Why Do People Care about Healthcare Reform?

Bankruptcies Due to Medical Debt are High

One reason given for the need for health care reform is that our current health care system drives large and increasing numbers of Americans into bankruptcy.

has a map showing how many people in Greater Cincinnati have declared bankruptcy due to medical debt. To see this map, please click here.

There has been a lively debate about how large these numbers are and what they mean, but it is possible to say some things with certainty. First, we tend to think that “bankrupt” is the same as “broke.” In fact, bankruptcy is a legal status granted to people who file applications with the court establishing that they are unable to pay their debts. So for every person who files for bankruptcy, there are additional people with significant debt—medical or otherwise—who struggle to pay it off or who cannot navigate the legal system.

Second, what we know about medical bankruptcy is limited by what people put on their bankruptcy applications. For example, people who used credit cards or a second mortgage to pay medical bills may tell the courts that credit card debt or imminent foreclosure is the reason they are filing for bankruptcy, even though that debt or foreclosure might not have happened if they hadn’t been paying medical bills.

Similarly, several things may happen together that force someone into bankruptcy. For example, a person may become ill and lose his or her job. Not only might that person lose health insurance coverage, he or she also loses income, which affects the ability to keep up with medical bills, mortgage or rent payments, credit card bills, car payments, student loans, and other bills. Another person may be just getting by financially when a serious illness adds high out-of-pocket medical costs. In other words, many bankruptcies involve medical costs but those costs may not be the last straw or the only reason for financial trouble.

The most recent study of medical bankruptcy found that nearly two-thirds of personal (not business) bankruptcies filed in 2007 were linked to illnesses. The study also found that having a medical cause for bankruptcy was much more common in 2007 than in 2001 (Himmelstein, Thorne, Warren, and Woolhandler, 2009). Although an earlier version of this study by the same authors was criticized by some (Dranove and Millenson, 2006), the more recent version addresses many of these criticisms. According to the most recent study, out-of-pocket medical costs averaged $17,943 for all households with a medical cause for bankruptcy.

In addition, 78% of people reporting medical reasons for bankruptcy had health insurance at the onset of ill health. Of these insured debtors, over three-fifths had private health insurance. By the time they filed for bankruptcy, only half of them still had private coverage. People who had a medical reason for bankruptcy were more likely than not to have attended college and to have owned a home within five years of bankruptcy. They were also slightly less well off financially than people whose bankruptcies did not have a medical reason.

Even if the study’s finding that two-thirds of personal bankruptcies had a medical cause is high, as some may claim, medical bankruptcy is still a significant problem for many people—and not just people starting out without resources. Medical bankruptcy seems to follow from high medical bills, even if the person is insured. This happens because health insurance often covers some services but not others and requires the patient to make co-payments and meet certain deductibles for most covered services. Health insurance policies also may have annual or lifetime dollar limits on what the insurer will pay no matter how much the insured patient needs. 1 in 5 Ohio adults (19%) owed more than $2000. For example, in Ohio, 45% of adults reported they had unpaid medical debt. For more information, please see Ohioans’ Experiences with Going into Debt to Pay for Healthcare one-pager.

Moreover, if poor health makes someone leave his or her job, employer-based insurance coverage ends immediately in 25% of firms and after one year in another 25%. Replacing this insurance with a private plan that is not through an employer can be difficult and expensive. Public insurance, such as Medicaid, on the other hand, is available only to certain groups of poor people, and even then there are eligibility and asset restrictions on savings accounts, retirement accounts, property value, etc. Medicare is only available to people over age 65 and some younger people with disabilities.

The consequences of bankruptcy are also worth noting. Not all debt disappears after a bankruptcy filing. It can remain difficult to pay bills after filing for bankruptcy, and a bankruptcy on one’s credit record may make it difficult to secure a job, mortgage, apartment rental, or car loan in the future.

Bankruptcy is a growing problem in the U.S., and medical debt is not the only reason for personal bankruptcy. The question for health care reform is whether getting sick should be so hazardous to families' economic well-being.

Sources

Himmelstein, DU, D Thorne, E Warren, S Woolhandler. 2009. Medical bankruptcy in the United States, 2007: results of a national study. American Journal of Medicine, www.pnhp.org/new_bankruptcy_study/Bankruptcy-2009.pdf.

Himmelstein, DU, D Thorne, E Warren, S Woolhandler. 2005. Illness and injury as contributors to bankruptcy. Health Affairs, Web Exclusive, Feb 2. http://content.healthaffairs.org/cgi/content/full/hlthaff.w5.63/DC1.

Dranove, D, Millenson, M. 2006. Medical Bankruptcy: Myth vs. Fact. Health Affairs Web Exclusive, Feb 28. www.Kellogg.northwestern.edu/research/chime/papers/myth_vs_fact.pdf .

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