American households are getting wrecked by medical debt

When Deanne Overvold’s husband, Lee, started complaining of back pain late last year, she thought the painkillers his doctor prescribed would be the end of it. Five months later, a round of lab tests would reveal that Lee, 60, wasn’t just suffering from a backache — he was diagnosed with acute myeloid leukemia, a fast-moving bone marrow cancer.

“You never realize the cost of catastrophic illness until you’re in it,” says Deanne, 60. “It’s rather devastating to go from being able to pay the bills to wondering how you’re going to take care of the next month."

In their 30 years of marriage, the Overvolds had each taken on traditional household duties — Lee worked and managed the finances, while she cared for their two sons at home.  At the time of his diagnosis, Lee earned $120,000 a year working in sales for an energy company in their hometown, Fontana, Calif. The rigor of his treatment regimen forced him to leave his job on disability, which cut the family’s income by 40%. Very quickly, his hospital bills consumed their emergency savings and the couple began drawing on his retirement benefits much earlier than expected.

“At least five of his cancer specialists weren’t covered by our insurance,” Deanne says. “And one day the hospital would charge $300 for one drug and the next day it would cost $750. It’s like it just keeps coming and you can’t stop it.”

Lee died in August, less than six months after his diagnosis. Deanne was left with more than $100,000 in hospital and physicians’ bills, she estimates -- an amount far too inadequate for her savings to cover. Six years away from reaching full retirement age herself, she’s begun looking for full-time work for the first time in more than two decades. On the recommendation of a friend, she enlisted the help of a financial advisor who specializes in helping widows and widowers. 

“We had planned to retire at 67 and we had everything planned out,” Deanne says. “Now, there is no plan.”

Spiraling medical debt

Nerdwallet

Like so many Americans who’ve been financially crushed by medical bills, Deanne’s expenses became an unmanageable burden.

A report by financial education website Nerdwallet.com released today shines new light on medical debt’s crippling effect on American households. Between 2010 and 2013, American households lost $2,300 in median income, but their healthcare expenses rose by $1,814, according to Nerdwallet. Out-of-pocket healthcare costs are expected to accelerate to a 5.5% annual growth rate by 2023 – more than twice as fast as the national economy, which grew by 1.9% last year.

“We found that one in three dollars that are currently in debt collections are actually medical, which we found quite shocking,” says Christina LaMontagne, general manager of NerdWallet Health and author of the report.

Medical debt  triggers more than 60% of bankruptcy filings in the U.S. According to a September Bankrate survey, 44% of consumers making less than $30,000 a year say they have more medical debt than emergency savings.

Further complicating matters is America’s notoriously confounding medical billing system. A widely cited May 2013 study by the Centers for Medicare and Medicaid Services found that hospitals sometimes charge 10 to 20 times what Medicare typically reimburses for a service (Medicare estimates are often used as a baseline for medical service pricing). According to Nerdwallet’s study, two-thirds of adults said they have received medical bills that cost more than they were initially quoted, and hospital billing errors resulted in overcharges of up to 26%.

“As consumers have increasing amounts of out-of-pocket responsibilities, it’s very unsettling to think the bills you receive might be wrong and you might be overpaying,” LaMontagne says.

Retirement at risk

Healthcare is among the greatest costs retirees will face when they leave the workforce, surpassing $220,000 for those who live into their 80s. And retirement healthcare costs are expected to rise from from 69% of Social Security benefits for a couple retiring in 2015 to 98% of Social Security benefits for a healthy couple retiring in 2025 and 127% for couples retiring in 2045.

When workers are faced with costly health issues during their working years, future retirement plans can easily be derailed.

Kathy Penton, 58, was the breadwinner in her family when she was diagnosed with Fibromyalgia, a syndrome that causes chronic nerve and joint pain, in 2002. She was in her early 40s, a time when both men and women should be reaching their peak earning years. Instead, the constant pain drove her to leave her management position at the telecommunications company she had worked at for more than 10 years.

Kathy and her husband, Lonnie, 63, who live in Savannah, Ga. went from a dual-income household to relying solely on Lonny’s $50,000-a-year job at an auto repair shop. It took more than two years for Penton to successfully qualify for disability benefits, and by that time the couple had been regularly dipping into her 401(k) account and using credit to make ends meet.

“I know I could have planned better but before I even had a chance think about it, it was gone,” she says.

After paying taxes on early 401(k) withdrawals and sustaining a painful 25% loss during the 2008 financial crisis, Penton says her $100,000 nest egg is practically nonexistent today. When their bank threatened to foreclose on their home after two missed mortgage payments in 2008, it was a major tipping point. More than $20,000 in credit debt, the couple decided to file for bankruptcy.

Penton’s health needs were covered by the benefits she received in her severance package, but she wasn’t prepared to support her son, who, in 2009 at age 22, was diagnosed with chronic pancreatitis, an incurable but treatable condition that requires regular care. When her son’s frequent hospital stays interfered with his work, he was let go from his job at a shipping dock and moved back home. Penton paid for his COBRA benefits but when they ran out, no insurance company would touch him (this was pre-Affordable Care Act, when insurers could deny coverage based on pre-existing conditions). It would cost $300 a month to enroll him in a health plan in the new federal marketplace, an expense she says neither he nor she could afford.

“What bothers me most is the shame I feel, because I know there are others who are worse off than me and I knew that I needed to be prepared for my retirement beyond Social Security benefits,” she says. "But when your only child is sick and you’re sick, what are you going to do?"

Looking to tackle unpaid medical debt? Check out Nerdwallet Health for tips on finding help in your area.

--Was your state among those that didn't expand Medicaid under the Affordable Care Act this year? If you fall into the 'Medicaid gap', we'd love to hear your story: yfmoneymailbag@yahoo.com.

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Read more in our Obamacare series:

The Obamacare marketplace one year later: How you’re faring

How to see through opaque health care costs

Obamacare navigators are facing a tough road this year

The Opt-Out nation: Why uninsured Americans passed on Obamacare