The myth that medical bankruptcies are rare

Myth and Measurement — The Case of Medical Bankruptcies

By Carlos Dobkin, Ph.D., Amy Finkelstein, Ph.D., Raymond Kluender, B.S., and Matthew J. Notowidigdo, Ph.D.
The New England Journal of Medicine, March 22, 2018

During the push to pass the Affordable Care Act, President Barack Obama often described the “crushing cost of health care” that was causing millions of Americans to “live every day just one accident or illness away from bankruptcy” and repeatedly stated that the high cost of health care “causes a bankruptcy in America every 30 seconds.” Stories of illnesses and injuries with financial consequences so severe that they caused households to file for bankruptcy were used as a major argument in support of the 2010 Affordable Care Act. And in 2014, Senators Elizabeth Warren (D-MA) and Sheldon Whitehouse (D-RI) cited medical bills as “the leading cause of personal bankruptcy” when introducing the Medical Bankruptcy Fairness Act, which would have made the bankruptcy process more forgiving for “medically distressed debtors.” But it turns out that the existing evidence for “medical bankruptcies” suffers from a basic statistical fallacy; when we eliminated this problem, we found compelling evidence of the existence of medical bankruptcies but discovered that medical expenses cause many fewer bankruptcies than has been claimed.

Policymakers’ beliefs about the frequency of medical bankruptcies are based primarily on two high-profile articles that claim that medical events cause approximately 60% of all bankruptcies in the United States. In these studies, people who had gone bankrupt were asked whether they’d experienced health-related financial stress such as substantial medical bills or income loss due to illness. People were also asked whether they went bankrupt because of medical bills. People who reported any of these events were described as having experienced a medical bankruptcy. This approach assumes that whenever a person who reports having substantial medical bills experiences a bankruptcy, the bankruptcy was caused by the medical debt. The fact that, according to a 2014 report from the Consumer Financial Protection Bureau, about 20% of Americans have substantial medical debt, yet in a given year less than 1% of Americans file for personal bankruptcy, suggests that this assumption is problematic. Clearly, many people face medical debt but do not go bankrupt. Even after correction for overly broad definitions of “medical” expenses, the existing, widely cited evidence on medical bankruptcy is built on the fallacy that when two things occur together there is necessarily a causal relationship between them.

To understand the problem, consider an analogous line of inquiry: suppose we want to know which factors increase a person’s chances of becoming a technology billionaire. Investigation of recent technology giants might suggest that dropping out of college is a high-return strategy (think: Bill Gates, Steve Jobs, and Mark Zuckerberg [dropping out of Harvard seems to have a particularly high payoff]). By examining only college dropouts who have already became technology billionaires rather than all college dropouts, this analysis misses the fact that most college dropouts do not go on to lucrative careers in the tech business. A similar problem pervades the current literature on medical bankruptcy. The studies mentioned above examine the experiences only of people who went bankrupt, but it is impossible to infer the role of medical expenses in causing bankruptcy without information on the proportion of the population with large medical expenses that did not go bankrupt.

To estimate the share of bankruptcies actually caused by medical factors, we therefore selected a sample of people who were admitted to the hospital in California and tracked information on their annual credit reports, including whether and when they filed for bankruptcy. Because we examined the relationship between when people go to the hospital and the timing of any bankruptcy, we were able to estimate the increase in bankruptcy filings caused by illness or injury, rather than the fraction of people filing for bankruptcy who happen to have substantial medical expenses.

Our study was based on a random stratified sample of adults 25 to 64 years of age who, between 2003 and 2007, were admitted to the hospital (for a non–pregnancy-related stay) for the first time in at least 3 years. We linked more than half a million such people to their detailed credit-report records for each year from the period 2002–2011.

The results show a clear effect of hospital admission on bankruptcy: the rate of bankruptcies rises sharply in the years after hospital admission, and this change is statistically significant (at conventional levels) both 1 and 4 years after the admission, after which bankruptcies appear to level off. This finding indicates that the expenses that result from the illness or injury that caused the hospital admission — for example, out-of-pocket medical costs and lost labor income — cause some people to file for bankruptcy. However, the magnitude of the bankruptcy effect is much smaller than previously thought: we estimate that hospitalizations cause only 4% of personal bankruptcies among nonelderly U.S. adults, which is an order of magnitude smaller than the previous estimates described above.

Of course, these results do not cover all potential medical bankruptcies. They do not consider hospitalizations for children or for the elderly — although in other work we found that hospitalizations have no effect on bankruptcy rates among the elderly. Our results are also specific to our population — people in California hospitalized for non–childbirth-related conditions who have not had a hospital admission in the previous 3 years (although they may, and often do, have additional admissions over the subsequent years).

Perhaps most obviously, our analysis excludes illness and injuries that do not result in a hospital admission. However, our sample of hospitalized people is likely to include most people with large medical expenses: in the Medical Expenditure Panel Survey, we estimated that about 63% of people in the top 5% of annual medical spending (at least $8,433) had had a hospitalization in that year. This finding suggests that focusing on hospitalized people probably does not lead to vast underestimation of the effect of all illness and injury on bankruptcy rates.

Our results also do not speak to the financial costs of hospital admissions outside the bankruptcy-filing decision. We have found that hospitalizations cause increased out-of-pocket spending on medical care, increased medical debt, and decreased employment and income. These costs may have considerable adverse consequences, and evidence from the Oregon Health Insurance Experiment indicates that they can be partially ameliorated by health insurance. But our findings suggest that medical factors play a much smaller role in causing U.S. bankruptcies than has previously been claimed. Overemphasizing “medical bankruptcies” may distract from an understanding of the true nature of economic hardship arising from high-cost health problems.


The Economic Consequences of Hospital Admissions

By Carlos Dobkin, Amy Finkelstein, Raymond Kluender, and Matthew J. Notowidigdo
The American Economic Review, February 2018


We use an event study approach to examine the economic consequences of hospital admissions for adults in two datasets: survey data from the Health and Retirement Study, and hospitalization data linked to credit reports. For non-elderly adults with health insurance, hospital admissions increase out-of-pocket medical spending, unpaid medical bills and bankruptcy, and reduce earnings, income, access to credit and consumer borrowing. The earnings decline is substantial compared to the out-of-pocket spending increase, and is minimally insured prior to age-eligibility for Social Security Retirement Income. Relative to the insured non-elderly, the uninsured non-elderly experience much larger increases in unpaid medical bills and bankruptcy rates following a hospital admission. Hospital admissions trigger less than 5 percent of all bankruptcies.


Illness And Injury As Contributors To Bankruptcy

By David U. Himmelstein, Elizabeth Warren, Deborah Thorne, and Steffie Woolhandler
Health Affairs, February 2, 2005


In 2001, 1.458 million American families filed for bankruptcy. To investigate medical contributors to bankruptcy, we surveyed 1,771 personal bankruptcy filers in five federal courts and subsequently completed in-depth interviews with 931 of them. About half cited medical causes, which indicates that 1.9–2.2 million Americans (filers plus dependents) experienced medical bankruptcy. Among those whose illnesses led to bankruptcy, out-of-pocket costs averaged $11,854 since the start of illness; 75.7 percent had insurance at the onset of illness. Medical debtors were 42 percent more likely than other debtors to experience lapses in coverage. Even middle-class insured families often fall prey to financial catastrophe when sick.

From the Discussion

Only broad reforms can address these problems. Even universal coverage could leave many Americans vulnerable to bankruptcy unless such coverage was much more comprehensive than many current policies. As in Canada and most of western Europe, health insurance should be divorced from employment to avoid coverage disruptions at the time of illness. Insurance policies should incorporate comprehensive stop-loss provisions, closing coverage loopholes that expose insured families to unaffordable out-of-pocket costs. Additionally, improved programs are needed to replace breadwinners’ incomes when they are disabled or must care for a loved one.


Medical Bankruptcy in the United States, 2007: Results of a National Study

By David U. Himmelstein, M.D., Deborah Thorne, Ph.D., Elizabeth Warren, J.D., Steffie Woolhandler, M.D., M.P.H.
The American Journal of Medicine, August 2009


BACKGROUND: Our 2001 study in 5 states found that medical problems contributed to at least 46.2% of all bankruptcies. Since then, health costs and the numbers of un- and underinsured have increased, and bankruptcy laws have tightened.

METHODS: We surveyed a random national sample of 2314 bankruptcy filers in 2007, abstracted their court records, and interviewed 1032 of them. We designated bankruptcies as “medical” based on debtors’ stated reasons for filing, income loss due to illness, and the magnitude of their medical debts.

RESULTS: 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. The rest met criteria for medical bankruptcy because they had lost significant income due to illness or mortgaged a home to pay medical bills. Most medical debtors were well educated, owned homes, and had middle-class occupations. Three quarters had health insurance. Using identical definitions in 2001 and 2007, the share of bankruptcies attributable to medical problems rose by 49.6%. In logistic regression analysis controlling for demographic factors, the odds that a bankruptcy had a medical cause was 2.38-fold higher in 2007 than in 2001.

CONCLUSIONS: Illness and medical bills contribute to a large and increasing share of US bankruptcies.

From the Discussion

Medical impoverishment, although common in poor nations, is almost unheard of in wealthy countries other than the US. Most provide a stronger safety net of disability income support. All have some form of national health insurance.

The US health care financing system is broken, and not only for the poor and uninsured. Middle-class families frequently collapse under the strain of a health care system that treats physical wounds, but often inflicts fiscal ones.


Getting Sick Can Be Really Expensive, Even for the Insured

By Margot Sanger-Katz
The New York Times, March 21, 2018

When you get really sick, the medical bills may not be your biggest financial shock.

New research shows that for a substantial fraction of Americans, a trip to the hospital can mean a permanent reduction in income. Some people bounce right back, but many never work as much again. On average, people in their 50s who are admitted to the hospital will experience a 20 percent drop in income that persists for years. Over all, income losses dwarfed the direct costs of medical care.

The authors of the paper, published in The American Economic Review, were surprised by how often an illness or injury could upend the finances of Americans with health insurance.

“I had sort of  assumed that if they had health insurance, then they had economic protections against health shocks,” said Amy Finkelstein, an economist at M.I.T. and an author of the paper.  “I hadn’t thought about the idea that even with the best gold-plated, fancy health insurance, you could still have a lot of economic risk.”

The researchers focused on hospitalization because it’s one of the easiest ways to pinpoint when a person’s health declines substantially.

But the costs of illness are not always limited to medical bills. Being sick can make it hard to work. Though people who had insurance were better protected from hospital bills than people who were uninsured, both groups faced a substantial risk that they would lose income, and a substantially increased chance that they would declare bankruptcy after leaving the hospital.

To the authors, the lesson of the paper is that standard health insurance isn’t enough — policymakers need to think about ways to better protect people against the income risks that accompany illness.

David Himmelstein, a professor of public health at Hunter College, was the co-author of a much-cited paper estimating that medical problems were responsible for a large proportion of American bankruptcies. (Another co-author was the Harvard Law professor Elizabeth Warren, now a Massachusetts senator.) Dr. Himmelstein said, based on his research and his experience as a physician, that he wasn’t surprised to see how lost work was contributing to the financial travails of the sick. His original paper called not just for health insurance, but also for disability insurance.

“It’s why when we wrote about this we titled our paper ‘illness and injury’ as a cause of bankruptcy, not ‘medical expenses’ as a cause of bankruptcy,”  he said.



By David Himmelstein, M.D. and Steffie Woolhandler, M.D., M.P.H.

The NEJM commentary (and the longer NBER paper on which the commentary is based) use slanted statistics based on unsupportable assumptions to reach a wrong conclusion.

The authors' whole estimate rests on four incorrect assumptions:

Faulty Assumption 1 - That illness starts at the moment of an initial hospitalization. Dobkin et al's own data strongly suggests that this is not true, since the bankruptcy filing rates were already climbing in the three years prior to the initial hospitalization. This incorrect assumption would cause them to substantially underestimate the true medical bankruptcy rate of hospitalized persons.

Faulty Assumption 2 - That people with a hospitalization within the three years prior to the period they looked at have the same medical bankruptcy rate as those with no prior hospitalizations. In essence, their study leaves out most people with very frequent hospitalizations - the sickest group and probably a group at high risk of medical bankruptcy.

Faulty Assumption 3 - That people who were not hospitalized are at no risk of medical bankruptcy. They justify this assumption by citing data that most high COST patients are hospitalized. While that is true, people who are hospitalized during the year account for less than 20% of total out-of-pocket spending. So their study assumes that non-hospitalized people (who incur more than 80% of out-of-pocket costs) do not experience medical bankruptcy.

Faulty Assumption 4 - That overall bankruptcy rates were stable during the study period. In fact, a major bankruptcy reform occurred midway through their data collection period, the 2005 BAPCA law. BAPCA was designed to reduce debtors' access to bankruptcy courts, and caused a dramatic dip in bankruptcy filings. This would tend to reduce bankruptcies in the period after hospitalization (relative to the pre-hospitalization baseline) and cause them to underestimate the bankrupting effects of illness.


Additional Comment:

By Don McCanne, M.D.

Although our health care financing system is the most expensive in the world it all too often has failed to prevent financial hardship in the face of medical need. Insured or not, patients often face onerous medical bills compounded by reduction in income due to their illness or injury.

In their original landmark article, "Illness And Injury As Contributors To Bankruptcy," David Himmelstein and his colleagues stated, "Insurance policies should incorporate comprehensive stop-loss provisions, closing coverage loopholes that expose insured families to unaffordable out-of-pocket costs. Additionally, improved programs are needed to replace breadwinners’ incomes when they are disabled or must care for a loved one."

There is no question that medical debt, including loss of income due to injury or illness, has been a major contributor to personal bankruptcy, though usually not the sole cause. Without medical debt and disability, many would have avoided the formality of bankruptcy, and thus the label of "medical bankruptcy" is appropriate. Regardless of labels, the $3.3 trillion we are spending on health care is not preventing financial hardship for too many of those with medical needs. We clearly need a better method of financing health care - a single payer national health program, aka Improved Medicare for All - plus better financial support systems for disability and unemployment due to medical causes.

Carlos Dobkin and his colleagues have published an article concurring with the problem of financial hardship for a selected set of individuals requiring hospitalization, emphasizing the great burden of loss of income in association with those illnesses or injuries. In their original paper they challenge the studies demonstrating the high prevalence of medical bankruptcy by concluding, "Hospital admissions trigger less than 5 percent of all bankruptcies."

Yet in the New York Times article co-author Amy Finkelstein states, "I had sort of  assumed that if they had health insurance, then they had economic protections against health shocks. I hadn’t thought about the idea that even with the best gold-plated, fancy health insurance, you could still have a lot of economic risk." So medical need and financial hardship clearly do go hand in hand here in the United States.

What is more difficult to understand is why they use their study of selected hospitalizations to try to dismiss the concept of medical bankruptcy when they recognize what a problem medical debt is.

Further, in their comment above, David Himmelstein and Steffie Woolhandler explain why peculiarities - faulty assumptions - of the Dobkin study extrapolated an underestimate of the prevalence of medical bankruptcies. Dobkin et al are right in their emphasis on loss of income associated with large medical expenses, but they are wrong to be dismissive of medical bankruptcy.

The primary reason for this long message is that Carlos Dobkin and his colleagues now apparently feel compelled to publish an article in The New England Journal of Medicine titled, "Myth and Measurement — The Case of Medical Bankruptcies." Though acknowledging the tremendous burden of medical debt, they state, "Overemphasizing 'medical bankruptcies' may distract from an understanding of the true nature of economic hardship arising from high-cost health problems." What? Economic hardship is economic hardship.

The problem with their NEJM article is that we are going to hear over and over again from the opponents of comprehensive reform the statement, "MEDICAL BANKRUPTCY IS A MYTH."

What does that contribute to the cause? Do they contend that their spuriously low number indicating hospitalizations cause 5 percent of bankruptcies is a perfectly acceptable consequence of our dysfunctional health care financing system? Why did they do this? Extrapolating, do they think that they really made a case for rejecting an improved Medicare for all? They didn't. They just helped to make the case for it while pouring more poisonous rhetoric onto the fire.

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