How Much Cash Should You Have Stashed for a Medical Emergency?

SDI Productions / Getty Images
SDI Productions / Getty Images

No one wants to have a medical emergency, but unfortunately they’re not uncommon. If you or a family member find yourself in this position, you want to make sure you can foot the bill for the best possible care.

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Fixing a broken leg can cost up to $7,500, while the average cost of a three-day hospital stay is approximately $30,000, according to the U.S. Centers for Medicare and Medicaid Services.

In 2019, there were an estimated 151 million emergency department visits in the U.S., according to the Centers for Disease Control and Prevention. Furthermore, 22% of adults aged 18 and over had visited the ER during this same timeframe.

What you might not realize is the Emergency Medical Treatment and Labor Act requires emergency departments to treat or stabilize anyone experiencing a medical emergency, regardless of their insurance status or ability to pay.

This is crucial and can literally save a life, but of course probably won’t keep you from receiving a bill. Therefore, Annette Harris, founder of Harris Financial Coaching, recommended that individuals have about $1,000 on hand to cover annual medical expenses, including out-of-pocket deductibles.

“Once you meet the annual limit of what you’re paying out of pocket, your plan may pay for the rest of your medical treatment costs for the year,” she said. “Until that occurs, having enough cash on hand can reduce the need to use your credit card to cover costs.”

When saving for healthcare expenses, she noted there are different variables to consider. This includes whether your health insurance plan is an HMO, PPO or has an HRA to reimburse medical expenses.

Alternatively, if you cannot pay the bill for your medical emergency, she said you might be able to withdraw funds from your 401(k).

“If you don’t have the funds available, have an immediate medical need and your plan is not covering the expenses needed for medical treatment, asking your employer if they allow for medical hardship withdrawals may provide you with the necessary funds to cover the costs,” she said. “Beware that you will have to pay a 10% tax penalty if you seek a withdrawal.”

However, she said if you are at least 59 1/2 years old, your 401(k) plan might allow you to make a withdrawal without both providing documentation and incurring a tax penalty.

Build a Medial Expense Cash Reserve

You want to start saving to ensure you have enough cash on hand for a medical emergency, but you’re not sure where to start. Stephen Dunbar, JD, CLU, financial planner with Equitable Advisors, suggested dividing costs into three different categories.

“I would suggest separating medical expenses into buckets to better understand how to build up a reserve,” he said.

He said the first bucket would cover short-term, episodic care, such as injuries from falls and seasonal viruses. The second bucket would cover medical costs associated with long-term disease management — i.e., blood pressure medication or treatment for diabetes. Finally, the third bucket would cover extraordinary medical costs in your senior years, such as assisted living or care for dementia.

The medical coverage associated with buckets one and two are covered by standard medical plans — provided by private healthcare companies or Medicare — and would simply require you to pay the associated premiums and co-pays, he said.

“I would recommend building a cash reserve of up to six months as a contingency plan to make sure that the premium and co-pay cost can be covered in the event of a financial emergency,” he said.

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Since bucket three is long-term care — which requires a significant amount of funds — he said saving for this category is more complicated.

“When people move into the long-term care phase, they will typically live for three years,” he said. “The cost of long-term care over three years could be up to $400,000, depending on which state the individual lives in.”

He recommended long-term care insurance as the best way to cover the costs associated with bucket three. “A cash reserve is either unaffordable or inefficient,” he said. “Most individuals cannot set aside $400,000-plus out of their nest egg.”

Even if you do have the money, he said keeping it in wait isn’t the best financial move.

“It does not make financial sense to park $400,000-plus on the bench with no return for a potential long-term care event,” he said. “Long-term care insurance is the best strategy, followed by assets conservatively invested while waiting to be spent on long-term care.”

One move he wouldn’t advise is using credit cards to pay medical expenses or taking a cash advance to put in your reserve medical fund, due to the high financing costs associated with typical credit cards.

Make Sure Your Medical Bills Are Accurate

Medical bills can certainly be expensive, but sometimes you might not owe as much as you’re led to believe. Jay Zigmont, PhD, CFP, founder of Childfree Wealth, warned to watch out for unfair billing practices.

“In many cases, you may get billed for medical charges before they send it to your insurance,” he said. “You will be sent a bill that looks like you owe it all, and if you pay it, they will most likely never send it to your insurance.”

For example, he recently experienced a billing issue when having blood drawn.

“I got a bill for $160 from the lab initially, and a nasty collections note a month later before they sent it to insurance,” he said. “After they sent the bill to insurance, my total amount due was $10. If I had paid the first bill, I’d be out $150.”

Therefore, he emphasized the importance of taking the time to learn exactly what your insurance covers, before you pay any medical bills.

“If you do not have enough money to pay the bills, be sure to ask for the office of financial aid or charity care,” he said. “Hospitals will often work with you to either write off the bill or put you on a payment plan.”

It can be outrageously expensive, but you can’t afford to skimp on healthcare. Having a nest egg stashed aside for a medical emergency can help cover these costs, so you can focus on recovering instead of stressing about paying for care you need.

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