Bankruptcies, Prof. Warren, and the Trouble with Medical Bills

Go read this article: http://www.msnbc.msn.com/id/31325093/ns/business-personal_finance.

Here we have an American citizen who has too many credit cards, who refuses to explore bankruptcy as an option, and who does not represent the majority of Americans who find themselves staring at the abyss of unrelenting debt. The constant attention given to these people, though, gives the distinct impression that the average American struggling with debt is someone who could not say "no" to easy credit.

According to Elizabeth Warren, Professor at Harvard and the current chair of the Congressional Oversight Panel created to oversee the banking industry's bailout, here are some statistics with regard to bankruptcy filers:

• 44% of filers are couples;
• 30% are women filing alone;
• 26% are men filing alone;
• Slightly better educated than the general population;
• Two out of three have lost a job;
• Half have experienced a serious health problem;
• Fewer than 9% have not suffered a job loss, medical event or divorce

(Source: The Fragile Middle Class: Americans in Debt (2001))

Of course, it's worth noting that Prof. Warren's (more recent) work has been criticized for some glaring mistakes. For instance, Megan McCardle keenly points out that Prof. Warren's recent work ignores the fact that bankruptcies primarily caused by medical bills have decreased in number. (McCardle's article can be found here: http://meganmcardle.theatlantic.com/archives/2009/06/elizabeth_warren_and_the_terri.php)
Then again, just because the number of bankruptcy cases opened has fallen does not mean that the percentage of filings have not increased; according to Warren, the ratio of bankruptcies filed due to medical bills has increased from 50% in 2001 to 70% in 2008. McCardle does not really refute that; her critique is more of a caution against immediately assuming that, due to the ratio, the number of filings has increased.

The point that should be taken from Prof. Warren's work is that, assuming that the numbers of bankruptcies filed for medical costs have not increased or decreased, medical costs still remain a problem spot for Americans. Check out some of the following numbers for non-business bankruptcy filings, taken from the Administrative Office of the Bankruptcy Courts of the United States (as cited here: http://www.bankruptcyaction.com/USbankstats.htm):

• 2008 - 1,074,225
• 2007 - 822,950
• 2006 - 597,965
• 2005 - 2,039,214
• 2004 - 1,563,145
• 2003 - 1,625,208
• 2002 - 1,539,111

If the ratios claimed by Warren are true, and assuming the ratio of medical-bill-related bankruptcies was 50% in 2002, then we have caught up to ourselves; the number of 2002 medical-bill-related bankruptcies would be 769,555, and the number of 2008 medical-bill-related bankruptcies would be 751,957. Meanwhile, the number of bankruptcies filed that were not primarily caused by medical bills have decreased dramatically, from 769,555 to 322,268. There are several possible interpretations of this data that would be convenient for Prof. Warren's general polemic: medical costs are astronomical, and making bankruptcies the only feasible way to get out; medical bills are resistant to traditional forms of debt compromise; health insurance companies are charging deductibles that are too high or refusing too many claims; etc.

The other possibility if the following: those who can afford to pay the medical bills have insurance, and medical bills are unsecured debts subject to discharge under a Chapter 7 bankruptcy filing. Where mortgages and car loans are debts secured by collateral, medical bills are not. People who own no assets, who are uninsured, and have a low income really only have one choice when faced with large medical bills. Unfortunately for the hospitals and medical providers, this option is exceedingly attractive under the current bankruptcy laws.

This is not to say that we need to tighten up the bankruptcy laws to make it more difficult for debtors to discharge their medical bills. Rather, the rhetoric utilized to promote change in the current health care system in the country needs to charge. Even if costs were cut by half, this would not necessarily mean a corresponding or significant decrease in bankruptcy filings, for the only sure way to eliminate medical-bill-related filings is to institute a social-medical system that would cover the indigent. The focus of the fight for health care reform -- for both sides -- is to decrease the overall costs for the benefit of the employers and employees who pay premiums. Assuming that this is the proper focus for the fight, the Obama Administration's proposal to lift the tax deduction on health premiums is unsupportable.

As the article illustrates, people will get themselves into their own troubles. There's no avoiding it. Even with all of the consumer and worker protections in the 1950's, there were still bankruptcies, and bankruptcies still occur in the most socialist of nations. What we can do, however, is concentrate on where the pinch is felt most -- small businesses and the middle class that are bleeding from the massive hikes in medical premiums. Frankly, the only sound way to do this is to reduce the incentive for rent-seeking behavior on the part of the insurers, either by forcing them into non-profit status or heavily-taxing their above-normal profits.