Medical Bankruptcy Myths

The idea that half of all bankruptcies are caused by medical debt has become part of the common folklore.  But where did the idea come from?  What is the evidence for it?  The claim, first made in a 2005 Health Affairs article, is at variance with four decades of economic research, including a finding that even large medical bills have no impact on family living standards.

The paper by David Himmelstein, Elizabeth Warren, Deborah Thorne, and Steffie Woolhandler was published as a Health Affairs web exclusive on February 5, 2005. The authors are strong proponents of government run health care.

The data comes from 1,250 personal bankruptcy cases, assumed to be representative of the almost 1.5 million households that filed for bankruptcy in 2001.  The data on each bankruptcy were abstracted from court records and supplemented with 931 telephone interviews. The paper's conclusions about illnesses in households were based on medical interviews conducted with 391 people. The paper does not specify how those people were selected. It does say that Himmelstein and Woolhandler (H & W), both MDs, coded the diagnoses given by debtors into the categories used for the analysis. 

The classifications used to determine a medical bankruptcy were odd. Only 28.3 percent of the sample cited self-reported illness or injury as a cause of bankruptcy.  However, H & W managed to almost double that figure (to 54.5 percent) by counting the following as "illnesses":

  • 1. A birth or addition of a new family member
  • 2. A death in a family
  • 3. A drug or alcohol addiction
  • 4. Uncontrolled gambling
  • 5. Loss of at least 2 weeks of work-related income due to illness or injury by anyone in the household
  • 6. Out-of-pocket medical bills of $1,000 in the two years before filing by anyone in the household
  • 7. Mortgaging a home to pay medical bills.

In a 2005 article in the Northwestern University Law Review, Prof. Todd J. Zywicki called the $1,000 threshold for contributing medical debt "indefensible." That's an understatement.  By H & W criteria, a bankruptcy with $50,000 in student loans and $1,001 in unpaid medical bills would be classified as a "medical bankruptcy."  Moreover, the average U.S. household had out-of-pocket expenses of $2,182 in 2001!  

In a 2006 review (gated) of the H & W study results in Health Affairs, David Dranove and Michael L. Millenson:

  • Recalculate the medical bankruptcy rate using the data given in the H & W paper. They conclude that just 17 percent of the H & W sample "had medical expenditure bankruptcies," although it cannot be stated "with any degree of certainty whether medical spending was the most important cause of bankruptcy."
  • Explain that "four decades of studies have addressed the bankruptcy-medical spending connection" and that the results from those studies are much closer to their 17 percent estimate than to the 54.5 percent estimates of H & W.
  • Cite a 2002 Fay, Hurst, and White American Economic Review study, which found no statistical link between bankruptcies and health problems.
  • Cite a 1999 Domowitz and Sartain Journal of Finance study, which found that high medical debt raised the probability of bankruptcy for the tiny proportion of the population that had high medical debt, but that at the margin, credit cards were the largest single contribution to bankruptcy.

Moreover, Helen Levy in an Economic Research Initiative on the Uninsured working paper estimated the effect of being diagnosed with a serious new health condition, (cancer, diabetes, heart attack, chronic lung disease, or stroke) and found that household consumption "remains smooth" in the face of serious health shocks for both insured and uninsured households.

Comments (7)

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  1. Nick E says:

    Thank you for writing about this study – I reviewed this paper for a graduate seminar years ago and hated it passionately.

    The one thing you left out is simple logical argument. The study claims to show that medical debt “causes” bankruptcies, but the only way it could do this would be by including data on bankrupt persons and non-bankrupt persons, with a logistic analysis showing that the odds of bankruptcy increased significantly as a function of rising medical debt. The H & W study, though, fails to show this BY DESIGN – that is, since they only included bankrupt persons in their sample, the dependent variable has zero variation in the only analysis that would establish causality. In other words, the beta associated with the medical-debt variable would be 1.00 by definition in any analysis predicting the likelihood of bankruptcy.

    I studied health policy in a very pro-government-insurance department. The H & W study was my personal breaking point as far as that perspective goes.

  2. medlaw says:

    I was not aware this study was so flawed, although the 50% claim did seem quite unrealistic. That said, medical expense are a major concern for US persons with health insurance. Most people are blissfully unaware of what is not covered until they have a serious illness. It’s shocking how quickly large bills accumulate. For those with very little extra disposable income, just one serious illness in the family can push them into a situation where they cannot pay their debts. If the medical provider reduces the debt to judgment, that precipitates a cascade of other problems.

  3. E. F. Klein, Jr MD (Bud) says:

    I am truly amazed that pseudo science can persist this long and be quoted so liberally and remain, by and large,generally unchallenged. Failure to promulgate the truth or to promote such unscientific drivel can only mean that the “study” served(s) a predetermined purpose. I do not believe the original investigators are/were scientifically stupid…just unethical. As are the individuals, institutions, and educators who knowingly repeat the dishonesty. The old and frequently quoted statement…There are lies, damned lies and statistics”…..still holds true.

  4. [...] Woolhandler, claim more than half of personal bankruptcies are due to medical bills (critiqued here) and most recently 62.1 percent (critiqued [...]

  5. medical says:

    The World Health Organization is renewing its appeal to the Israeli government to allow necessary medical equipment, spare parts, and repair crews to enter the Gaza Strip.

    WHO spokesman Paul Garwood says the agency has been waiting for up to a year to be allowed to bring in hundreds of items. He says these include X-ray machines, electronic imaging scanners, laboratory equipment and basic items, such as elevators for hospitals.

  6. Bob Haiducek, Bob the Health and Health Care Advocate says:

    Good for you, Medlaw! — “I was not aware this study was so flawed, although the 50% claim did seem quite unrealistic. That said, medical expense are a major concern for US persons with health insurance. Most people are blissfully unaware of what is not covered until they have a serious illness. It’s shocking how quickly large bills accumulate. For those with very little extra disposable income, just one serious illness in the family can push them into a situation where they cannot pay their debts. …”

    Excellent. There is not much of an argument, no matter whether the percentage is around 60% or around 20%. As you imply, we are talking about common sense here. Depending on who does the estimate, there are between 226,000 and 875,960 bankruptcies due to medical debt. If you divide that by 3 you get roughly 71,000 to 290,000 bankruptcies. Compare that to the zero bankruptcies due to medical bills in all other high-income free-market countries.

    Bob the Health and Health Care Advocate

  7. Bob Haiducek, Bob the Health and Health Care Advocate says:

    I should have given a reference with sources for my post. Here it is:
    http://www.medicareforall.org/pages/Bankruptcies_Caused_by_Illness_or_Medical_Debts#barchart

    Bob the Health and Health Care Advocate