Medical Debt as a Cause of Consumer Bankruptcy

Daniel A. Austin

Maine Law Review, forthcoming

Abstract

During his 2009 State of the Union Address, President Obama urged Americans to support healthcare reform, stating "[t]his is a cost that now causes a bankruptcy in America every thirty seconds." That attention-grabbing statistic was based on a 2009 study, co-authored by now Sen. Elizabeth Warren, which concluded that 62.1% of consumer bankruptcies are medical bankruptcies. The figure has been widely cited by lawmakers, academics, and in the media. Other researchers dispute the study findings, and the issue of medical bankruptcies continues to be a focal point in debates over healthcare policy and bankruptcy law reform.

Several other studies have likewise examined medical debt in bankruptcy, with widely divergent results. However, many of the existing studies have been limited in their focus on a single year, narrow geographic region, or questionable methodologies. The present study improves on prior studies by drawing upon medical debt data drawn from 500 randomly-selected consumer bankruptcy cases filed each year between 2005 and 2013 (4500 cases in total), and by asking debtors in a nationwide survey why they filed bankruptcy. The data shows that medical bills are the single largest cause of consumer bankruptcy — but not nearly to the degree asserted in the study cited by President Obama. Current research shows that the percentage of "medical bankruptcies" (bankruptcies filed primarily because of medical debt) account for between 18 to 25% of consumer bankruptcy cases. In Massachusetts, however, where health care insurance has been mandatory since 2006, medical debt is a much lower component of consumer debt than in any other state, accounting for no more than 9% of consumer bankruptcies.

This study is important for several reasons. First, it provides a new picture of medical bankruptcies. It avoids methodological concerns of some studies, and the narrow data constraints of others. Thus, it will better inform debate and discussion regarding healthcare policy. Second, medical debt is an important component of consumer bankruptcy. There is no other multiyear study tracking the levels of medical debt in consumer bankruptcy. Researchers and policymakers who focus on consumer bankruptcy will be able to utilize this data in their analysis, no matter what normative position they take. Finally, it will improve the political debate. Members of Congress no longer need to stand on widely divergent estimates over medical bankruptcy as they consider health care policy and bankruptcy policy issues.