house.
At PayShield, we are replicating the intimate relationship between small business owners and their employees at larger companies. As a third party intermediary, we enable large employers to show that they care about their people just as much as small business owners do. We help employees get access to an emergency line of credit that is convenient, reputable, and far less expensive than typical loans, and at no risk to the employer.
I’ve known Mike since I was a kid. He’s a hard-working devoted family man trying to make life better for his kids. We can do more to help people like Mike when they experience an emergency.
 In subsequent posts, I’ll investigate other causes, including car and home repairs, as well as changes in income from contingent and precarious work conditions.