Losing Health Care Due to Bankruptcy:
Is there one case every 30 seconds?
6 Mar 2009 in Regulatory Economics, Regulatory Policy, Information Quality
President Obama hosted a "health care summit" yesterday, during which he made an astounding claim, according to Dan Lothian, White House Correspondent for CNN:
"The cost of health care now causes a bankruptcy in America every 30 seconds. By the end of the year, it could cause 1.5 million Americans to lose their homes," according to an excerpt of his opening remarks released by the White House.
Could this be true?
If it were true that loss of health insurance caused a personal bankruptcy every 30 seconds, there would be two per minute, 120 per hour, 2,880 per day, and 1,051,200 per year.
In a press release issued on March 5, 2009, the Administrative Office of the U.S. Courts reports that there were 1,117,771 personal bankruptcies filed in 2008:
Bankruptcy filings in the federal courts rose 31 percent in calendar year 2008, according to data released today by the Administrative Office of the U.S. Courts. The number of bankruptcies filed in the twelve-month period ending December 31, 2008, totaled 1,117,771, up from 850,912 bankruptcies filed in CY 2007. Filings have grown since CY 2006 when bankruptcy filings totaled 617,660, in the first full 12-month period after the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) took effect. An historic high in the number of bankruptcy filings was seen in calendar year 2005, when over 2 million bankruptcies were filed.
If the President's claim is true, then 94 percent of all personal bankruptcies are due to loss of health insurance.
Given the prevalence of employer-provided health insurance as a fringe benefit from employment, it is much more likely that loss of employment is the what causes households to lose health insurance. Thus, attributing bankruptcies to loss of insurance for these households, and not loss of employment, is demonstrably false. Policy proposals that make labor more expensive -- such as mandating employee health insurance -- would if enacted make this problem worse.
Moreover, there are many factors that lead to personal bankruptcy, most notably spending in excess of income. For example, it has been noted that many homeowners face foreclosure because they refinanced their homes to pull out cash. In doing so, they increased their indebtedness and increased their monthly mortgage payments, often at so-called "teaser" introductory interest rates. When the teaser rates were reset at market rates, they no longer could afford to pay their mortgages.
Loss of health insurance is an important issue. The Administration has not yet disclosed persuasive evidence that it is a significant cause of personal bankruptcy.
From N. Mahalia on 8 April 2009, 15:45
Dear Sir/Madam, The administration should not be obligated to disclose persuasive evidence that loss of health insurance is a significant cause of personal bankruptcy. First the president referred to high costs for health care in general, which would include medical coverage as well as any costly procedures. So yes, loss of health insurance may strongly relate to loss of one's job, but that wasn't the point. There are plently of sound studies that demonstrate evidence that health care costs have a significant impact on bankruptcies, and I would be happy to point you to any of them. However, you missed some key facts.
#1. The rise in bankruptcies deals with rising costs, and a host of other issues, not necessarily because homeowners are opting for shopping sprees. If costs continue rising as real incomes fall, then that means you have to incur debt to pay for things like emergencies, paying for your children's college or simply to sustain family expenses (housing, child care, transportation, health care, etc). You haven't considered factors such as the deregulation of the credit card industry and overall trends in credit card debt on bankruptcies. Incidentally credit cards are often used to pay medical debts.
#2. The fact that bankruptcy regulations were reformed in 2005 to make it much tougher to file for personal bankruptcy deserves attention. The '05 reform substantially cut bankruptcies. And despite that, bankruptcies have risen 80% in just two years. I don't know about you but I find that alarming.
#3. You can dispute numbers if you like, but the fact is the growth in bankruptcies is tied to the housing and financial crisis. And the fact is that health care costs are a major contributor to bankruptcies.
Perhaps you were just fact-checking. But it's important not to gloss over this important issue.