Personal bankruptcies are down 50% in the US. Thanks, Obamacare?

All those rules might have added up to something
All those rules might have added up to something
Image: AP Photo/J. Scott Applewhite
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For decades, starting in the 1980s and up to the mid-2000s, medical bills rose and rose to become one of the largest causes of personal bankruptcy filings in the United States which increased right alongside it. But after hitting record levels in 2005 (paywall), personal bankruptcy filings are are now in their twelfth straight year of decline. US federal court records show a 50% drop since 2010 from 1.5 million to 766,00 last year with no signs of abating.

Isolating the reasons remains difficult. As it happens, the decline began the same year Congress passed the Affordable Care Act (ACA). Virtually every published researcher agrees that the ACA has contributed to a drop in the number of bankruptcies, yet teasing out precisely how much Obamacare contributed to this has lead researchers to estimate anywhere from about 10% to more than 50% of the decline.

How Obamacare cut medical debt

The ACA has two levers to reduce medical debt: capping annual and lifetime out-of-pocket medical expenses, and expanding coverage to more than 20 million previously uninsured people through Medicaid and the subsidized, private health-insurance options available on the exchanges. Both have contributed to a steep decline in the number of Americans unable to afford medical care.

An annual survey by the US Centers for Disease Control and Prevention found the number of Americans reporting they cannot buy necessary medical care fell 35% between 2010 and 2016, to the lowest point since the booming 1990s. The correlation with the law seems clear: the ACA was signed in 2010, rolled out in 2011, and fully implemented by 2015.

Yet understanding just how the healthcare system forces Americans into bankruptcy from medical debt is important. Republican efforts to repeal Obamacare are dead (for now) after a failed July 28 Senate vote, but new attempts to kill or amend the ACA law are already underway.

Historically, the link between bankruptcy and health care has been hotly contested along partisan lines. On the high end, a 2009 study co-authored by Elizabeth Warren (then an economics researcher at Harvard University, now a US senator) found medical expenses contributed to as many as 62% of personal bankruptcies in 2007 (critics on the right criticized the study for defining “medically-related debt” too broadly). More recently, a 2017 analysis of bankruptcy court data and Consumer Reports survey results from 2,000 Americans, found “expanded health insurance helped cut the number of [personal bankruptcy] filings by half.”

Neale Mahoney, an associate professor of economics at the University of Chicago Booth School of Business, says 50% is probably too high a number to attribute solely to medical debt: the equivalent of about 382,000 annual medical-related bankruptcy filings last year. He noted that a respected 2014 study by Northeastern University associate professor of law Daniel Austin had estimated that national medical bankruptcies represented only 18% to 25% of all personal filings. More recent research found that just ACA’s Medicaid expansion provision was responsible for slightly less than 3% of the decline in bankruptcies. (This did not account for the effect of health care exchanges and more comprehensive insurance plans.) ”While we don’t know the effects of these other provisions,” Mahoney said, “it seems likely that the ACA only had a modest effect on the overall bankruptcy filing rate.”

Thomas Miller, a former health economist for the Joint Economic Committee in Congress and now a fellow at the conservative American Enterprise Institute, cautions that the estimates we have for the ACA’s effect on bankruptcy trends are imprecise at best due to the confounding effects of a rebounding economy and a bankruptcy law passed in 2005. He admonished some researchers, and political partisans on both sides of the aisle, for drawing unfounded claims on statistically small studies (some state-level surveys in Austin’s research, for example, included just 100 people), anecdotal data, and lack of clear causal connections. “I’m not saying there’s not a [medical bankruptcy] problem, or it didn’t get a little better,” he says. “We just need a sense of proportion.”

In 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act, which made it harder and more costly to file for bankruptcy. A long-term view shows that the bankruptcy reform law appears to have led to an initial spike in the national bankruptcy filing rates as people rushed to file before the more stringent laws took effect in 2005, and then a slow to return to more normal levels (experts advised looking at the overall trend versus the 2005-2010 period).

The bankruptcy law was the first of three profound events that nearly all experts agree led to millions of fewer bankruptcies in the US over the last decade. That was followed by a slow but recovering economy following the 2009 recession, and the ACA measures that started to roll out in the early 2010s.

A recent study by researchers at the University of California-Los Angeles, working with consumer-protection bureaus at the federal and state (Pennsylvania) levels, sought to untangle some of these factors. Taking advantage of a natural experiment created by a 2012 Supreme Court ruling allowing states to opt out of the Medicaid expansion mandate for low-income Americans, the researchers analyzed 5 million credit reports, some from the 19 states rejecting the Medicaid expansion and others from the states accepting it.

Their findings (pdf), published as conference proceedings this July, were striking. While the study does not assign an exact number to the share of reductions in bankruptcies attributable to the ACA, it concludes that “the [Medicaid] expansion reduced households’ unpaid medical bills by $4.8 billion in its first two years, lowered delinquencies and personal bankruptcies, and improved credit scores scores.” The study also found that new medical debt among adults aged 18-64 fell by 30-40% between 2011 and 2015.

Show me the (final) number

Mahoney of the University of Chicago believes most researchers could agree the ACA lowered the medical-related bankruptcies in the US by “somewhere between 10%-30%.” He cites research by The Oregon Health Insurance Experiment showing an incontrovertible link between health insurance and financial health. The experiment expanded Medicaid to 10,000 low-income adults through a lottery in 2008; later analysis found Medicaid had virtually eliminated out-of-pocket catastrophic medical expenses, slashed the likelihood of borrowing money or skipping other bills by more than 50%, and lowered the probability of having an unpaid medical bill sent to a collection agency by 25% for those in the program. “It’s hard to deny it hasn’t mattered,” says Mahoney.

What makes medical debt so insidious is that it often strikes at the worst time: a person gets sick, incurs massive expenses, loses their job (and thus often their insurance), and destroys their finances (which may already be precarious). Ultimately, it’s rarely just one form of debt that topples a person’s finances: medical debt may just be the final straw. A crippling medical bill can trigger years of otherwise avoidable economic misery—it can destroy life savings and access to credit for homes, cars or other assets that could improve their lots—and diminish prospects for their children.

“That’s what gets forgotten,” says Patricia Herman a researcher at the nonpartisan RAND Corporation who said that the comprehensive insurance mandated under the ACA, not bare-bones plans with spotty coverage once permitted, are needed to avoid catastrophic medical bills that tip people into insolvency. “This is not regular debt,” she said. “It’s the one-two punch. and it knocks lot of people down.”