Ask an Ex-Banker: Medical Debt

By The Banker | Ask an Ex-Banker, Blog Posts, Personal Finance
9 Jan 2013
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medical debtDear Banker,

I have a question about medical debt. My 36-year-old sister just suffered a brain hemorrhage, collapsing at work and sent to the hospital. I am happy to say that she is expected to make a full recovery, but the treatment and ensuing hospital stay involved a week in intensive care, a neurosurgical “procedure,” numerous CT scans, and many, many medicines which she will take for months, if not her entire life. Although she and her husband have health insurance, they otherwise live on a very tight budget, and we are afraid of the hospital bills that will result from this incident.

We “heard” that health-care providers cannot bankrupt people who are unable to pay. If they do the best they can to cover the bills but simply fall short, which they most certainly will, on both counts, does some entity absorb the debt that they cannot pay? The government? The hospital? The insurance companies?

I mean, what do they do if the family simply doesn’t have the money to pay for the essential care she received?

Thank you, Concerned Sister (Alexandria, VA)

 

Dear Concerned,

I’m sorry to hear about your sister’s condition, and I hope she continues to recover.

Your question is a really important one – as extraordinary medical costs often bring on a financial calamity, following directly on the heels of a health calamity.

I read in your question anguish over your sister’s health – compounded by the anguish of financial insecurity for her even after she achieves a full recovery.

A hospital/patient relationship, in my opinion, is distinct from a business/customer relationship or banker/borrower relationship in a way which should change the way debt gets treated.

By that I mean neither the hospital nor your sister had a choice about the transaction.  Your sister clearly didn’t choose to get a brain hemorrhage and her choice of treatment – whether made by her or her family – was made under considerable duress.  The hospital, for its part, cannot refuse to treat your sister’s condition, despite its cost to the institution, or her likely ability to pay.  She has to have the treatment to survive – given the consequences of not getting treated – and the hospital has to treat her, regardless of the financial consequences.

This absence of choice makes medical debt different from, say, ordinary credit card debt.

In my business experience, and indeed in my basic world view, refusing to pay a debt is akin to stealing.  You received something valuable.  Reneging on payment means you took that valuable thing without paying.  This is hard-assed and perhaps unpopular, but that’s my view.  Don’t hate me, I’m an ex-Banker.[1]

Medical debt stands out, however because of the absence of choice between customer and provider.[2]  Fortunately, most hospitals take this into account and assume a certain amount of financial indigence in their patient population.  In other words, most hospitals make a larger provision for non-payment of their bills than a typical business.  Traditionally, most hospitals have been run by religious organizations, governments, or universities that consciously blend a financial approach with an ethical non-financial approach to providing service.[3]

This approach could mean good news for your sister and your family, as the hospital should be prepared for many patients’ inability to pay their bills in full, including your sister’s.

Now, to return to your specific question of what can happen – and what your family should do.  It’s a myth that the hospital can’t push your sister into bankruptcy.

Of course they can.  Here’s the worst case scenario:

Let’s say she owes $50,000 to the hospital, and she ducks the bill because, as you say, she doesn’t have the money to pay it.  The hospital will refer the bill to a collector, who can initiate a letter and phone campaign to get her attention and urge payments.  Occasionally this campaign can threaten her employment, and it certainly will put her through considerable stress.

Following continued non-payment, the hospital may refer the bill to a collection attorney, who may take a period of time to sue her in court to obtain a judgment.  With a judgment in hand, the hospital can, in most states, garnish her wages[4], place a lien on her home[5], or haul her into a court for a debtor’s exam to disclose her income and assets.

By the time (at least a year from now) that the hospital has obtained a judgment, the amount due will have risen considerably owing to penalties, interest, and lawyer’s fees.

With a court-ordered judgment, her credit will be wrecked so any future borrowing will be either refused or offered at usurious rates.

 

Needless to say this is a bad place to be in, and bankruptcy could seem like an attractive option for your sister.

So what should your sister and your family do to avoid this?

Up front, you should make an accurate record of her income and assets.

Ideally, for your short-term purpose, this record will show her inability to settle her $50,000 medical debt.

Next, find the highest ranking person in the hospital’s accounts receivable department and plead your sister’s case, offering to pay something monthly that she can actually afford.  If that’s $100/month great, but if it’s only $25/month, so be it.

At a rate of $100/month ($1,200/year) that $50,000 medical debt will never be paid in full.  That’s ok.  At some point, a year or three from now, your sister can return to the hospital receivables department and offer some lump sum amount ($5,000?) based on her tax refund or house refinancing or ability to borrow $5,000 from a bank.  Chances are, at some point, the hospital will welcome the partial settlement and offer debt forgiveness on the remainder.

Not-for-profit hospitals, in particular, budget for non-payment by many patients.  Many may budget a particular amount of non-payment per year, so forgiving the $45,000 your sister can’t pay in 2013 may be impossible now since it exceeds their figure, but may be possible later because of the budget in  a new calendar year.

As a finance professional who dealt with many non-paying debtors, I was always receptive to minimal monthly payments from an upfront debtor who made clear to me that non-payment and bankruptcy represented a much worse, mutually-assured destruction option.  If the hospital accounts receivable department acts rationally it will welcome some regular, low payments now rather than engage in a collections fight with your sister that they’re uncertain to get anything from in the future.

I hope that helps and good luck to your sister and your family.



[1] Of course we can all imagine scenarios in which stealing may be ethically justified, such as a parent attempting to provide food or basic shelter for their minor children.  The ethical imperative and human impulse to survive trumps the ethical imperative to not steal in certain circumstances.  Yes, I just agreed to accompany my wife to the movie version of Les Miserables.  Jean Valjean stole a piece of bread 19 years ago.  That’s fine, I forgive him.

[2] The exceptions being optional medical procedures, such as elective plastic surgery.  You had better pay for those butt implants in full, or else I will judge you harshly!

[3] It’s also why I have an instinctual aversion to for-profit medical practice.  Yes, there may be some additional efficiencies to be gained from market practices, but medical service is not like other services.  In the absence of a choice of whether or not to treat your broken leg, or appendicitis, or brain hemorrhage, pure profit motives can create ethical monstrosities.

[4] Not in Texas for example and a few other states.

[5] Not in Florida for example or Texas and a few other states with ‘homestead’ exemptions.

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5 Comments

  1. I’d also recommend talking to nurses and hospital administrators. In all likelihood there is a hardship fund at the hospital to deal with cases where insurance isn’t sufficient, which may be able to help. Even if that is not an option, opening those communication channels may present other options to lower overall payments.

    A local hospital near us has “secret” discounted balance months. The idea is that you can clear your entire balance due with the hospital by paying X% of the balance, where X is negotiated between you and the hospital. I’ve heard it range from 30-50%. But you can only find out about these periods if you’re openly communicating with the billing department.

    • The Banker says:

      That’s great information, thank you.
      Of course every hospital will have their own policy, and their own billing department personalities, but I should hope many, if not most, would be amenable to negotiating an affordable amount.

  2. Tarra Hassin says:

    I’m sure we all have stories about the absurdity of the lack of “choice” that occurs once you are in an urgent/ emergency situation. You don’t get to shop around for a fair price for a CT scan or negotiate your room rate before you’re admitted. Unfortunately, trying to negotiate after the care has been given (often with little knowledge of its necessity and NEVER with a price tag attached) is incredibly challenging. Also, the “retail” prices are in some strange way inflated (but discounted for insurance companies!), but even when you intend to pay, it can be REALLY hard to get a break. At all. (P.S. I hate Christus system, just sayin’. They must be for-profit, the way they conduct their billing and collections.) Have you ever tried to ask a nurse how much the Tylenol she’s handing you costs? Why shouldn’t we know– if we’re going to have to pay the bill? Why should one tablet cost $8?!

    • The Banker says:

      Christus isn’t supposed to be for-profit (its Catholic and supposedly led by nuns) but I believe you when you say the billing system is outrageous and frustrating and weirdly distorted. The for-profit/not-for-profit/insurance company/government/private mix of health care in our country is weird and leads to odd outcomes.
      Like being extraordinarily expensive beyond any other country comparison, yet lots of people aren’t covered or aren’t covered sufficiently.

  3. JB McMunn, MD says:

    What a fascinating question! Here’s my take:

    There are two potential types of obligation: (1) legal, and (2) moral.

    In the first case the government has mandated a duty to provide care under EMTALA; the medical services must be rendered by the available providers. They can’t refuse to treat based on the patient’s ability to pay.

    The patient, being unconscious, has no say in the matter. In her stead, the government has mandated that by default she undergo the maximum level of care, unless she has legally arranged otherwise (e.g., a living will) or someone acts in her stead as assigned by the State (more on this below).

    In the moral case one might consider it barbaric to deny needed emergency care. This is the moral dilemma. One might think that a hospital or doctor would never refuse treatment to someone in dire need based on financial considerations. One would be wrong. Over a course of many years. Many times per year.

    The government declared that financial status cannot be the basis of denial of emergency care (EMTALA). An ER can no longer turn away a woman in labor because she doesn’t have insurance. This pre-empts the service providers’ free will to determine whether they are ethically bound to administer treatment. Morals are moot: It’s the law.

    In summary, the government forces the medical service providers to engage in the treatment, and it forces the patient to undergo the treatment.

    It must logically follow that the government, having coerced both parties into the arrangement, must pay the bills.

    Another dilemma not addressed above is that most states have delineated a process whereby a relative may act on the patient’s behalf. In this instance the woman was married and I can’t imagine any state that did not provide for her husband to make decisions on her behalf.

    In the absence of a husband it might go a child, parent, or sibling. Most states have a legal hierarchy. Therefore her husband was driving the patient bus. It was not a government-mandated default setting.

    But what would happen if the doctors felt the patient required treatment and the husband refused? Would they have to get a court order? If the court ordered treatment who should pay? The judge is an agent of government. What if the situation was so urgent that there was no time to consult a judge? In such cases the law usually sides with those elected to proceed with maximum reasonable care.

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