Healthcare Myths: III. Bankruptcy

I was going to take a few days off the healthcare beat — yesterday’s post was exhausting. But then a must-read crossed my desk:

President Obama’s kicking off his health care reform today in the worst possible way: with a mischaracterization of the data.

“The cost of health care now causes a bankruptcy in America every thirty seconds,” Obama said at the opening of his White House forum on health care reform. The problem: That claim, based on a 2001 survey, is simply unsupportable.

The figure comes from a 2005 Harvard University study saying that 54 percent of bankruptcies in 2001 were caused by health expenses. We reviewed it internally and knocked it down at the time; an academic reviewer did the same in 2006. Recalculating Harvard’s own data, he came up with a far lower figure — 17 percent.

A more recent study by another group, approaching it another way, indicates that in 2007 about eight-tenths of one precent of Americans lived in families that filed for bankruptcy as a result of medical costs.

Hope you have your floaties. The BS is about to get really deep.

A good part of the problem is definitional. The Harvard report claims to measure the extent to which medical costs are “the cause” of bankruptcies. In reality its survey asked if these costs were “a reason” — potentially one of many — for such bankruptcies.

Beyond those who gave medical costs as “a reason”, the Harvard research chose to add in any bankruptcy filers who had at least $1,000 in unreimbursed medical expenses in the previous two years. Given deductibles and copays, that’s a heck of a lot of people.

If our gamble with taking two houses in two states had bankrupted us, we would have counted as being bankrupted by medical expenses, as the out-of-pocket costs of my daughter’s complicated birth were nearly $2500 and we’ve also paid over $1000 over the last few years to cover my wife’s periodic MRI’s. That’s with the good insurance that generally comes with academia, incidentally. We’ve had some big expenses.

Moreover, Harvard’s definition of “medical” expense includes situations that aren’t necessarily medical in common parlance, e.g., a gambling problem, or the death of a family member. If your main wage-earning spouse gets hits by a bus and dies, and you have to file, that’s included as a “medical bankruptcy.”

A last problem was sampling: The Harvard researchers surveyed bankruptcy filers in five federal districts accounting for 14 percent of bankruptcies nationally; projecting this to the other 86 percent is sketchy.

The lead author is — in a strange coincidence — the co-founder of a group campaigning for socialized medicine.

This really looks like garbage. This looks like someone ran the data, found it didn’t produce the number they wanted and massaged the results until it did.

I’m well aware — as the article notes — that healthcare expenses can be financially crippling for the uninsured. My mom is digging into her savings to take care of my uninsured sister. But when you include gambling problems and deaths as “health events”, that’s not exactly ringing the bell for healthcare reform.

(I also have a severe distaste for people who speak of bankruptcy as though it were a suffering on par with cancer. The thought of bankruptcy terrifies me — and our job/house situation would have me close if I didn’t have savings and relatives. But I ever, God forbid, get seriously ill and the doctors save my life at the cost of bankruptcy, I won’t be screaming for reform. I’ll be counting my blessings that I live in a country which such great healthcare.)

The dissection of the Harvard study doesn’t surprise me at all. A while back, McArdle noted a study which claimed:

According to Zhu, having a serious medical condition makes you 50% more likely to file for bankruptcy, but not because of medical bills; medical bills are only a very small percentage of the overall debt of bankrupts, and are not significantly correlated with higher credit card debt, which one would expect if people were keeping down their medical bills by charging them to Visa. Presumably it’s the income effect of disability or caretaking responsibilities.

Job loss may precipitate bankruptcy, but bankrupts don’t report being laid off at a significantly higher rate than the control group. The difference is, the control group had savings to cover its financial emergency.

It’s also worth noting that it’s harder to save on $25,000 a year than $75,000, and bankrupts as a group tend to be poorer, which means they have little shield from adverse events. On the other hand, the bankrupts were consuming at levels comparable to the wealthy controls. Spending as much money as those who are much richer than you is pretty much definitionally a recipe for disaster.

In other words, a health event — like a job loss or death — puts a strain on the finances. If you’ve been responsible, the strain won’t break you. But if you haven’t been (or can’t because you earn too little), it might.

Again, I’m not saying the healthcare system is perfect. One of the reforms I would like to see is to make it easier for people to buy cheap insurance (or HSA’s), which will have big deductibles but provide coverage in case of a healthcare catastrophe. Breaking down the laws that forbid people from shopping for insurance in other states would help that. But Obama — and most of the Congress — are opposed.

2 Responses to “Healthcare Myths: III. Bankruptcy”

  1. rpl says:

    One of the reforms I would like to see is to make it easier for people to buy cheap insurance (or HSA’s), which will have big deductibles but provide coverage in case of a healthcare catastrophe.

    That would be a good start. Another good reform would be to end the practice of insurance companies colluding to push up prices for the uninsured. As it stands, insurance companies negotiate a “discount” of 50% or more. Fair enough, I suppose, except for the fact that what actually happens is that the provider raises its prices by a factor of 2, and applies its discount to the higher rate. The result is that the price doesn’t change for the insurance company, but everyone else pays more. Insurance companies are fine with this because their real purpose was never to save their customers money; it was to make it prohibitively expensive not to be insured.

  2. Mike says:

    Well, I don’t about your analysis of the price. A lot of companies are now tying their fee schedules to Medicare’s. As I argued before, Medicare’s fees are barely survivable for providers. I more accurate description would be, for some arbitrary procedure:

    Medicare fee: $700
    Private Insurance fee: $1500
    Non-Insured fee: $5000

    But even the uninsured have some power, as people who have HSA’s have discovered. The doctor/hospital wants to be paid. So you can often negotiate those prices down significantly. A relative of mine, who’d just as soon not be named on my blog, got the price of a echocardioagram down by 50%.