One of the arguments for the need for the Affordable Care Act was a supposedly large and rising share of bankruptcies that were due to medical costs. One prominent study, authored by a team including current Senator Elizabeth Warren, found that more than 62 percent of all bankruptcies in 2007 were medical, with the share rising since 2001.
These findings were repeatedly cited during health care reform debates. In March 2009, President Obama claimed that health care costs caused “a bankruptcy in America every 30 seconds.” In his opening remarks at the 2010 health summit, then-Senator Harry Reid said that “about 70 percent” of the 850,000 bankruptcies in 2008 “were filed because of health care costs.”
However, the findings in the underlying study were overstated, according to a new estimate by economists Carlos Dobkin of the University of California, Santa Cruz, Matthew Notowidigdo of Northwestern University, and Amy Finklestein and Raymond Kluender of MIT, recently published at The New England Journal of Medicine. Investigating the evidence presented regarding medical bankruptcies, these authors claim those previous studies suffered from a “basic statistical fallacy.” When corrected, medical expenses cause many fewer bankruptcies than those previous claims.
In previous studies, people who went bankrupt were asked if they had experienced health-related financial stress or went bankrupt because of medical bills. Those reported experiencing both financial stress and high medical bills were included in the count of medical bankruptcies. The problem with this methodology is that the group analyzed is restricted to people who went bankrupt, but does not provide any insight or analysis regarding the much larger group of people with medical expenses who did not go bankrupt. For this reason, although medical bills or debt and bankruptcy are often correlated, the causality is uncertain.
Rather than looking at the share of bankruptcies that involve medical bills, the new paper looks at the effect of a hospitalization on the likelihood of declaring bankruptcy. The authors analyze a sample of people aged 25 to 64 who were admitted to the hospital in California between 2003 and 2007 for the first time in the past three years, and tracks their information through credit reports to see the share that filed for bankruptcy.
Using this method, they find that hospitalization increases the rate of bankruptcies, but estimate that hospitalizations only cause four percent of bankruptcies among nonelderly adults. As they note, this estimate “is an order of magnitude smaller than the previous estimates” such as the 62 percent figure cited above. Even among the uninsured, hospitalizations were only responsible for six percent of bankruptcies.
This estimate is confined to a small group of adults. By restricting the study to people with their first hospital admittance in the last three years, the effects of chronic illness on medical bankruptcies are not captured. However, past research from the authors found that hospitalizations had no effect on bankruptcies among the elderly, presumably because they are covered by Medicare. Their sample for this study likely includes most people with the largest medical bills, as almost two-thirds of people with the top 5 percent of annual medical expenditures had a hospitalization that year. Overall, medical bills may lead to a slightly higher share of total bankruptcies than the four percent estimate, but not by a substantial amount, and far less than previous estimates.
The relevance of these new findings is that the design of the ACA was to some extent built upon a misdiagnosis of the shortcomings of the previous system. The total number of bankruptcies has fallen from its peak of about 1.6 million in 2010, but there was no inflection point when the coverage provisions of Obamacare went into effect. This is not surprising if medical bills were never a major cause of bankruptcy.
Of course, hospitalization does introduce complications and problems. Some individuals may be unable to return to full work and may see their earnings decline, or face higher medical spending that does not end up leading to a bankruptcy. Focusing so much on the vastly overstated medical bankruptcy problem distracts from these real problems, which should be the focus of ongoing efforts to improve the country’s health care system.
Charles Hughes is a policy analyst at the Manhattan Institute. Follow him on Twitter @CharlesHHughes.
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