Unpaid Medical Debt Leads to 62.1% of Personal Bankruptcy Filings, Study Shows

Medical debt, hospital bills and other unaffordable healthcare costs contributed to 62.1% of personal bankruptcy filings in 2007, according to a study published in The American Journal of Medicine in 2009.

Most people believe that poor, uneducated and uninsured or under-insured people file medical bankruptcy. They assume that having health insurance coverage can protect them from financial ruin if they end up having a chronic or catastrophic illness. The shocking truth is that they're absolutely wrong!

The surprising finding from the study showed that most Americans who filed for personal bankruptcy due to medical debt and other health care costs were middle-class, homeowners who had gone to college -- 75% reported having health insurance.

Private health insurance didn't offer protection against medical bankruptcy due to uncovered services and gaps in their coverage. Insurance co-payments and deductibles only added to the high medical bills. Illness caused patients and their families to quit their jobs or get fired. They lost their insurance due to job loss. Many families had a lapse in coverage during the 2 years before the medical bankruptcy filing. In addition to loss of health insurance coverage, income was also lost due to illness-related job loss while medical bills were increasing.

Sadly, people dealing with serious emotional and physical problems due to their illness have to deal with serious financial problems, too. What is frightening is that this medical and financial nightmare can happen to anybody.

The new study by David U. Himmelstein, Deborah Thorne, Elizabeth Warren and Steffie Woolhandler used a novel method to analyze medical bankruptcy. They obtained 118,308 bankruptcy petitions filed in the United States between January 25, 2007 and April 11, 2007. A random national sample of 2,314 bankruptcy filers were surveyed and interviewed; their court records were also abstracted.

The study revealed these findings:

• The highest out-of-pocket health care costs were associated with non-stroke neurological illnesses, such as multiple sclerosis (mean $34,167). Other diagnosis with high out-of-pocket health care costs were diabetes ($26,971), injuries ($25,096 ), stroke ($23,380), mental illnesses ($23,178) and heart disease ($21,955).
• For 48% of medical debtors, hospital bills were the largest single out-of-pocket expense. Prescription drugs for 18.6%, doctors’ bills for 15.1% and insurance premiums for 4.1% of other debtors were the largest expense. Nursing homes and medical equipment where the largest expense for the remainder of medical debtors.
• Loss of income associated with the illness also contributed to financial problems related to medical bills. In 37.9% of medical debtors, the illness resulted in the patient's family member losing or quitting a job; in 24.4% of debtors, the illness led to getting fired.
• Unpaid medical bills due to unaffordable health care costs contributed directly to the bankruptcy of 92% of medical debtors.

The financial burden of illness has been increasing not only for the poor and uninsured. Even insured, middle-class families were driven toward bankruptcy filing by unaffordable healthcare costs.

This new study used a novel method to analyze medical bankruptcy. So, it revealed information that older banckruptcy studies were unable to show because they were based solely on court records. Even though they showed that rates of medical bankruptcy were substantial, these court-based studies often understated medical bankruptcies. Why? Many medical debts were not recognizable on court records.

Many medical debts were disguised as credit card debt or mortgages. Most medical debtors charged health care they couldn't afford to credit cards or they mortgaged their homes to pay for medical bills. In addition, debts due to hospitalization or doctor visits -- which were turned over to collection agencies -- were not usually recognizable on court records.

The findings of this new study provide strong support for health-care reform.

According to the authors of the study, “the U.S. healthcare financing system is broken not only for the poor and uninsured, but also for insured, middle-class families – they frequently collapse financially under the strain of the current health care system.”

Personal bankruptcy filings attributable to unpaid medical debt rose by 49.6% from 2001 to 2007. Illness and associated medical bills contribute to an increasingly large share of bankruptcies in the United States.

After the economic downturn, health care costs have increased further and the numbers of uninsured as well as under-insured people have increased. Medical bankruptcy filings is likely to increase further.

Personal bankruptcy filings surged in 2009.

According to the National Bankruptcy Research Center, the number of Americans filing for personal bankruptcy last year rose by 32% compared to 2008. The surge was driven largely by foreclosures and job losses. It is the highest level of personal bankruptcy fillings since 2005; people rushed to file before the new bankruptcy laws took effect on October 2005.

More people with high income and high education levels were among the 1.41 million Americans who filed for bankruptcy protection in 2009.

Many Americans are not living a healthy lifestyle and soaring health care costs associated with resulting illnesses can lead to financial disaster for millions of families. This can also lead to billions of dollars in health care costs for the United States – and poses a major threat to the long-term economic health of this country.

By developing healthy habits, Americans can avoid largely preventable chronic illnesses, such as, diabetes, high blood pressure and heart disease. Personal bankruptcy filings associated with unpaid medical debt can be avoided. Millions of deaths can be prevented. Billions of dollars in health care costs for the country can be saved.