Living on the Edge: Health Care Expenses Strain Family Budgets

Living on the Edge: Health Care Expenses Strain Family Budgets

HSC Research Brief No. 10
December 2008
Ha T. Tu, Ph.D.

Families are particularly sensitive to escalating health care costs. Even families with health insurance can face high deductibles and copayments that strain household budgets, especially when incomes are tight. Health care affordability concerns intensified with the 2008 economic downturn, with rising unemployment, tightening of consumer credit and major declines in home values and retirement savings. The financial pressures of the downturn, together with escalating health care costs, may increase the number of families struggling with medical bills.

Affordable Medical Care Central to Health Reform

Making health care more affordable for families is a cornerstone of nearly every major health reform proposal. Surveys show that health care costs consistently rank among the public's top concerns—as many as two-thirds of Americans report being very worried about the costs they will face if they become seriously ill.

Health care costs are a pervasive concern, but some families are more vulnerable than others to experiencing financial problems from health care costs. Families may have financial problems related to medical bills for many reasons: not having health insurance, high deductibles and copayments under their insurance plans, having costly health problems, and having low income.

In fact, medical bill problems are relatively common across many types of families. An analysis of the 2007 Health Tracking Household Survey conducted by the Center for Studying Health System Change (HSC)—prior to the worsening of the economy—found that a quarter of nonelderly families had problems paying medical bills or had accrued medical debt. This report describes the wide reach and effects of medical bill problems and discusses implications for health reform.

Specifically, this analysis characterizes the extent to which financial pressures from medical expenses pervade families across income levels, insurance status and health status. It further explores the consequences families experience in terms of financial problems, health care access, and changes in their work and personal lives. In-depth interviews conducted with 20 families supplement the survey analysis with insights that the survey questions alone cannot provide (see Data Source for a description of the data).

Financial Pressures from Medical Expenses

To measure the financial effects of medical expenses, the survey asked respondents about problems paying medical bills, medical debt and financial effects of medical expenses (see box). From these measures, families are classified as having medical bill problems if any family member (1) had problems paying medical bills, (2) had medical bills being paid off over time, or (3) had medical debt. The three survey measures are highly correlated and, taken together, capture the financial difficulties families face in managing medical bills.

People were asked whether they and/or any family members experienced any of the following:

Problems paying medical bills: problems paying or unable to pay medical bills

Medical bills being paid off over time: medical bills that are being paid off over time

Modest Out-of-Pocket Expenses Cause Strain

Health care costs strain the budgets of many families—including many with relatively low out-of-pocket costs. An estimated 44 million American families—or about a quarter (25.7%) of all nonelderly families—reported having problems paying medical bills in 2007 (see Figure 1). By comparison, the median out-of-pocket spending for families was about $688 per person in 2007—approximately 2 percent of the median family income.

However, the distribution of out-of-pocket spending varies widely, with many families spending much more than the median amount and a nontrivial number of families incurring substantial costs. More than a fifth (22.4%) of nonelderly families spent 5 percent or more of family income on out-of-pocket medical expenses, and 6.9 percent of families spent 10 percent or more (see Figure 2). Out-of-pocket spending includes individual payments for premiums, medical care and prescription drugs.

Out-of-pocket costs for health care do not have to be high to cause financial problems for some families. While the rate of medical bill problems is highest among families with the most burdensome out-of-pocket costs, only about a third (35.2%) of families with medical bill problems spent 5 percent or more of income on out-of-pocket medical costs (see Figure 3). Moreover, among families spending less than 5 percent of family income on out-of-pocket medical expenses, about a fifth (21.2%) reported medical bill problems.

These findings suggest that measuring the out-of-pocket cost burden alone does not tell the whole story of health care affordability problems. While the out-of-pocket spending measure captures the amount spent relative to family income, it does not account for other factors contributing to a family's overall financial well-being—for example, other expenses, savings and debt. It is likely that what constitutes an "affordable" expense depends on many personal factors besides the ratio of out-of-pocket spending to income.

In addition, out-of-pocket spending measures do not account for the medical care that people may have foregone because of cost. Families facing affordability problems may have avoided care altogether rather than incur bills they could not afford to pay.

Indeed, in-depth interviews with families confirmed the survey findings. Several of the 20 families described instances where their medical expenses were not particularly high but still caused financial strain. For example, a young mother with a $10,000 salary described how a string of medical events requiring modest copayments became a financial burden over time. She characterized the copayments as "not that much money," but "when you have to pay them so frequently, they definitely add up."

Medical Bill Problems Increase as Out-of-Pocket Spending Rises

Not surprisingly, higher levels of out-of-pocket spending are associated with significantly higher rates of medical bill problems (see Figure 3). About half (50.1%) of families spending 5 percent to 10 percent of income on out-of-pocket medical expenses reported medical bill problems—twice the rate (21.2%) for families spending less than 5 percent of income. Among families spending 10 percent or more of income on out-of-pocket expenses, the rate was much higher still (64.7%).

Families with higher out-of-pocket costs also are more likely to report more-severe financial consequences. Among all families reporting medical bill problems, 38.0 percent reported one indicator of medical bill problems, 29.1 percent reported two, and 33.0 percent reported all three indicators of problems. By comparison, among families spending 10 percent or more of income on medical costs, 26.7 percent reported one indicator, 27.2 percent reported two and 46.2 percent reported all three indicators.

Difference by Income

Medical bill problems are more prevalent among lower-income families—45.3 percent of families with incomes below 200 percent of the federal poverty level compared with 18.8 percent among families at or above 200 percent of poverty (see Figure 4).

However, medical bill problems also affect a substantial number of higher-income families. The rate among families with incomes of 400 percent of poverty and above—approximately $84,800 for a family of four in 2007—was 12.6 percent, indicating that about seven million higher-income families reported problems paying medical bills. While higher-income families may be better able to weather the financial impacts compared with lower-income families, their financial difficulties resulting from medical costs still can be considerable.

The finding that income level and out-of-pocket spending do not fully predict medical bill problems underscores the complex interplay of factors contributing to the financial burdens of health care. A family's overall financial situation—including other debts, financial assets and the stability of income—undoubtedly affects their ability to pay medical bills.

Differences in the rate of medical bill problems across income groups also can be affected by the likelihood of insurance coverage, with lower-income families less likely to be insured. However, even among insured families, 21.4 percent of families with incomes below 200 percent of poverty reported medical bill problems, compared with 17.3 percent among insured families with incomes at or above 200 percent of poverty.

Health Status and Chronic Conditions

Families that include members who are in fair or poor health or who have chronic conditions also are more likely to have medical bill problems. Among families where at least one member reports being in fair or poor health, 42.1 percent had medical bill problems, compared with 22.1 percent among families where all members are in good to excellent health (see Figure 4). Similarly, families with at least one member reporting a chronic condition had a rate of 30.7 percent—eight percentage points higher than for families with no members with a chronic condition. These findings corroborate the concern that people who use more health care services are likely to face higher medical bills.

Multivariate analyses found that the most important predictors of medical bill problems are income level, insurance status, health status and family out-of-pocket spending. Families with lower income, without insurance, in poorer health and with high out-of-pocket spending relative to income had the greatest odds of having medical bill problems. Even after controlling for these factors, a number of other demographic factors were associated with medical bill problems—for example, younger age, larger family size and not being married were associated with a higher likelihood of problems.

Having insurance was associated with a lower probability of problems. However, this finding must be interpreted with caution since the analysis did not control for the level of insurance benefits, such as the scope of services covered, deductibles and copayments. More generous health plans are associated with lower rates of medical bill problems.

Financial Consequences of Medical Bill Problems

Families with medical bill problems frequently reported major financial consequences. Among families with medical bill problems, nearly half (47.9%) used up all or most of their savings paying medical bills, and more than a quarter (28.9%) said they were unable to pay for basic necessities such as food, heat and housing because of medical bills (see Figure 5). In addition, the majority of families reporting medical bill problems (55.9%) had bills that were being paid off over time, indicating that their debts extend beyond their current financial resources.

Among families with medical bill problems, the financial consequences were more severe for lower-income families. About 60 percent of lower-income families with medical bill problems depleted all or most of their savings to pay medical bills (vs. 39.3% of higher-income families), and 40.9 percent were unable to pay for basic necessities (vs. 20.1% of higher-income families).

These findings suggest that while lower-income families bear the greatest financial consequences, higher-income families are by no means immune to the adverse effects of medical bills. As the family stories in this report show, seemingly manageable medical expenses can become crushing burdens when combined with other financial pressures.

Among the 20 families interviewed in depth, all had experienced financial consequences from their medical expenses. Nearly all reported accruing debt from medical bills, and several reported being contacted by collection agencies. One woman described how she feels when collection agencies call: "I can tell when it's them. I just don't answer the phone. I start to shake." Another woman said that her medical debts led to a car repossession. A man reported that as a result of his wife's medical expenses from cancer treatment, he filed for bankruptcy.

To manage their medical bills, some families reported taking on other types of debt, borrowing from family or friends, and even skipping bills. One family charged all their medical bills to a credit card—their outstanding balance was about $13,000. She reported, "We try to put most of our bills on a credit card, because that way they can't be calling you if you have the minimum payment. If you owe money to everybody else, they're going to be calling you."

Several families mentioned using their tax refunds and, in one case, an income tax credit to pay their medical bills. One woman described her strategy for managing her medical and other debts: "Every year when it's time for my taxes I make a list and I try to come up with a payoff strategy, and every year I end up paying it all to medical bills, and the other stuff just sits there."

Consequences for Health and Medical Care

In addition to financial consequences, families with medical bill problems reported consequences for their health and medical care. Among families with medical bill problems, a large share report not getting needed medical care because of costs (see Figure 5). About 40 percent of these families reported delaying care, not getting a test or treatment or not filling a prescription because of cost (see Figure 5). Similarly, about 40 percent of families with medical bill problems cut back on care, including delaying care and not filling prescriptions.

These findings are consistent with other studies showing that families in financial distress from medical bills often respond by reducing their use of medical care. Unfortunately, this response can lead to worsening health conditions and potentially higher medical costs in the future.

The in-depth interviews also revealed health consequences. Several families described cutting back on medications to reduce costs. One woman with asthma said, "I stretch everything out as much as I can because I know how much my copay is." A family with a child who has attention deficit hyperactivity disorder (ADHD) said they sometimes skip their child's medication to save money. Another mother said she puts off getting care for herself to reduce costs: "It's usually me that suffers. The kids always come first."

A man who has high blood pressure described how he often goes without his medication: "I'll call the doctor's office and say, 'I've run out of my blood pressure medicine. Can you call me in something?' They'll say, 'No, we need to see you.' Well, I can't afford to come see you, so I just go without it."

Financial pressures from medical bills also affect other aspects of families' lives. About a fifth (22.2%) of families with medical bill problems reported that someone in the family changed their work situation because of medical bills (see Figure 5). The survey found that about equal percentages of families reported working more or working less. Families may work less because of their health problems, while others may work more to pay off medical bills.

Three-quarters (75.3%) of families with medical bill problems reported some type of financial or health consequence—depleted savings, unable to pay for basic necessities, delayed care, did not get care, did not fill a prescription or changed work situation. Among lower-income families with medical bill problems, the rate was 81.1 percent.

Changes in Insurance Affect Financial Burden

Because insurance status is an important predictor of medical bill problems, any change in insurance—gaining or losing coverage—likely affects the financial effects of medical bills. In analyses of the longitudinal component of the survey that follows the same people over time, changes in insurance coverage between survey rounds (2003 and 2007) were associated with changes in the rate of medical bill problems.

People who gained insurance were less likely to report medical bill problems (15.8%) than those who remained uninsured (21.9%). People who lost insurance were more likely to have problems (25.0%) than those who remained insured (17.1%). These findings demonstrate that gaining insurance tends to ease medical bill problems—a key reason that extending insurance coverage to the uninsured is fundamental to health reform. But they also show that insurance does not eliminate medical bill problems.

In the in-depth family interviews, several families described the adverse effects of losing insurance. A 44-year-old woman with rheumatoid arthritis left her job for health reasons and lost her insurance. Because of her medical bills, she had to move in with her mother. She described her situation: "Right now, I can't work because of the pain. I can't afford any of my medications, so the pain gets worse. If I could afford my medication, maybe I could go back to work."

Economic Downturn and Medical Care Affordability

Although the survey was conducted prior to the worsening of the economy in 2008, insights from the in-depth interviews suggest that many families already were struggling financially, and medical expenses appeared to contribute to their financial problems. Medical expenses appeared to be "the straw that broke the camel's back" for many families. Therefore, even moderate medical expenses can lead to financial problems, as many people's financial reserves are depleted.

The current recession is likely to increase the number of families with medical bill problems. As incomes decline and unemployment rises, more families will have lower incomes and more families will lose employer-based health insurance—both of which are associated with higher rates of medical bill problems. In addition, families that continue to have employer coverage may face higher cost sharing as employers shift more health care costs to workers.

Health Reform Implications

That a quarter of all nonelderly families reported medical bill problems prior to the economic downturn underscores the urgent need for health care reform and the vital role that affordability must play. Health reform likely would ease the problem, even as it won't solve the problem.

Expanding health insurance coverage—to the 45 million Americans currently uninsured—would reduce the number of people facing financial hardship from medical bills. However, insurance coverage alone is not sufficient. Specifically, policymakers need to address what type of insurance coverage is sufficient to prevent financial hardship. An earlier study found that among insured nonelderly adults, 12 percent experienced unmet medical needs and financial stress related to health care.

Policy makers also need to balance making coverage affordable with the need to encourage cost-effective use of health care services. Cost sharing can help reduce unnecessary utilization, but, at the same time, can impose financial burdens on families and discourage the use of needed services.

Finally, the effects of medical expenses must be understood in the context of families' broader financial situations. Health reform can improve affordability, but for some families, medical expenses will remain a burden as long as their overall financial conditions are difficult.

Policy makers need to consider these trade-offs in developing insurance benefit standards as part of health reform. These decisions will be critical in determining whether health reform actually achieves the goal of making medical care affordable for American families.

This analysis uses data from the HSC 2007 Health Tracking Household Survey and in-depth interviews with 20 families. In addition, some results use data from the Community Tracking Study (CTS) Household Survey, which preceded the Health Tracking Household Survey.

The in-depth interviews were conducted in two rounds—10 in November 2007 and 10 in February-March 2008. Respondents were recruited at community organizations and clinics. Participants were screened for financial problems related to medical expenses. All participants had at least one family member who was currently insured. Several had recently experienced a change in their insurance status. The interviews explored families' experiences with medical expenses, the consequences of those expenses and the coping strategies they used.

Additional details about the qualitative interviews, including a description of the families, can be obtained by contacting HSC at (202) 484-5261 or [email protected].

Notes

1 Blendon, Robert J., and John M. Benson, "Americans' Views on Health Policy: A Fifty-Year Historical Perspective," Health Affairs, Vol. 20, No. 2 (March/April 2001); and USA Today/Kaiser Family Foundation/Harvard School of Public Health, Health Care Costs Survey (August 2005).

2 The analysis is based on the family-level file for the 2007 Health Tracking Household Survey (see Data Source). An estimated 170 million nonelderly Americans live in family units. In these analyses, a "family" refers to the health insurance eligibility unit, which is defined as an adult or married couple plus dependent children. Dependent children are defined as those under age 18 plus full-time students ages 18-23 and those ages 18-23 with family income less than 200 percent of the federal poverty level. Hereafter, the term "family" refers to this definition. All analyses are weighted to be nationally representative. Rates cited in the text are significantly different (p < 0.05) from the reference group unless otherwise noted.

3 The median out-of-pocket spending per person was estimated from the 2005 Medical Expenditure Panel Survey (MEPS), adjusted to 2007 dollars. Out-of-pocket spending includes spending on insurance premiums, medical care and prescriptions. The median family income is estimated from the 2007 Health Tracking Household Survey.

4 Out-of-pocket spending is estimated from the 2005 MEPS. In addition to individual spending, MEPS computes a family-level out-of-pocket spending measure that combines expenditure for all members of the health insurance eligibility unit. MEPS uses the same definition of family as the HSC Health Tracking Household Survey (see Note 2). HSC researchers linked the MEPS out-of-pocket-spending-to-income variable to the 2007 Health Tracking Household Survey based on insurance status, income, family size, self-reported health status, age, and Census division. See Peter J. Cunningham, "The Growing Financial Burden of Health Care: National and State Trends, 2001-2006," Health Affairs, Web exclusive, Vol. 29, No. 5 (June 2010).

5 Being married was not statistically significant in the adjusted analysis.

6 Cunningham, Peter J., "Affording Prescription Drugs: Not Just a Problem of the Elderly," Research Report No. 5, Center for Studying Health System Change, Washington, D.C. (April 2002).

7 The CTS Household Survey preceded the Health Tracking Household Survey and used the same methodology. While the survey instruments are not identical, the questions used for the measures in this analysis are the same or comparable.

8 Strunk, Bradley C., and James D. Reschovsky, "Trends in U.S. Health Insurance Coverage, 2001-2003," Tracking Report No. 9, Center for Studying Health System Change, Washington, D.C. (August 2004); and Cunningham, Peter J., and Ha T. Tu, "A Changing Picture of Uncompensated Care," Health Affairs, Web exclusive, Vol. 22, No. 6 (November 2003).

Data Source

The HSC 2007 Health Tracking Household Survey is a nationally representative telephone survey of the civilian, noninstitutionalized population. The survey was conducted between March 2007 and February 2008, and has a sample of about 17,800 individuals. The survey is funded by the Robert Wood Johnson Foundation. For more information on the survey, see Ha T. Tu and Johanna Lauer, "Methodology: 2007 Health Tracking Household Survey," Technical Publication No. 74, Center for Studying Health System Change, Washington, D.C. (forthcoming 2009).

Additionally, in-depth telephone interviews were conducted with 20 families in two rounds—10 in November 2007 and 10 in February-March 2008—to supplement the survey data with richer insights on families' experiences with health care expenses.

Respondents were recruited at community organizations and clinics in the Washington, D.C. metropolitan area and were screened for financial problems related to medical expenses. All participants had at least one family member who was currently insured.

For more details about the in-depth interviews, including more information about the families, contact HSC at (202) 484-5261 or [email protected].

Funding Acknowledgement

This research was funded by the Robert Wood Johnson Foundation.

Appendix - A Comparison of California and the United States

Because of its large and diverse population, California is of particular interest in studying medical bill problems. The state's demographics, insurance landscape and health care market make it a useful comparison to national trends. Using an oversampling of California respondents in the 2007 Health Tracking Household Survey, this appendix compares medical bill problems in California with national estimates.

Overall, the rate of medical bill problems among California nonelderly families (24.3%) was comparable to the national rate (25.7%). However, California had a significantly higher uninsured rate (25.0%) compared with the national average (18.7%), suggesting that factors beyond insurance status—such as California's relatively higher cost of living—play a role in medical bill problems.

Among insured families in California, 18.5 percent reported medical bill problems, similar to the national rate for insured families. Among uninsured families, California's rate was 41.0 percent, compared with the national rate of 42.1 percent. These results highlight the fact that insurance coverage does not fully protect families from medical bill problems.

California families with medical bill problems reported similar rates of financial consequences as families nationally—about half (49.8%) depleted savings, and about a quarter (23.3%) were unable to pay for basic necessities.

The California findings reinforce the national results, demonstrating that medical bill problems are widespread and not limited to particular states or populations. As California continues to pursue state-level health reform initiatives, the experience of families struggling with medical bills will be an important barometer of whether reforms are achieving their goal of improving affordability.

In-depth interviews with families also shed light on the impact of living in a high-cost state. Several California families reported that the combination of high housing costs and medical expenses left them with little financial cushion. One Los Angeles family described how they chose between paying for their child's asthma medication and paying rent, noting: "Something has to give every month."

The survey findings and family stories paint a picture of widespread financial vulnerability from medical expenses—both in California and across the nation. Addressing health care affordability must be a key component of any reform effort, whether at the state or federal level.

For further information about the California oversample or the methodology, contact HSC at (202) 484-5261 or [email protected].

The remaining two respondents reported less dire but still fairly serious financial difficulties. For example, one woman reported that she and her family chose to go without dental care altogether rather than take on additional medical debt, even though her children needed dental work.

A 50-year-old single man with three children has insurance through his job, and no one in his family has a chronic health condition. His biggest medical expense in the last year was dental care for his children. He noted, "By the time they did the fluoride treatments and X-rays for all three kids, I was out $500. That's a lot of money when you're paying rent, car insurance, and trying to keep the lights on."

A 34-year-old married woman with one child has thousands of dollars in debt from the birth of her child. Although she has insurance through her employer, the plan had a $3,000 deductible, and the total birth cost exceeded $8,000 after complications. She and her husband are paying off the remaining balance in monthly installments. She said, "We'll be paying this off until our son starts school. And that's if nothing else happens."

Sources and Further Reading

The federal government tracks household medical spending through the Agency for Healthcare Research and Quality Medical Expenditure Panel Survey (MEPS), which collects detailed data on health care costs, insurance coverage and service utilization across the U.S. population. MEPS remains one of the most comprehensive sources for understanding how out-of-pocket expenses affect American families at different income levels.

For ongoing analysis of insurance affordability and cost-sharing trends, the Kaiser Family Foundation Health Costs program publishes research on premiums, deductibles and the growing share of household budgets consumed by medical care. Their annual employer benefits surveys document how cost burdens have shifted toward workers and their families over time.

Income thresholds and poverty measures referenced in studies of medical financial hardship draw on data from the U.S. Census Bureau Income and Poverty statistics. These figures provide the baseline for determining which households face the greatest risk of medical debt relative to their earnings.

The Commonwealth Fund conducts national surveys on health care access, affordability and insurance adequacy. Their research on underinsurance has been particularly influential in documenting how high deductibles and cost-sharing leave even insured families vulnerable to financial strain from routine medical needs.

Peer-reviewed studies on medical debt, household financial toxicity and the connection between health spending and economic stability appear regularly in Health Affairs, a leading health policy journal that publishes original research on costs, coverage and the broader economic consequences of health care spending in the United States.