What Most of Us Already Knew

by: CA Berkeley WV

Thu Jun 04, 2009 at 12:45:43 PM EDT

The American Journal of Medicine online confirms what most of us here already kne

Medical problems contributed to nearly two-thirds (62.1 percent) of all bankruptcies in 2007, according to a study in the August issue of the American Journal of Medicine that was published today online. The data were collected prior to the current economic downturn and hence likely understate the current burden of financial suffering. Between 2001 and 2007, the proportion of all bankruptcies attributable to medical problems rose by 49.6 percent. The authors’ previous 2001 findings have been widely cited by policy leaders, including President Obama.

Surprisingly, most of those bankrupted by medical problems had health insurance. More than three-quarters (77.9 percent) were insured at the start of the bankrupting illness, including 60.3 percent who had private coverage. Most of the medically bankrupt were solidly middle class before financial disaster hit. Two-thirds were homeowners and three-fifths had gone to college. In many cases, high medical bills coincided with a loss of income as illness forced breadwinners to lose time from work. Often illness led to job loss, and with it the loss of health insurance.

The situation was dire before the economic meltdown last September. You don't have to do anything "wrong" to end up on the wrong end of this equation. Many companies that do provide health care benefits for their employees have raised deductibles, in my case six fold from $400 per person to $2400 per person. As hospitals acquire new technology, it will be used to justify the cost, so you can get there pretty quick for something that seemed simple. We have access to these expensive tests, often ordered to assure further referrals, whose contribution to health care outcomes have not been studied.

 The changes to current credit card agreements, such as lowering credit limits, adversely affect credit scores. For the uninsured the decision to not carry insurance in the beginning is often a financial one, undermining the notion that many people are uninsured by choice. A lower FICA score will in turn be reflected in car insurance rates, ability to get rental lease, etc. as it percolates through your financial life. Your wealth, or net assets, is determinant in the affordability issue, not just your income.  

Bankruptcy laws were changed at the urging of the credit card industry. The Republican lead House passed the bill seven times before it finally passed the Senate in 2004. The unintended consequences of this are being felt in the housing sector.  

The old bankruptcy law, in effect since 1978, was considered extremely housing-friendly. Most distressed borrowers favored filing under Chapter 7, essentially cheap, quick debt liquidation. In practice, most got to keep their homes, while the rest of their property and assets were sold off to pay a portion of unsecured debts such as credit-card and medical bills. When the assets ran out, the remaining loans were cancelled—although some debts were off limits, like student loans and child support. Future paychecks could go to mortgage payments.  

By contrast, the new law was designed to protect creditors. For one thing, only low-income borrowers can file for Chapter 7, which wipes out debts. The amended law pushes more people into Chapter 13, which forces households to accept 3-5 year repayment plans on all debts—secured and unsecured. In other words, they're still trying to make payments on car, credit card, medical, and other bills that used to be discharged in Chapter 7. That makes meeting the mortgage more onerous. Filing for Chapter 13 temporarily halts foreclosure proceedings, but the protection only lasts as long as the borrower is making mortgage payments.

These numbers can only get worse if the issue of inflation of medical costs and the uninsured are not addressed. Bankruptcy laws are under the jurisdiction of the House and Senate Judiciary Committees. Who have you heard talk about bankruptcy reform?  

The housing crisis is now hitting conventional mortgages. The new credit card bill will kicks in next year. In moving to solve the issue of having the most expensive health care in the world while ranking behind Chile and Costa Rica in outcomes, let us not forget this other leg of the stool.