Medical Bankruptcy and the Economy

Do Medical Bills Really Devastate America's Families?

emergency room
••• Photo: Ariel Skelley/Getty Images

Medical bills were the biggest cause of U.S. bankruptcies, according to a CNBC report. It estimated that 2 million people were adversely affected. A popular Facebook meme said the 643,000 Americans go bankrupt each year due to medical costs. President Obama, in his 2009 State of the Union address, said that a medical bankruptcy occurred every 30 seconds. That's 1 million bankruptcies in a year.

Rising health care costs make these statistics seem credible. But why are they so different? And what is the actual impact of medical bankruptcies on the economy? Most importantly, what's the best way for you to avoid becoming one of those statistics?

Medical Bankruptcy Facts

One reason why the estimates are so different is that they were done in different years. Those years were following the Great Recession. As a result, bankruptcy rates of all kinds skyrocketed. Consumer bankruptcies rose from 822,590 in 2007 to 1.5 million in 2010. Since then, they've fallen to 770,846 in 2016

That's one reason why President Obama's estimate is so high. In 2009, there were 1.4 million bankruptcies. Obama based his calculation on a 2009 Harvard study coauthored by his Assistant, Elizabeth Warren. It said 62.1 percent of all bankruptcies were because of medical bills. The researchers interviewed those who filed for bankruptcy between January and April 2007. It defined medical causes as those to include those mortgaged a home to pay medical bills. It also included those who had medical bills greater than $1,000 or lost at least two weeks of work due to illness.

Several scientists criticized the researchers for being too broad in including those last two reasons. 

Even so, Obama's calculations were a little high. Multiply 1.4 million bankruptcies by the Harvard study's 62.1 percent, and you get 877,372 bankruptcies created by medical bills.

In 2011, researchers Tal Gross and Matthew Notowidigbo found that out-of-pocket medical costs caused 26 percent of bankruptcies. Their study only looked at low-income debtors.

In 2013, two studies were done that created wildly different conclusions. The most widely-reported was done by Nerdwallet Health. The researchers based their estimates on the 2009 Harvard study. They excluded the bankruptcies due to job losses from medical problems. The researchers declared that 57.1 percent was more accurate.

Later that year, CNBC reported that Nerdwallet found that medical bills caused 646,812 Americans to declare bankruptcy. CNBC extrapolated that to everyone in their household. The average household has three people, which translates to 2 million people affected.  

The Facebook meme summarized the same article to arrive at its estimate of 643,000 medical bankruptcies. The myth-buster Snopes used the study to disprove the Facebook meme that said 643,000 Americans go bankrupt each year due to medical bills.

Also in 2013, bankruptcy attorney Daniel Austin found that up to 26 percent of bankruptcies were primarily due to medical costs. He only counted large medical costs as a major of cause bankruptcy. These large costs were more than 50 percent of the respondent's total debt or more than 50 percent of his/her income. Total personal bankruptcies in 2013 were 1,038,720. Multiply 26 percent by total bankruptcies, and you get 270,067 bankruptcies.

In 2015, the Kaiser Family Foundation found that medical bills made 1 million adults declare bankruptcy. Its survey found that 26 percent of Americans age 18-64 struggled to pay medical bills. According to the U.S. Census, that's 52 million adults. The survey found that 2 percent, or 1 million, said they declared bankruptcy that year. 

In 2017, found that people aged 55 and older account for 20 percent of total filings. That number has doubled since 1994. Even with assistance from Medicare, the average 65-year-old couple faces $275,000 in medical bills during retirement. 

Who to Believe

Researchers disagree on how much medical bills cause bankruptcies. The biggest problem in answering the question is that those filing for bankruptcy aren't required to state the reason. As a result, estimates are based on surveys. The methodology differs from study to study. It depends on how the researchers and the survey respondents define medical debt.  

Second, a variety of factors cause bankruptcies. Most people with medical debt have other debt. They may also have low income, little savings, and job losses. That makes it difficult to determine whether the bankruptcy was because of medical debt alone. For example, the Kaiser Family Foundation study found that only 3 percent said their bankruptcy was because of medical debt. But another 8 percent said it was because of a combination of medical and other debt.

It also found that the insured were a bit more likely to declare bankruptcy (3 percent) than the uninsured (1 percent). That could be because they thought they were protected from medical bills. Many were not prepared for unexpected deductible and coinsurance costs. Almost a third weren't aware that a particular hospital or service wasn't part of their plan. One-in-four found that the insurance denied their claims. 

How did those with insurance wind up with so many bills? After high deductibles, co-insurance payments, and annual/lifetime limits, the insurance ran out. Other companies denied claims or just canceled the insurance.

How to Avoid Medical Bankruptcy

It's not a good idea to file for bankruptcy to discharge medical bills. For one thing, a bankruptcy stays on your record for 10 years. You may not be able to rent an apartment, get an auto loan, or buy a home. Some employers would reject your job application for that reason.

In some states, you may lose your home. For example, Nebraska only protects $12,500 in home equity from seizure. In total, you could lose $100,968 in assets. The biggest loss is in Delaware, where you could lose $125,745 on average. 

Also, bankruptcy is expensive. Average costs are from $1,500 to $3,000 for a Chapter 7 filing with a lawyer. Chapter 13 average costs are from $3,000 to $4,000 with an attorney. Those are national average costs. The costs could be much higher in many eastern states. 

The best way to avoid medical bankruptcy is to prevent medical bills. To do that, you must prevent or manage chronic diseases. The most expensive are diabetes, at $26,971 per family, and neurological disorders like multiple sclerosis, which cost $34,167 on average. The biggest expense is hospitalization, which caused half of the bankruptcies. 

High medical bills from accidents can't be avoided. For those situations, a financial cushion is a must. Sock away three to six months of expenses in a savings or money market account. Only a third of Americans have more than $1,000 in savings.  

As the research shows, health insurance won't completely protect you. Many people were bankrupted by high deductibles and other out-of-pocket expenses. You should have at least the amount of your deductible in savings.