Tuesday, April 12, 2005

That Harvard Bankruptcy Study

Surely by now you've heard all about it:

Back in February, scholars at Harvard University published a study of 1,771 bankruptcy filings in 2001 and discovered that roughly half of all bankruptcy cases are "medical bankruptcies" — the bankruptcy stemmed from medical causes / expenses. Direct text to the study is found here. (Not surprisingly, one of the coauthors of the study is our oft-mentioned Elizabeth Warren, of Two-Income Trap and Dr. Phil fame.)

My input here is going to reside simply with the boundaries which the authors used to categorize "medical bankruptcies." Those were divided into two groups of debtors, and were characterized as follows:

  • "Major Medical Bankruptcy" debtors . . .
      — Cited illness or injury as a specific reason for bankruptcy, or
      — Reported uncovered medical bills over $1,000 in the past two years, or
      — Lost at least two weeks of work-related income because of illness/injury, or
      — Mortgaged a home to pay medical bills.

  • "Any Medical Bankruptcy" debtors . . .
      — Cited any of the above, or addiction, or uncontrolled gambling, or birth, or the death of a family member.

    How's that for a broad brush? I mean, one thousand dollars of uncovered medical bills over two years? Wow. It'd take something outlandish to cause that, right? Like, say, an uncomplicated birth. Or 9 months' worth of asthma medication. Or a couple of hospital ER copays applied toward annual deductible.

    No wonder the authors write: "Debtorsí out-of-pocket medical costs were often below levels that are commonly labeled catastrophic."

    Of course they were. You know what that means? It means the medical bills probably didn't cause the bankruptcy. There's a good chance it was all the other consumer debt previously piled up, just waiting for the right moment to spill down from the hillside and make itself an insurmountable obstacle. This happens, you know. It's called Murphy's Law.

    When you have $36,000 of credit card debt ... $27,000 in auto loans ... $5,000 of unpaid medical bills .. and then find yourself taking the first off-ramp to Chapter 7 Station, guess what? It wasn't the medical bills that caused the bankruptcy.

    Yes, I know real medical bankruptcies happen — maybe often. In fact, I might be one premature birth or extended-therapy-illness away from it. But please don't tell me that half of all bankruptcies are genuinely attributable to medical causes.

    At this point, though, the media have already taken the Harvard study pretty much as gospel.


  • — Posted by Michael @ 12:08 AM


    Thanks for putting into words what I've had an 'inkling' about the entire time. Why doesn't American want to face the man in the mirror about our debt ratio? It's sick (no pun intended).


    Americans take many chances with their financial well-being; this much is true. It's clear that the huge debt as described in your scenario was the major contributor to the bankruptcy. BUT all debt contributes to bankruptcy. In your scenario, the debtors presumed that no additional debt would be incurred, and that their income would satisfy the required payments on the existing debt. The additional unplanned medical bills pushed their budget over the edge of solvency. Surely this is a direct result of poor planning, but without the additional medical bills, there would have been no bankruptcy.

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