Protect Assets From Unexpected Medical Expenses

By Robert J. Mintz, J.D., LL.M (taxation)

A growing focus of our practice in recent years is on asset protection planning for individuals to protect against medical expense related liability risks. Medical expenses resulting from an illness or injury to yourself or a family member, represent the single most serious threat to your home, savings and future income.

The potential financial disaster is clear if you’re uninsured. Although premium subsidies are currently provided under the Affordable Care Act for those at moderate income levels, millions of middle class and even wealthy individuals cannot afford coverage and are without insurance. In these cases a trip to the hospital or any extended treatment can cause tens or hundreds of thousands of dollars in medical bills (assuming treatment can be obtained at all). If the physician or the hospital does not arrange a payment plan before the treatment begins, it will, most likely, pursue collection reasonably soon after. Depending on the law of your state, the assets which can be seized include your home and savings and other personal property.

What continues to be less well understood is that even for those covered under private plans, exchange plans or employer sponsored plans, the financial risk remains significant. Copays, large deductibles and uncovered treatment, represent potential liabilities which cannot be controlled. That’s not an overstatement. Out of network physicians may be brought in during procedures or surgery without a patient’s knowledge or approval. Depending on the coverage, insurance may cover none or a small portion of these charges. Some states prohibit balance billings but most allow it.

A client seriously injured in an automobile accident spent several months in ICU and recovery. She underwent spinal surgery and numerous serious procedures. During spinal surgery her physician brought in an out of network doctor to assist, without the patients consent or knowledge. Total medical bills exceeded $1 million and although her insurance covered a portion of the charges, it did not cover the the balance.. With copays, deductibles and out of network charges, she was left with total uncovered charges of $245,000, accumulating interest and late payment penalties.

Despite the coverage requirements of the Affordable Care Act, insurer may simply refuses to pay large portions of what should be covered charges. This happened routinely before the ACA .

According to a study by the California Nurses Association California’s largest insurers denied 13.1 million claims in just the first three quarters of 2010. That amounted to 26% of all claims submitted. For example, of these insurers, PacifiCare denied 43.9%–Cigna 39.6% and Anthem Blue Cross-27.3%.

“These rejection rates demonstrate one reason medical bills are a prime source of personal bankruptcies as doctors and hospitals will push patients and their families to make up what the insurer denies,” said CNA/NNU Co-President DeAnn McEwen. The data, new findings by the Institute of Health and Socio-Economic Policy, the CNA/NNU research arm, is based on data from the California Department of Managed Care.

Claim denials by insurers are still routine. What happens if you receive medical treatment which runs into the tens or hundreds of thousands and your insurer denies the claim because of an unmet deductible, a copay, an out of network physician, or for a treatment or drug that is not approved? Who pays the doctor and the hospital?  If there is no insurance or the amount is limited, your provider will require that you guarantee full payment of the likely costs incurred, less any amount actually reimbursed by your insurer. Meaning, you’re on the hook for whatever your insurance company fails to pay. If your insurer denies a claim that should be covered, you can fight it out and ultimately sue your insurance company but lawsuits take a long time and plenty of money that most people can’t afford.  That’s exactly what the insurer is counting on and why it’s more profitable to deny claims and defend the occasional litigation. The strategy of resisting a high proportion of claims is an essential and integral part of the business model of the health insurers even under the ACA.

When Patients Can’t Pay

What happens when a large medical bill can’t be paid?  Usually the outcome is a lawsuit filed by the hospital or collection agency with a judgment and a lien filed against the patient’s home and accounts. In most states, a percentage of the debtor’s employment earnings can be garnished. Generally, before this point is reached, the patient files a personal bankruptcy to stop the wage garnishment and wipe out the medical bills and other accumulated debts. But that requires that he give up all of his assets including savings accounts, real estate and equity in his home.  These assets, except those that are specifically exempt, are turned over to the court and divided among the creditors.

According to a study by Harvard University, about half of the 1.5 million annual bankruptcy filings are caused by illness and medical bills. And surprisingly, three fourths of those had health insurance at the start of the illness which triggered the filing. “Unless you’re Bill Gates, you’re just one serious illness away from bankruptcy”, said Dr. David Himmelstein – the study’s lead author and an associate professor of medicine. “Most of the medically bankrupt were average Americans who happened to get sick.”

How Patients Protect Themselves

The high level of financial risk posed by an unpredictable medical event is now leading patients to take steps to protect their savings from this threat. For instance, I met with a couple in their early 50s. They have about $300,000 of equity in their home and $200,000 in savings. He is self-employed and she works for a small company. Both are covered under her group plan, but, with rising costs, the company might cut back or terminate the plan sometime soon. Individual policies or exchange policies may be available at that point but the cost and extent of the coverage will have the usual limitations.  The goal of their planning is to protect current and future savings from large, unexpected bills at any point in the future. They need their savings for retirement and a substantial loss would be a financial and personal disaster for them.

Family Savings Trust

Asset protection with a specially designed Family Savings Trust can often shield savings from these events.

A Family Savings Trust is extremely flexible in form and can incorporate provisions, which combine the features of many domestic arrangements within the language of the plan documents. All of your assets can be held within the trust—but be governed by special terms appropriate for that asset.

For those concerned with protection against unexpected medical bills, a trust can be tailored to specifically to address the issue of medical expenses. For example, the trust may be designed to hold your home,  and savings and brokerage accounts with the goal of protecting these assets from unexpected medical expenses.  It is often designed to preserve the tax benefits associated with the home (including the mortgage interest deduction, property taxes, and avoidance of gain on a future sale), while carrying out appropriate estate planning and asset protection goals for family wealth.

Medical costs are the largest potential source of potential risk and liability that most people face. The actual risk of loss ranks higher than any professional or business activity we have seen. Most likely, you or a close family member will incur substantial medical expenses at some point and all or a portion of those costs will become a personal liability of yours. If you have a home or some savings, bankruptcy will not be a feasible option because those assets, over the exemption amount will be subject to the claims of medical creditors.

All estate planning devoted to preserving family assets should properly consider and appropriately plan for shielding accumulated wealth and future earnings from unexpected liabilities and risks.

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