The Truths & Myths Behind Medical Bankruptcies
Recent independent reports showed that medical costs are the leading cause of bankruptcy in the US. Estimates done in different years show that between 600,000 and 1.4 million US residents are affected by medical bankruptcies each year. That statistic is quite troubling. Especially endangered by the risk of medical bankruptcy are the seniors whom we, at MedAlertHelp, care so much about.
Medical Bankruptcies in the US Statistics
It’s painfully simple – skyrocketing healthcare costs lead to increasing medical debt and therefore bankruptcy. According to statistics, over 50% of Americans are affected by some sort of medical hardship. Moreover, the National Health Expenditure Accounts reports that the total healthcare spending in the United States has increased from $27.2 billion in 1960 to $3.49 trillion in 2017, whereas the cost per person rose from $146 to $10,739 per year. Even Obamacare failed to properly address rising healthcare costs. By 2009, the increasing health care costs were consuming 19% of the total federal budget of $3.5 trillion.
According to a 2009 Harvard study, bankruptcies due to excessive medical bills accounted for 62.1% of all bankruptcies in the US. The estimated rate of bankruptcy, determined by the study, included not only people who mortgaged a home due to medical costs but also those who had medical bills greater than $1,000 and those who lost at least two weeks of work due to medical problems.
Other researchers, however, criticized the inclusion of the last two reasons. Obama stated in his speech in 2009 that every 30 seconds a medical bankruptcy occurred resulting in one million bankruptcies per year. Even though this assumption was based on the Harvard study, Obama’s estimates were higher than the real rate, which was calculated to be about 877,372 cases in 2009.
Another study, conducted by Gross and Notowidigdo in 2011, showed that out-of-pocket medical costs produced 26% of bankruptcies. However, they recruited only low-income debtors, which could be the reason for the low percentage.
Two more independent studies carried out in 2013 again showed different results. NerdWallet Health declared that 57.1% of all cases were bankruptcies due to medical bills based on the Harvard study, but this excluded bankruptcies due to job losses from illness. CNBS extrapolated data from the NerdWallet Health study and applied it to everyone in the household of those directly affected by the bankruptcy. Thus, the number of people impacted increased to 2 million.
The Kaiser Family Foundation (2015) stated that 26% of Americans age 18 to 64, or about 52 million adults, struggled to pay for healthcare costs. The survey estimated that 2% of them, or one million people, declared bankruptcy because of medical bills that year.
The most recent study, conducted in 2017 by Debt.org, demonstrated that people older than 55 represented 20% of the total number of people who are filing bankruptcy on medical bills. Furthermore, the number of people who have declared bankruptcy due to medical bills has doubled since 1994.
Even though 58% of American retirees are in good health, the disturbing fact is that the average 65-year-old couple will face medical bills of about a quarter million dollars during retirement, even with support from the national health insurance program of the US, Medicare. Here, the savings for retirement, such as a 401k plan, play a considerable role as a backup plan for covering otherwise unpayable medical bills and avoiding bankruptcy.
The Disparity of the Data on Medical Bankruptcies in the US
The mentioned percentages and numbers of people affected by bankruptcies of this kind differ significantly. The reasons for that are several. First, there is no requirement to declare the motive for filing bankruptcy. In return, the bankruptcy rates due to medical bills are estimated using surveys. Moreover, different studies use different methods for defining and estimating medical debt.
Second, many people may also have underlying debt, low income, little savings, or unsteady jobs when their medical debt piles on. Thus, the medical bills were not the only reason for bankruptcy. The Kaiser Family Foundation study revealed that 8% of people declared bankruptcy because of the simultaneous presence of medical and other debt, whereas only 3% considered it medical debt bankruptcy alone.
Third, when we compare the insured to the uninsured, the former were more likely to declare bankruptcy than the latter (3% vs. 1%, respectively). Although medical insurance aims to protect people from the debt brought on by medical expenses, about one-third of the patients weren’t ready to meet unexpected related payments (deductibles, co-insurance costs, etc.).
The annual and lifetime limits are also distressing. Another third of those who declared bankruptcy wasn’t aware that a particular hospital or service wasn’t part of their plan. Nevertheless, some companies denied about 25% of the claims or even canceled the insurance. All these facts explain how it’s possible for coverage to run out and how insured patients can also end up filing for bankruptcy due to medical bills.
Medical Bills Can Bankrupt
As the Harvard study showed, medical bills remained the primary factor in the decision to file bankruptcy in more than 50% of all bankruptcy cases. Many people see a chance to overcome medical debt by filing for medical bankruptcy.
As we’ve already explained, not only those who don’t have health insurance, but also insured people are left with overwhelming medical debt. One of the reasons for that are increasing medical insurance premiums. Thus, even policies provided by the Affordable Care Act marketplace are affordable only because of the high set policy deductibles.
Deductibles are the remaining money that has to be paid by the patient before any other medical bills are covered by their insurance. Nowadays, deductibles can reach $10,000 for one person or $20,000 for a whole family, respectively.
The Best Way to Avoid Medical Debt Bankruptcy
One of the best ways to skip bankruptcy related to medical bills is disease prevention, primarily by managing chronic illnesses (mostly cardiovascular diseases, diabetes, etc.) and keeping away from their medical complications. However, it is clear that accident-related medical costs can’t be avoided.
Furthermore, basic health insurance cannot wholly protect from higher medical prices. So choosing better coverage, such as a Medicare Advantage plan advisable. You can also run into unforeseen out-of-pocket expenses. If this is the case, a financial backup is needed. Unfortunately, only one-third of Americans have more than $1,000 in savings. It’s recommended that people store away 3–6 months of expenses in savings to be able to cover at least the amount of possible deductibles.
What Happens When You File Bankruptcy
Filing for bankruptcy is a controversial decision. On the one hand, it’s subject to moral judgment and can even be seen as a failing. On the other hand, however, it is a chance to get a fresh start, to move forward, and to get out from uncontrollable debt due to an accident or severe illness. Bankruptcy can be good for the economy because the affected people become contributing members of society again. The US Constitution established the “uniform laws on the subject of bankruptcy throughout the United States” as a mechanism to help people in such situations.
The Impact of Medical Bankruptcies on the Economy
Although all functional aspects of filing for bankruptcy apply to this specific reason as well, discharging medical bills are not one of them, regrettably. A bankruptcy record stays on for ten years, which can make renting or buying a house or getting a loan difficult. Sometimes, bankruptcy can even restrain your job prospects.
A very unpleasant side of declaring bankruptcy is the risk of losing your home. It depends on the state, but in Delaware for example, someone could lose most of what they have due to the seizure of assets. Furthermore, the additional expenses accompanying the bankruptcy, like chapter filing with an attorney, can increase in urban areas.
Hospital and Doctor Bills Can Be Written off to Avoid Bankruptcy for Medical Bills
In some cases, there’s no need to declare bankruptcy to eliminate medical debt, especially if this is the only debt and the debtor can make other regular payments, such as house or car payments, child support, and alimony. Moreover, medical creditors are better to work with compared to other debt creditors.
First, a public hospital or doctor of a Medicare or Medicaid patient will send a bill and won’t bother them further. Those medical bills will stay in the billing department for as long as possible before being sent off to a collector. Second, some healthcare providers and doctors are willing to accept a tiny amount of the bill on an installment plan each month. Third, the medical debt may not affect your credit score much since medical creditors seldom belong to credit reporting agencies.
Medical bankruptcies impact not only the economy of the country but also people’s lives, including their health, way of living, and quality of life. It’s best that elderly patients who might be at risk educate themselves on the ways to protect their savings in case the worst happens. However, in some circumstances filling for bankruptcy because of unpayable medical bills is the best way out of a grim situation.
What are medical bankruptcies?
Although there is no exact definition, medical bankruptcy is a mechanism to get a discharge of doctor and hospital bills that can amount to thousands of dollars. However, in some cases, people could experience this type of bankruptcy due to a combination of reasons in addition to medical bills, such as job loss.
What is the cause of most bankruptcies?
Despite the fact that bankruptcy paperwork doesn’t require the debtor to declare their motives for filing for bankruptcy, it’s not difficult to find out if the case was related to medical costs. Comparing all the listed debts that led to bankruptcy, we can easily discern that often the most extensive contributing factor are medical bills. Besides, at the debtor’s meeting of creditors, the trustee often questions what led to choosing to file bankruptcy.
How many medical bankruptcies are there?
NerdWallet Health raised concerns when they indicated that bankruptcy resulting from unpayable medical bills affected 1.7 million Americans in 2013. And nearly ten million adults who have health insurance coverage struggle with healthcare-related bills. Aside from those who file for bankruptcy protection, 56 million adults – more than 20% of the population aged 19 to 64 – experience financial hardship.
Many households face challenging out-of-pocket payments because of high-deductible insurance plans. Unfortunately, the number of medical bankruptcies since Obamacare continues to increase. Although insurance under the Affordable Care Act aims to give more people coverage, it does not resolve the issue – millions of people with year-round full coverage are still stunned by medical costs
How much medical debt do Americans have?
Bankruptcies because of medical debt represent about three out of every five filings of bankruptcy. For more than 11 million patients, the vicious cycle forms by taking additional credit debt to cover growing medical bills. Unsurprisingly, the deficit only mounts due to the higher interest rates charged for unpaid balances. Another 15 million Americans deplete their savings to fund medical bills. Nevertheless, around ten million patients will be unable to pay for rent, food, and utilities because of devastating medical bills.
The disturbing fact is that more than 25 million people in the US try to save money by taking less medication, skipping doses, or even delaying refilling prescriptions. Unfortunately, postponing necessary medication is a short-term fix to a problem that will lead to grave health problems in the long-term.
What percentage of bankruptcies are filed as a result of medical bills?
The above-mentioned Harvard Study from 2009 showed that more than 50% of bankruptcy cases in the US are due to medical bills. Other studies declared that the rate is about 25%. However, the study of Nerdwallet Health from 2014 confirmed that medical bills are the single most significant contributing factor to bankruptcy cases in the US, leaving behind credit card or mortgage debts. Thus, hundreds of millions of bankruptcy cases in the US clear a significant proportion of medical debts each year.
Do medical bills ever go away?
By good luck, medical debt is dischargeable in bankruptcy. One can qualify for a Chapter 7 case under the means test, which calculates whether the debtor can afford to make payments using their income and expenses. In fact, if the means test is not passed, the debtor can file a Chapter 13 for a 3–5-year repayment plan.
In some circumstances, it’s worth it for patients to negotiate payment arrangements with medical creditors instead of presenting medical bankruptcies cases. However, if the debtor can’t get any satisfaction from working with creditors, either Chapter 7 or Chapter 13 are the next step.