mEDICAL bANKRUPTCY

A Guest Post by Randy Ammon

As I’ve been listening to various talk radio programs I’ve heard the following new talking point proffered by national health care supporters at least four times in the past 48 hours: We have to pass a government option! Two-thirds of the bankruptcies in the US are caused by medical bills!

The basis for this argument is found in this recent study in the American Journal of Medicine. A snippet of the conclusion of the study is as follows: Using a conservative definition, 62.1 percent of all bankruptcies in 2007 were medical; 92 percent of these medical debtors had medical debts over $5000, or 10 percent of pretax family income.

At first look you’d have to say “Wow!” Can nearly two-thirds of bankruptcies be caused by the results of medical costs? The answer, after you look at the study and some other information is “No.”

Brett J. Skinner, director of bio-pharma, health, and insurance policy at the Fraser Institute, does a great job of deconstructing the noted study. His article, here, notes several items that left the study’s conclusions suspect.

First, Skinner makes the logical comparison with Canada. With the bankruptcy law very similar in the two countries, and Canada having a government provided health care system, if the studies conclusions are correct, we should expect to see significantly lower bankruptcy rates in Canada. We don’t. In both 2006 and 2007 Canada had a higher bankruptcy rate per population than we had in the US.

Secondly, Skinner looked at other studies done on the topic. One of those analyses, done by the Department of Justice, found that medical debts accounted for only 12 to 13 percent of the total debts among American bankruptcy filers who cited medical debt as one of their reasons for bankruptcy.

So here’s the question: “Is it possible to reconcile the study with the data Skinner found or is the study a fraud?” Thanks for asking. Yes, the two can be reconciled.

Going back to the original study we find that the mean negative net worth (the excess of debt over assets) of those who claimed to file bankruptcy due to medical reasons was $44,622 (Table 1). We also see on page 4, that the average total, out of pocket medical costs for those that filed bankruptcy for medically bankrupted families were $17,943. If we assume that the entire amount of out of pocket costs were left unpaid and counted in the negative net worth (it wouldn’t be but let’s use it for a moment), that would still leave a negative net worth of approximately $27,000 that resulted from other reasons.

A negative net worth of $27,000 would typically not be from a home mortgage as most borrowers are not be allowed to borrow more than the equity (the study was done in 2007 before the current melt down and reduction in home values). A negative net worth could be partially incurred from a vehicle as most new vehicles are upside down in equity for the first year or two of ownership. However, with the average mean income reported as only $30,000, one wouldn’t expect a whole lot of really expensive new vehicles included in the negative net worth of this sample. A negative net worth of $27,000 likely comes from one place — credit cards or other uncollateralized loans.

While the current study didn’t break it out this way, another study shows that the average person who claims they filed for bankruptcy because of medical reasons also had significant credit card debt. In a study done on 2003 Delaware bankruptcies, Ning Zhu from UC Davis found, that compared to a control group, those who filed bankruptcy had a slightly higher mortgage debt, nearly the same debt for vehicles but had a mean of over $25,0000 of credit card debt compared to less than $2,500 for the control group.

Regarding the possibility of an “adverse event” like medical costs causing bankruptcy, Zhu concludes: “Although adverse events surely trigger the filing of some personal bankruptcy cases, our evidence suggests that excessive consumption is a very important cause for personal bankruptcy that has not received due attention.”

Based on Zhu’s analysis and the large negative net worth that was not attributable to medical costs, medical costs were simply the “straw that broke the camel’s back.” The straw could have been any of a number of other things i.e. a major car repair, a major home repair or any number of other unexpected items.

Rather than any one specific issue, like most other bankruptcies, the folks that this study samples had a series of issues with the last one in line, for them, medical expenses, being more than they could handle. In each case, medical costs were just one of the issues that led them to bankruptcy. To say medical expenses were the reason that these folks filed for bankruptcy is about as accurate as saying that the Titanic sank because it was holding too much water.

Randy Ammon is a self-employed business consultant. He was campaign manager for Dave Thompson in his run for Chair of the Republican Party of Minnesota.