No Runny Eggs

As I’ve been listening to various talk radio programs I’ve heard the following new meme proffered by Obamacare supporters, at least four times in the past 48 hours:

We have to pass a government option!  2/3rds of the bankruptcies in the US are caused by medical bills!

The basis for this argument is found in this recent study in the American Journal of Medicine.  A snippet of the conclusion of the study is as follows:

Using a conservative definition, 62.1% of all bankruptcies in 2007 were medical; 92% of these medical debtors had medical debts over $5000, or 10% of pretax family income.

At first look you’d have to say “Wow!”  Can nearly 2/3rds of bankruptcies be caused by the results of medical costs?  The answer, after you look at the study and some other information is “No.”

Brett J. Skinner did a great job of deconstructing the noted study.  His article, here, noted several items that left the study’s conclusions suspect.

First, Skinner makes the logical comparison with Canada.  With the bankruptcy law very similar in the two countries, and Canada having a government provided health care system, if the studies conclusions are correct, we should expect to see significantly lower bankruptcy rates in Canada.  We don’t.  In both 2006 and 2007 Canada had a higher bankruptcy rate per population than we had in the US.

Secondly, Skinner looked at other studies done on the topic.  One of those analysis was done by the Department of Justice:

finding that medical debts accounted for only 12 percent to 13 percent of the total debts among American bankruptcy filers who cited medical debt as one of their reasons for bankruptcy.

So now your question ought to be, “Is it possible to reconcile the study with the data Skinner found or is the study a fraud?”  Thanks for asking, I think I can reconcile the two.

Going back to the original study we find Table 1 shows that the mean negative net worth (the excess of debt over assets) is not materially different between those who claimed to file bankruptcy due to medical reasons (-$44,622) and those who filed for other reasons (-$37,650).  On page 4 we see that the average, total, not just the unpaid portion of out of pocket medical costs for those that filed bankruptcy for medically bankrupted families was $17,943.  If we assume that the entire amount of out of pocket costs were left unpaid and counted in the negative net worth (it wouldn’t be but let’s use it for a moment), that would still leave a negative net worth of approximately $27,000. 

A negative net worth of $27,000 would typically not be from a home mortgage as most of those would not be allowed to borrow more than the equity.  Also, remember that the study was done in 2007 before the current melt down and reduction in home values.  A negative net worth could be partially incurred from a vehicle as most new vehicles are upside down in equity for the first year or two of ownership.  However, with the average mean income reported as only $30,000, one wouldn’t expect a whole lot of really expensive new vehicles included in the negative net worth of this sample.  A negative net worth of $27,000 likely comes from one place, credit cards or uncollateralized loans.

While the study didn’t break it out this way, it appears to me that the average person who claims they filed for bankruptcy because of medical reasons also had significant credit card debt.  I suspect, but can’t prove it with what is in the study, that the individuals who filed for medical bankruptcy didn’t file only because of the medical costs.  Likely, the medical costs were the “straw that broke the camel’s back.”  And, while medical was the straw for these people  in this instance, the straw could have been any of a number of other things i.e. a major car repair, a major home repair or any number of other unexpected items. 

It appears to me that rather than any one specific issue, like most other bankruptcies, the folks that this study looks at had a series of issues with the last one in line, for them, medical expenses, being more than they could recover from.  In their case, medical costs were just one of the issues that led them to bankruptcy.  To say medical expenses were the reason that these folks filed for bankruptcy is about as accurate as saying that the Titanic sank because it was holding too much water.