A little-mentioned Obamacare benefit: fewer bankruptcies

Here’s another benefit of the Affordable Care Act you may not have read much about, but is profoundly threatened by the Republican repeal effort: It has reduced the tide of healthcare-related personal bankruptcies.

That’s the finding of a recent survey published by Consumer Reports, based on a poll of 2,000 consumers conducted this year and statistics showing that personal bankruptcy filings have fallen from more than 1.5 million in 2010 to 770,846 last year.

The publication acknowledges that other factors have contributed to the decline, particularly 2005 changes in bankruptcy law that made personal bankruptcy harder and more costly to file and the general improvement in the economy since 2008. But its experts “almost all agreed that expanded health coverage played a major role in the marked, recent decline.”

The Consumer Reports study is a new data point in a long-running debate about the impact of medical costs on U.S. households and the effect of bringing insurance coverage to millions more Americans. The issue has become highly politicized, in part because healthcare costs affect households in myriad ways and defining “medical bankruptcy” is difficult.

Another factor is that some of the original studies identifying medical bankruptcy as a problem were co-written by that all-purpose bete noire of conservatives, Elizabeth

Warren, when she was a law professor at Harvard and not yet a U.S. senator from Massachusetts. Her critics attacked as exaggerated her claim that as many as 62% of all personal bankruptcies were medical-related.

But Warren and her coauthors hardly concealed that they were defining medical bankruptcies broadly. In a 2009 paper asserting that “illness or medical bills contributed to 62.1% of all bankruptcies in 2007,” they included cases in which any of the following conditions applied: the debtors themselves attributed their filing to medical bills, had bills that came to more than $5,000 or more than 10% of family income, had mortgaged their home to pay those bills, or had lost two weeks or more of income because of their own illness or the need to care for a family member.

Even if that’s too inclusive, other studies have found that medical expenses can have a devastating impact on household finances in ways that aren’t even captured by the categories listed by Warren et al, and that the Affordable Care Act offered Americans considerable relief. A series of surveys by the U.S. Centers for Disease Control and Prevention shows that the percentage of Americans reporting problems paying medical bills fell from 56.5% in 2011 to 43.8% in 2016, consistent with the spread of ACA-related insurance coverage.

An especially rigorous analysis published in 2014 by Daniel A. Austin, a law professor at Northeastern University, concluded that even though Warren’s definition was too broad, it was nevertheless true that “medical bills are the single largest cause of consumer bankruptcy.”

Austin placed the percentage of medical bankruptcies at 18% to 25% of all personal filings nationwide. Interestingly, he showed that the rate was much lower in Massachusetts, where health insurance became mandatory after 2006, prior to passage of the Affordable Care Act in 2010. There, the rate of medical-related bankruptcies was 3% to 9%. Austin’s survey covered a random selection of 50 bankruptcy cases filed from 2005 to 2013 in each of 10 jurisdictions — parts of Arkansas, Arizona, California, Georgia, Indiana, New York, Oregon, Oklahoma, Pennsylvania and Wisconsin — plus Massachusetts.

It’s unsurprising that medical costs might stand alone as a spur to bankruptcy. They can come on suddenly, they’re often unexpected and they can be huge. A household living on the edge of solvency, whether because of overspending, unwise reliance on credit or other financial pressures, could be pushed over the cliff by a sudden health crisis. That underscores how difficult it is to define “medical bankruptcy” — is it the preexisting financial strains that caused the bankruptcy or the new health-related factor?

Before the Affordable Care Act, insurance plans in the individual and employer-sponsored markets routinely placed annual or lifetime limits on benefits; families facing a serious or chronic medical condition could outspend their annual benefits before the first crocus of spring, and lifetime benefits before the end of the year. The ACA outlawed such limits and mandated annual out-of-pocket limits instead, so the expenses of even the most beleaguered households were capped.

What is known is that among bankruptcy filers listing any medical debt among their liabilities, those expenses were heavy indeed. About 30% of all debtors owed more than $10,000 in medical bills when they filed for bankruptcy.

Austin tried to dispel the murkiness of the definition of “medical bankruptcy” by limiting it to cases in which medical debt came to more than half the debtor’s total debt or more than 50% of his or her income, or if the debtors themselves identified it as the primary cause of their filing.

Even so, he found, that definition potentially left out hidden medical debts. That’s because some was paid by credit card, including special healthcare credit cards, or paid out of a second mortgage or home equity line, in which cases it wouldn’t appear as a medical liability in a bankruptcy filing.

It’s also possible that debtors made a special effort to pay doctor or hospital bills before filing so they wouldn’t lose access to medical care. In those cases paying off the medical debt could have forced them to stiff other creditors; so even though medical costs wouldn’t appear on the list of liabilities filed with the bankruptcy court, it certainly would be a contributing factor.

Putting it all together, Austin found that medical bankruptcies are real and significant in the financial life of America, and that health insurance brings significant relief.

The Consumer Reports survey supports the conclusion that Obamacare delivered that relief to millions. Jim Molleur, a Maine bankruptcy attorney, told the publication, “We’re not getting people with big medical bills, chronically sick people who would hit those lifetime caps or be denied because of preexisting conditions. They seemed to disappear almost overnight once ACA kicked in.”

The implications of the Republican repeal of the ACA are inescapable. The measure approved by the GOP-controlled House and sent to the Senate would allow states to reimpose annual and lifetime caps on some benefits and erode protections against rejection or surcharges for consumers with medical conditions.

By killing Medicaid expansion, the bill would expose some 10 million low-income Americans to life without insurance coverage. By cutting back premium subsidies, the measure would make coverage more expensive for older consumers. The plan is not only dangerous for the physical health of millions of Americans but to their financial health too.