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Medical Debt May Not Be a Significant Bankruptcy Trigger

The New England Journal of Medicine (NEJM) is not a source most New York bankruptcy lawyers would turn to for scholarly discussion of bankruptcy in the United States. However, in March 2018, the medical publication ran a perspective piece arguing that medical debt as a principal cause of bankruptcy is vastly overblown, despite alarming media reports suggesting otherwise. Here are some of the article’s arguments—and why they may matter to New York bankruptcy debtors.

The NEJM article specifically pointed to a claim—which according to my research has never appeared on this blog—that 60 percent of all bankruptcies are caused by unpayable health-care bills. This claim originates from two research surveys that asked bankruptcy debtors whether they had experienced “health-related financial stress such as substantial medical bills or income loss due to illness,” or, “whether they went bankrupt because of medical bills.”

The article’s authors attacked the research producing these claims for several reasons. The first is just a basic understanding of causation: Just because survey respondents say medical debt played a role in their bankruptcies does not mean the debts caused them. The medical debt may be a salient factor, but analytically speaking the root cause of a bankruptcy is not necessarily what a debtor believes it is.

The NEJM authors’ second point is simple math: If only 20 percent of Americans report significant medical debt, and only 1 percent file bankruptcy each year, then owing medical debts in itself is unlikely to cause medical bankruptcy for most debtors. This is simply asserting that a causal relationship exists when any two variables coincide.

To arrive at a more accurate percentage, the authors compared a large sample of people who were admitted to hospitals for any non-pregnancy reason, linked them to their credit reports, and then evaluated whether and when they filed bankruptcy. Comparing the people in the sample who filed bankruptcy to all bankruptcies, the authors estimated that the out-of-pocket costs and lost income from the hospital stays contributed to about 4 percent of bankruptcy filings, which is much lower than 60 percent.

One might think, then, that the NEJM piece settles the argument on the frequency of medical bankruptcy, but it doesn’t. The NEJM gave the researchers who produced the studies making the 60-percent claim a chance to respond. In their rebuttal, they stressed a few important points: One, hospitalization is not the best measure of medical costs. Two, many of the people in the study were filing bankruptcy at higher rates before the hospitalization occurred, indicating that medical problems played a role. Third, they argued that out-of-pocket costs are more relevant to measuring bankruptcy risk than total costs, which means the study’s authors excluded more than 80 percent of medical spending. They also excluded costs spend on behalf of adult partners and children, which can also bankrupt a family. Finally, unpaid medical debts account for the bulk of debts sent to collections.

Possibly a significant contributor to this debate is defining what “medical bankruptcy” is. It’s one thing to argue that a bankruptcy after an expensive medical problem, a loss of health insurance, and a job loss isn’t purely a medical bankruptcy. But it’s another thing entirely to assert that the debts of people who don’t file bankruptcy matter when investigating people who do in fact file bankruptcy.

The NEJM perspectives piece is here (pdf), and the letter responding to it is here.

The 60 percent figure does seem to be a bit of stretch, but it makes sense given that debts for medical costs are more common than, say, irresponsible spending. If you have significant medical expenses, then the lesson from this academic exchange is that bankruptcies can happen for interrelated reasons. For example debtors can’t work to earn the money to pay for medical procedures. Whatever the statistic really is, if you are struggling under debts for medical bills, then talking to an experienced New York bankruptcy lawyer can help you assess your options.

For answers to more questions about bankruptcy, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced bankruptcy attorney Brooklyn NY Bruce Weiner for a free initial consultation.

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