What is Medical Bankruptcy?

A recent survey published by Consumer Reports, based on a poll of 2,000 consumers conducted this year and statistics showing that personal bankruptcy filings have fallen from more than 1.5 million in 2010 to 770,846 last year. The publication acknowledges that many factors have contributed to the decline, particularly 2005 changes in bankruptcy law that made personal bankruptcy harder and more costly to file and the general improvement in the economy since 2008. But its experts “almost all agreed that expanded health coverage played a major role in the marked, recent decline.”

The Consumer Reports study is a new data point in a long-running debate about the impact of medical costs on U.S. households and the effect of bringing insurance coverage to millions more Americans. The issue has become highly politicized, in part because healthcare costs affect households in myriad ways and defining “medical bankruptcy” is difficult.

An especially rigorous analysis published in 2014 by Daniel A. Austin, a law professor at Northeastern University, concluded that even though Warren’s definition was too broad, it was nevertheless true that “medical bills are the single largest cause of consumer bankruptcy.” Austin placed the percentage of medical bankruptcies at 18% to 25% of all personal filings nationwide.

It’s unsurprising that medical costs might stand alone as a spur to bankruptcy. They can come on suddenly, they’re often unexpected, and they can be huge. A household living on the edge of solvency, whether because of overspending, unwise reliance on credit, or other financial pressures could be pushed over the cliff by a sudden health crisis. That underscores how difficult it is to define “medical bankruptcy” — is it the preexisting financial strains that caused the bankruptcy, or the new health-related factor? What is known is that among bankruptcy filers listing any medical debt among their liabilities, those expenses were heavy indeed. About 30% of all debtors owed more than $10,000 in medical bills when they filed for bankruptcy.

The Consumer Reports survey supports the conclusion that Obamacare delivered that relief to millions. Jim Molleur, a Maine bankruptcy attorney, told the publication, “We’re not getting people with big medical bills, chronically sick people who would hit those lifetime caps or be denied because of preexisting conditions. They seemed to disappear almost overnight once ACA kicked in.”

The implications of the Republican repeal of the ACA are inescapable. It is very likely we will see an uptick in Bankruptcy filing in the coming years as a result of the repeal of the Affordable Care Act.