Summer 2009 review: Long overdue, more scrutiny being devoted to medical costs’ role in U.S. bankruptcies

July 21st, 2009 by Mike Hinshaw

[Editor's Note: This is the second in a three-part look at U.S. bankruptcy in the Summer of 2009. Part I is here. ]

Proving the adage about the use of statistics, two recent studies involving the relation between medical costs and bankruptcy have arrived at widely differing conclusions.

In a June 8 posting at the Web site of the National Center for Policy Analysis, the NCPA discusses research from a Canadian think tank called the Fraser Institute.  Under the startling headline, “U.S. MEDICAL BANKRUPTCIES A MYTH; PERSONAL BANKRUPTCY RATE HIGHER IN CANADA,” the NCPA wastes no time in making its main point:

“The idea that large numbers of Americans are declaring bankruptcy due to medical expenses is a myth.  Therefore, the introduction of government-run health insurance in the United States will do nothing to reduce personal bankruptcies, concludes a new study by the Fraser Institute.

There’s more, but the gist is simply that the Fraser study shows that a national health-care system is a bad idea for the U.S.–because bankruptcy rates are similar in Canada.

However, in the Fraser document itself, there’s an odd thing in the section labeled “Data and analysis” on page 2. Despite the vast differences in the Canadian health-care system, the Fraser paper makes a point of showing that conditions in each country are quite similar. Here’s an excerpted “highlights” version of their list:

  • The 2005 reforms to US bankruptcy laws have produced legal standards that are very similar to Canadian standards BankruptcyCanada, 2009a; 2009b).
  • Drug insurance is structured almost identically, so exposure to drug costs is similar in both countries.
  • Both countries have employment insurance programs that provide income support in the event of job loss (US Department of Labor,
  • 2004; Service Canada, 2009).
  • Access to medical care for people who experience long-term unemployment, disability from illness, and chronic low-income status is practically the same in both countries, being facilitated by non-profit, publicly funded community health centers (NACHC, 2009) and public programs like Medicaid in the US, and government-run systems in Canada.

In other words, the Fraser paper seems to contradict itself: the whole point of the argument relies on the idea that the Canadian health-care system is so other, so foreign, so different from the U.S. system.

Indeed, a more recent piece describes a study published in The American Journal of Medicine. Posted July 15 at, the article calls the study “surprising” because it  “showed that 62.1% of personal bankruptcies filed in 2007–before the economic downturn –were due to medical debt associated with healthcare costs.”

Furthermore, the article says, “[m]ost  Americans who filed for personal bankruptcy due to health care costs were middle-class, homeowners who had gone to college” and that, of those, “75% reported having health insurance.”

Now this is where it gets really intriguing–and may go some distance toward explaining the Canadian findings. According to the Journal study, previous studies have been overlooking bankruptcies related to medical costs and jobs lost to illness because of the way the studies were designed.

“Older studies on bankruptcy,” the article says, “were problematic because they were based solely on court records. Even though they showed that rates of medical bankruptcy were substantial, these court-based studies often understated medical bankruptcies. Why? Many medical debts were not recognizable on court records.

Many medical debts were disguised as credit card debt or mortgages. Most medical debtors charged health care they couldn’t afford to credit cards or they mortgaged their homes to pay for medical bills. In addition, debts due to hospitalization or doctor visits–which were turned over to collection agencies–were not usually recognizable on court records.”

So these researchers used a different methodology: “They obtained 118,308 bankruptcy petitions filed in the United States between January 25, 2007 and April 11, 2007. A random national sample of 2,314 bankruptcy filers were surveyed and interviewed; their court records were also abstracted.”

And here’s some of the highlights of the Journal findings:

  • The highest out-of-pocket health care costs were associated with non-stroke neurological illnesses, such as multiple sclerosis, followed by diabetes, injuries, stroke, mental illnesses and heart disease.
  • For 48% of medical debtors, hospital bills were the largest single out-of-pocket expense. Prescription drugs for 18.6%, doctors’ bills for 15.1% and insurance premiums for 4.1% of other debtors were the largest expense. Medical equipment and nursing homes where the largest expense for the remainder of medical debtors.
  • Illness-associated loss of income also contributed to financial problems related to medical bills. In 37.9% of medical debtors, the illness resulted in the patient’s family member losing or quitting a job; in 24.4% of debtors, the illness led to getting fired.
  • Unaffordable healthcare costs contributed directly to the bankruptcy of 92% of medical debtors.

Although it’s disappointing that such an approach to study medically-related bankruptcies is considered innovative, at least someone is taking the time to dig. And, of course, it’s not surprising that the writer concludes in opposition to the Canadian study: “The findings of this new study provide strong support for President Barack Obama’s arguments in calling for health-care reform.”

Perhaps, though, the most sobering conclusion is from the Journal authors, who write “the U.S. healthcare financing system is broken not only for the poor and uninsured, but also for insured, middle-class families – they frequently collapse financially under the strain of the current health care system.”

Next in the series: Unemployment and commercial bankruptcies.

Part I in this series is here.

Online resources: intro to Chapter 7, click here; intro to Chapter 13, click here.