Mises Wire

Personal Medical Bankruptcy: Made in DC

One unintended consequence of federal government intervention or regulation of medicine is individuals or families declaring federal bankruptcy for large unpaid medical bills. US healthcare costs and miles to the nearest star is measured in trillions. US healthcare spending reached $4.1 trillion in 2020 according to the most recent data from the Centers for Medicare and Medicaid Services. Americans spent $12,530 per person on medical care in 2020.

Federal government medical entitlement programs Medicare and Medicaid, which began in the 1960s, and the Affordable Care Act (Obamacare), enacted in March 2010, are some examples of federal intervention in the economics and functioning of medicine. Federal subsidies or payments of taxpayer dollars paid to doctors, hospitals, medical providers, etc. over time naturally removed incentives or motivations to operate in a for-profit or efficient manner.

Federal taxpayer dollars received by each doctor, medical practice, etc. is not viewed as their money but another person’s money, so their natural incentive or motivation to act in a prudent manner with these supposedly limited tax dollars is low. These federal subsidies increased healthcare costs over decades instead of allowing a free market to function, which could lead to lower costs. Increased medical costs are at a peak in the US, which is a prime reason a person files bankruptcy.

There are several reasons a person files bankruptcy for unpaid medical bills: they have no health insurance coverage through their employer, they are not able to pay for health insurance coverage as a small-business owner, they are an independent contractor (gig economy), they earn too much income to be eligible for a federal entitlement program like Medicaid, or they are not eligible for an Obamacare health insurance policy. These Obamacare health insurance policies are eligible for a federal subsidy to help the person pay the ongoing health insurance premiums. Federal subsidies have increased the cost of personal health insurance since 2010.

Personal health insurance often is unaffordable when federal subsidies increase health insurance premiums in place of a free-market insurance option. The person who cannot afford health insurance chooses to go without it. These subsidies over time do not allow the free market and human choice to occur in a natural manner where the real market’s price for insurance is possible. When a person needs medical care, they can incur significant out-of-pocket medical expenses when going to an emergency room, etc.

The cost of providing health insurance to employees has increased while benefits have shrunk. Obamacare, for example, required standard health insurance policies to have tests and procedures for a young or old person when the person covered is neither. Requiring these unnecessary tests even when not needed has driven up health insurance premiums since March 2010. Federal law does not allow interstate health insurance policy competition. You reside in Wyoming, and you are not allowed to buy a cheaper health insurance policy sold from North Carolina.

Medicaid provides a federal grant to a state to cover a very high percentage of the program cost. The state receiving the grant then uses its tax revenue to cover their portion of the program cost. Some states find the Medicaid costs increase each calendar year with no federal statutory limit on what that state can spend.

A 2021 Census Bureau study found 19 percent of households couldn’t pay for medical care when needed. The Consumer Financial Protection Bureau reported in 2022 when debt collectors contacted consumers, medical debt was the most likely reason.

Poor health and financial troubles are connected to bankruptcy. The link was notably made in a 2000 study that concluded medical bills accounted for 40 percent of federal bankruptcy filings in 1999. Medical debt is one of the leading bankruptcy causes, cited in 66.5 percent of federal bankruptcy cases in a 2019 study published by the National Institutes of Health. Medical bankruptcy continues to be common despite Obamacare becoming law in 2010.

The expansion of health insurance coverage under Obamacare since 2010 hasn’t reduced personal bankruptcy filings. Why do an estimated 530,000 families each year seek bankruptcy protection from unpaid medical bills? Bankruptcy protection works. This is an example of federal intervention leading to increased cost followed by a rise in personal federal bankruptcy filings.

Struggling borrowers can shed debts, medical or otherwise, when filing for protection from creditors under chapter 7, a liquidation bankruptcy. It is only for people who lack sufficient income to repay creditors. Most people file under it to discharge unpaid medical debt. The downside is filers may have to give up property, including their homes in some cases.

People who have jobs and earn enough to pay creditors back generally must file under chapter 13. It is sometimes called a wage-earner’s bankruptcy where debtors create a plan to repay their creditors over three to five years. The upside is filers may preserve their healthcare providers’ relationships if they repay some of their bills. That can be important to a debtor’s future health and well-being.

Debts in bankruptcy are classified as secured versus unsecured and priority versus nonpriority. Secured debts are backed by some collateral like a car or home, while unsecured debts like medical bills are not backed by an asset. Medical bills are a type of debt most likely to be discharged, or wiped clean, in a bankruptcy. While a discharge is bad news for creditors, it can be great for the borrower because it means the debt doesn’t have to be repaid. Federal intervention in the economy of medicine creates unforeseen problems.

Some long-term solutions to reducing medical bankruptcy include a complete repeal of Obamacare regulations, federal subsidies, and taxes; a massive reduction in federal Medicaid; blocking grants to states; addressing the upcoming bankruptcy of the Medicaid and Medicare programs on an unimaginable scale; and eliminating federal funding and regulation of medical procedures (too many are funded to name). These suggested solutions are not a cure. Personal medical bankruptcy filings show how federal oversight and regulation of medicine is bankrupt.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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