A new study out in the American Journal of Medicine discusses what fraction of bankruptcies is caused by medical debt. The paper by Himmelstein, Thorne, Warren, and Woolhandler estimates that 62.1 percent of all bankruptcies in 2007 were medical. This is a steep jump up from the authors’ 2001 estimate of 46.2 percent. Have medical debts and bankruptcy filings really skyrocketed as their findings suggest?
Fortunately, there is little to suggest that this is the case. A look at the Survey of Consumer Finances (2007) shows that medical indebtedness has not changed significantly over the past decade or so. The SCF includes medical debts with other debts incurred for goods and services. These debts have barely budged from around 5.8 percent of all debt in 2001 to 6.2 percent in 2007. At the same time, consumer bankruptcies have declined markedly since 2005. The aggregate number of filings has declined from 1.45 million in 2001 to 822,000 in 2007. So what could account for the study’s results?
We don’t have to look very far for an answer. It seems that the authors are reluctant to take their respondents seriously when it comes to an understanding of their indebtedness. The survey clearly states that only 29 percent of the respondents believed that their bankruptcy was actually caused by medical bills. This number sounds like a reasonable approximation of the actual impact of medical debt on bankruptcies. In fact, it accords well with other findings in the literature, including my own. In an AEI working paper, I showed that when medical debts (as a fraction of income) rise by 10 percent, we are likely to observe an increase in bankruptcy filings induced by those debts by approximately 27 percent. In other words, if between 2001 and 2007, medical debts increased by about 10 percent (as a fraction of income), the study suggests that about 27 percent of the total filings during this period can be attributed to medical debts. The SCF shows that for all families, total debts as a fraction of income actually have increased by roughly that 10 percent figure over this period. Therefore, even if all of this increase was due to medical debts (which is unlikely since mortgage debts are ten times higher), the additional bankruptcy filings due to medical debts should be 27 percent of the total. Another paper by Domowitz and Sartain estimates the fraction of medical bankruptcies at about 30 percent, half of what the Warren study finds.
The reason the authors find a 60 percent impact is because they include a whole host of medical related issues that may or may not have directly contributed to the bankruptcy filing. In fact, like their earlier study, the sample is biased because it includes people who have already filed for bankruptcy rather than including a control group of non-filers as well and then assessing the likelihood of medical debts causing bankruptcy filings. In short, what the authors have established is correlation, but not causation.
Aparna Mathur is a research fellow at the American Enterprise Institute.