Code Red: Two Economists Examine the U.S. Healthcare System

October 14, 2009

Setting the Record Straight on Medical Bankruptcies

Filed under: Health insurance,Health Reform,Health services research,Research methods,Uninsured — David Dranove and (from Oct. 11, 2013) Craig Garthwaite @ 8:47 am

For the past few months, I keep reading and hearing about medical bankruptcies. Newspapers, NPR, politicians, even President Obama.  First it was “half of all bankruptcies are caused by medical spending.”  Then it was seventy percent.  And it didn’t matter if you had health insurance – medical bankruptcy was always just around the corner.  The Democrats even want to cap out of pocket payments in private health insurance so that Americans don’t go bankrupt. Some think we need a single payer system to eliminate the threat of medical bankruptcy.

Stuff and nonsense, that’s what this is.  Of all the myths that have permeated the health reform debate, this may be the worst.  And my new research shows the dangers of myths that originate in academia.

Some background: A few years ago, a lawyer and a couple of doctors from Harvard were dabbling in empirical social science research and managed to publish a rather poorly designed and executed study of bankruptcies.  Confusing cause and effect – well, not really establishing either – they concluded that half of all bankruptcies were “medical bankruptcies” and that health insurance didn’t prevent them. The authors, notorious supporters of a single payer system, have since updated their work and increased the medical bankruptcy rate to 70 percent.

Many social science researchers have repudiated these studies, and for good reason.  The Harvard researchers found that folks who go bankrupt spent thousands of dollars annually on medical care and used this as the basis for their policy prescriptions.  But they cannot determine how many of these folks would have gone bankrupt if they had spent nothing on medical care.  Perhaps all of them, perhaps none.  There is no way to know.  And thus, there is no way to know how many bankruptcies would be averted if we increased health insurance coverage, capped out of pocket payments, or moved to a single payer system.

Health AffairsI was one of the leading critics of the Harvard study.  Working with Michael Millenson, an adjunct professor at Kellogg, I published a critique in the same journal that the original Harvard study appeared. (Full disclosure:  In the process of writing this critique, Michael and I accepted small honoraria from an insurance industry lobbying group.  The group paid for our time but not our opinions. We insisted that our work be peer reviewed and we did not allow the lobbying group to edit our work.)  It seems that Chicken Little got all the attention. The highly questionable findings of the Harvard study have become the stuff of legend.  The critiques have been all but forgotten.

It is well enough to criticize someone else’s research.  It is far better to tackle the same study with better methods and set the record straight.  This is what I have been trying to do.  A new study by Keziah Cook, Andrew Sfekas and myself, funded by the independent Robert Wood Johnson Foundation, uses the methods that I outlined in my critique of the Harvard study.  Our study has just been published by the journal Health Services Research. Examining household assets (comprehensive data on bankruptcies that would be usable for this type of study were not available), we find that it really does stink to be uninsured and get sick. Uninsured Americans who have major illnesses stand to lose 40-50 percent of their life savings.  This is reason enoughHealth Services Research to try to expand coverage to all Americans. Of equal importance, we also find that insured Americans who have a major illness do not dip into their savings.  In other words, private health insurance is doing its job and protecting Americans from financial catastrophe. If our goal is to prevent bankruptcies, we don’t need a single payer system.  And we don’t need to cap copayments.  In fact, capping copayments will eliminate one of the most effective tools we have for containing costs.

I realize that the concept of medical bankruptcies is captivating and my research confirms that the uninsured can face severe financial hardship when illness strikes.  But the Harvard studies are so poorly designed that it is impossible to tell from their work just how serious the problem is, and the conclusion that private health insurance does not protect against bankruptcy appears to be totally misguided.  Even worse, the Harvard studies are leading to bad policy.  Other than outright fraud, I cannot think of a worse thing to say about academic research.

I have said it before: It is vitally important that academics get the numbers right.

23 Comments

  1. I don’t find it surprising that the insured with major illnesses do not lose savings. Might the question be are they at risk of losing their insurance? How many of the uninsured with major illnesses who lost assets also lost insurance coverage whether from reaching a lifetime max or losing a job or being unable to pay premiums?

    Comment by kreidich — October 16, 2009 @ 1:50 pm

  2. You make a valid point. Our study only considers the 1-2 years after their initial illness. If they are unable to keep coverage, the wealth impact could occur in later years. Of course, most of our folks are covered through their employers and as long as they keep working or invoke COBRA/HIPAA, they should be able to keep coverage. Still, there may be more than a few folks who fall through the cracks and face financial headaches that we did not identify.

    Comment by dranove — October 16, 2009 @ 2:05 pm

  3. I’ve seen too many people who lose their jobs in their mid 50’s and later and are, or have been, ill and once the 18 months of Cobra expires they are unable to get health insurance regardless of cost. It is these people who are most at risk. Their careers are in decline and they are too young for Medicare, and as they are aging they are more likely to develop heart disease, orthopedic problems, cancer, etc. It it this group of Americans that are being most brutalized by the current health care “system” of private insurance oompanies who choose who they will allow to be insured.
    This is a serious and growing issue, and as we are passing through the most severe economic downturn in 70 plus years it will get much worse for these “late tweeners” who are caught between end of career and advent of Medicare. A comprehensive, non-deniable medical insurance coverage should be mandatory in a society that romanticises “rugged individualism” for the individual citizen but lavishes huge tax breaks and government give aways to corporate America.
    Afterall, fair should be fair!
    Acutal “flesh and blood” citizens and corporations are all considered to be individuals in this society, thus they should all be treated the same. It should only be correct and just that the health of the individual citizen should mean as much as the health of the too big to fail corporation!!!!

    Comment by tom — November 6, 2009 @ 2:20 am

    • Tom,

      I agree completely (and feel fortunate to have tenure and not have to live with these worries.) My point is that those of us fortunate enough to have insurance do have reasonable protections against high medical costs. But the system has so many holes in it that almost anyone could find themselves without insurance well before they are eligible for Medicare. Either we fill those holes (Cobra and HIPAA help but are far from perfect), accept the extraordinary financial risks, or abandon the competitive insurance system. I wish I knew for certain which of the three options is best for our country but the fact is that we are largely in unknown territory.

      DD

      Comment by dranove — November 6, 2009 @ 8:56 am

  4. So you agree that we need to expand coverage and force all insurers to insure everyone who wants to be insured at a reasonable cost.
    A single payer may not be a well guided policy, but what is wrong with a public option – as long as it is self funded?

    In any case I think that the agitation around the public option debate is masking a bigger problem: PRICE DISCRIMINATION BY US HEALTHCARE PROVIDERS.

    In the US every healthcare provider is extending different discounts to different insurance companies – in some cases refusing to accept certain insurance carriers.
    Beyond possible collection issues there is no economical justification for price discrimination: a consultation, a nuclear medicine scan or an IVD test costs the same to the provider, regardless of who the patient’s insurer is.
    Your supermarket does not price discriminate against you – but your doctor does.

    Of course it is perfectly legitimate that doctors with a better reputation charge more than those with a lesser reputation, but it should not be permitted for a given provider to charge different rates to different patients for the same service.

    Does this matter much? Actually it matters enormously.
    This is the root cause of the enormous barriers to entry in the healthcare insurance business: if you want to start an insurance company, or if you are an existing insurance company wishing to expand in another state, you are faced with astronomical upfront costs to strike deals with every single doctor and hospital in the state you wish to serve. A new, to be created “public option” would not escape those multi billion dollar costs.
    With a no-price-discrimination law in effect, every provider would have to determine the fees it wishes to charge for its services and extend it to all patients (again – that is DIFFERENT from a mandate for everyone to charge the same).
    It would then be possible for a new entrant (private or public) to completely avoid those costs by offering a plan where amounts reimbursed are entirely determined by the type of service / procedure.

    A no-price-discrimination law would therefore go much further to foster competition in the healthcare insurance business than the simple introduction of a public payer.

    I would even argue that a self-funded public payer could not survive, let alone succeed if a no-price-discrimination law is not enacted before the creation of the public payer.

    Comment by Remy — November 6, 2009 @ 9:24 am

    • It is not obvious that the public option is the solution. Tax credits and an exchange will go a long way towards filling in the gaps. The public option might do no better, might require far more subsidization, or might overwhelm the private system. Not everyone would want that.

      Price discrimination is an issue but let’s remember how this occurs. Without selective contracting by insurers, providers are free to charge whatever prices they wish to patients. And if patients have any sort of reasonable insurance, they will be insulated against these prices. That permits providers to charge extraordinarily high prices. That was the situation prior to the 1980s. So one solution is selective contracting. But it is hardly a perfect solution because, as you point out, larger buyers can get deeper discounts and this serves as an entry barrier. But I am not all that concerned about this, because even in markets with a dominant insurer, there are still usually 3-5 competitors such as United and Humana and these keep insurer prices reasonably in check. (Even if insurers were wildly monopolistic, their markups would still be a relatively trivial percentage of total health spending and would contribute hardly at all to spending inflation.)

      So we could mandate the same prices for everyone, but what would those prices be? Insurers would no longer have incentives to shop around and the foundation of selective contracting would crumble. We would see prices skyrocket overnight.

      DD

      Comment by dranove — November 6, 2009 @ 9:59 am

  5. I am a successful entrepreneur who sold controlling interest in my company with about 300 employees to a private equity firm two years ago. When I applied for Medicare 17 months after the sale (I was on COBRA), my wife and I (age 75 and 70, respectively) were denied coverage and thus became forcibly uninsured by government rules. Those rules require one to sign up for Medicare within eight months a leaving an employer-paid plan or wait until “open enrollment” in the first quarter of a calendar year and then pay a penalty for “late enrollment”. COBRA does not count as a employer-paid plan even though my former company partially subsidizes COBRA coverage. After diligently searching, I found that Medicare asserts a monopoly on individual coverage for all people over 65. No insurance company would cover us as individuals despite a sterling health history.

    But being an entrepreneur, I designed a solution. My wife had a shell S-Corporation left over from when she sold the assets of her publishing business to Prentice-Hall. We simply became employees of this Corporation and use it to manage our financial, real estate and other investment assets as well as a private foundation we formed with some of the proceeds of the sale of my company. The corporation buys group coverage for the two of us and also pays all co-pays and deductibles. All of this is tax-deducible so the net cost is quite a bit less than the $10,000 annual Medicare premium plus deductibles and co-pays.

    Comment by Richard H. Schulze — November 9, 2009 @ 1:07 pm

    • Richard,

      COBRA and HIPAA would make Rube Goldberg proud. The administrative bureaucracy created by these programs cost America’s employers millions of hours and billions of dollars annually. But as bad as this sounds, these programs have enabled millions of Americans to obtain insurance at a reasonable price. Every shred of economic theory suggests that these tradeoffs are real — if we want to cover more Americans, we will have to impose more rules on insurers. It is no wonder so many folks want to scrap the whole thing.

      DD

      Comment by dranove — November 9, 2009 @ 1:27 pm

  6. “And we don’t need to cap copayments. In fact, capping copayments will eliminate one of the most effective tools we have for containing costs.”

    Is this really the case? Looks like high out-of-pockets costs(especially high-deductible plans) create incentive for people to delay seeking medical attention. At the same time, quite a few serious medical conditions have vague and non-specific symptoms even in advanced stages. So, delay in seeking medical care could make a difference between, say, stage N and stage (N+3) cancer, and thus, lead to much higher medical costs.
    It would make sense to have incentives to seek care promptly to avoid the above scenario…

    Comment by lara — November 25, 2009 @ 1:00 pm

    • Lara,

      The evidence is pretty clear that cost sharing does, on average, reduce spending. But you are absolutely correct that there are exceptions — plenty of them. Ideally we would target the copayments to prevent the kind of short term thinking you have described. But how do we balance sound medical and economic research against the kind of interest group lobbying that is sure to affect such decisions?

      DD

      Comment by dranove — November 25, 2009 @ 1:25 pm

  7. The authors of the Harvard bankruptcy study never stated that “half of all bankruptcies are caused by medical spending.” In their article they stated, “medical problems contribute to about half of all bankruptcies.” In their later study raising the rate to sixty-two percent (not seventy percent), they stated, “Illness and medical bills contribute to a large and increasing share of US bankruptcies.” It is unfortunate that in the media “contribute to” was converted to “caused by” and used so many times that the misinterpretation has been perpetuated. To label this “outright fraud” seems to be an overstatement.

    As your studies demonstrate, “the uninsured can face severe financial hardship when illness strikes.” Other studies have confirmed that the underinsured can also face severe financial hardship, and, yes, even bankruptcy. The fact that our system still works for well-insured individuals with new illnesses is great news, but it is not reason enough to be complacent with the health care injustices that plague our nation.

    Although we may have very different views on the best policies to reform health care, we likely agree that everyone should have the health care that they need without having to face financial hardship. We all need to keep working to move us closer to that goal.

    Disclosure: I’m senior health policy fellow of Physicians for a National Health Program, an unpaid volunteer position.

    Comment by Don McCanne, MD — November 25, 2009 @ 3:44 pm

    • They don’t state it in their study but they have never stepped forward to correct the countless politicians who have.

      I would rather not belabor the point because we do agree on the need to protect every American from the financial consequences of illness, even if we disagree about the best way to do it. I wonder if you would support legislation that required states to experiment with various approaches, provided that they do something substantial?

      DD

      Comment by dranove — November 25, 2009 @ 4:37 pm

      • In lieu of more effective federal action, state proposals should certainly be considered. I participated in the California Health Care Options Project which led to Sen. Kuehl’s single payer legislation. It passed twice, only to be vetoed both times by Gov. Schwarzenegger. Again, I strongly suspect that that is not your preferred model, but at least we did make an effort – and we’re not through yet.

        Comment by Don McCanne, MD — November 25, 2009 @ 9:13 pm

      • Don,

        As you know, there have been many exciting state health care reform initiatives, ranging from market based approaches to more centralized models. (I remember Steve Shortell working diligently on a model designed around integrated delivery systems.) If the federal government would give a push, I think the states would rally to the cause.

        Heck, I wouldn’t mind if we took threw darts at a map of the U.S. and forced half the states to have government-run insurance and half to try to reform the market.

        Happy Thanksgiving.

        DD

        Comment by dranove — November 26, 2009 @ 9:00 am

      • Here we go again.

        Quick point: I have never disputed the fact that many Americans go bankrupt due to medical spending. My most recent research (funded by the Robert Wood Johnson Foundation) demonstrates the catastrophic cost of being uninsured. I have also said many favorable things about the Canadian healthcare system, including right here in this blog.

        But comments like yours really gall me because they do nothing to advance the debate about reform.
        Statements along the lines of “the insurance industry paid for your time so you must be biased” are in principle testable, though you seem to prefer proof by assertion (“I say it is so, ergo it is so.) May I suggest that you read the studies yourself before you level such charges?

        One more point. There were many, many letters to Health Affairs complaining about the Harvard study and as far as I know, none of the letter writers had been paid for their time. Please take the time to review these critiques before drawing conclusions about research methodology and bias.

        I am happy to continue substantive discussions of health reform (and I really appreciate the interchange with Dr. McCanne), but I am henceforth rejecting comments that make baseless claims about bias.

        DD

        Comment by dranove — November 26, 2009 @ 1:10 pm

  8. You accepted money from insurance lobbyists but you’re pure & clean? I’m not buying it, you’re bought & paid for!

    Comment by Geo — November 25, 2009 @ 4:08 pm

    • …or you could read the papers and decide for yourself if the criticisms are valid.

      DD

      Comment by dranove — November 25, 2009 @ 4:32 pm

  9. I am glad I do not live in U.S.A. , where a bit of bad luck can make you bankrupt.

    In New Zealand (off the coast of Australia )we have a “socialist” medical system.
    It is the cost effective model that you would like to achieve.

    If you are injured in an accident of any kind, then medical care is given at nil cost.
    If you have a serious medical condition develop then you will get care at nil cost. If it is not serious you may have a wait in line for a while.

    Or , like me you can take out medical insurance and get treatment in a Private Hospital. My Insurance has been very good ,with my wife having had two big operations . No lifetime amount of claims like you seem to have.

    U.S.A. is not so wonderful, unless you are rich.In an alleged Christian country there is little if any charity or kindness to you fellow man (or person).

    Comment by Elderlybloke — November 25, 2009 @ 7:27 pm

  10. Several problems here with this. I don’t think you should be criticizing the Harvard study so harshly. Your own “research” has multiple problems. Among them:

    1) “In the process of writing this critique, Michael and I accepted small honoraria from an insurance industry lobbying group.” Shocking. And very telling. It’s not surprising what followed. This type of ingrained, systematic corruption is so endemic that its participants have to rationalize it.

    Your acceptance of money from the insurance industry isn’t a “minor” point; it frames everything that follows in your “analysis”. Is your work cooked?

    2) You seem to completely ignore those who DO go bankrupt even though they had “health insurance”. What kind of “health insurance” was it? Did it cover the condition or illness that actually made them sick? Did it have an enormous “co-pay” or “lifetime limit” or “procedure limit”. (Gotta love those industry terms that they’d love all of us to internalize as the “normal” way health care is provided.)

    Did you look at those individuals who went bankrupt despite having a “health insurance” policy? Or did you simply assume that all of the “insured” were equally protected against any and all serious illnesses and/or injuries?

    Comment by Jim Capatelli — November 26, 2009 @ 12:40 pm

  11. David,

    Okay. Fair enough. No more comments from me about funding or bias.

    Turning to a more substantive, and often neglected “Big Picture” or “Mega Issue”, can you tell us why private, for-profit insurance companies need to be involved with health care?

    Specifically, what value do these insurance companies add to either our economy or individual health care? What do insurance companies produce?

    Do insurance companies fix a broken leg? Do they treat serious diseases? Do they provide diagnostic tests and procedures? Do they invent life-saving drugs? Do they create doctors, nurses and other health care professionals?

    Why does anyone start with the premise that private, for-profit insurance companies must have a role in our health care system? Do you accept that as a fundamental starting point? If so, why?

    Again, what do private, for-profit insurance companies produce, either for the economy as a whole or for our citizens who need health care?

    Comment by Jim Capatelli — November 27, 2009 @ 1:33 pm

    • That is a good question and one I have asked myself (and insurers) for the better part of the last two decades. One product that insurers provide is protection against financial catastrophe. That is extremely valuable, but can also be provided (at a lower cost) by the government.

      The other “product” is a general oversight of the system. Republicans would be quick to point out substantial Medicare fraud as an example where perhaps the private sector delivers this product better. (I am unconvinced by this “argument.”) But there are many other dimensions to this product — innovating payment mechanisms, disease management systems, technology evaluation, performance evaluation, etc.

      In theory, at least, insurers could therefore add a lot of value to the system. And there were times when I thought they were on the verge of moving beyond the theory. In theory, the government could screw these things up even worse. (It is easy to imagine a politically-inspired pay-for-performance system.) I think this is where the debate about the role of the government gets really interesting.

      DD

      Comment by dranove — November 27, 2009 @ 1:42 pm

      • Thanks, Dave. I appreciate your thoughtful and unbiased response to the question regarding the role of private insurance companies.

        In the case of fire insurance, home insurance or auto insurance, private companies do provide protection against absolute financial disaster. But the odds are, for almost all of us with these policies, that we’ll never have to actually make a claim. (And most of us are very happy about that.)

        But everyone has to see a doctor now and then. And everyone, eventually, will have some sort of health challenge or condition. And a relatively high percentage of the population will need treatment for a serious illness or injury.

        And this is where the private, for-profit insurance companies fail miserably. I personally know of several families who were thrown into a financial crisis because of a serious illness. They had no idea, until one of them became sick, that “insurance” wouldn’t cover their actual health care expenses. One friend’s daughter got leukemia when she was five. As you can imagine, it was every parent’s worse nightmare. But what made it much worse—and what they never expected—was the second nightmare regarding treatment and finances. This guy worked for a prestigious investment house in NYC. He was walking around for years, just assuming “My family is covered. We have health insurance to protect us.” It was only when his little girl got sick that he realized he was walking a tightrope every day, with no net to catch him.

        When it was all said and done, his daughter, thankfully, had a full recovery. She’s now a beautiful and brilliant college freshman. But it cost her family $223,000 “out-of-pocket” to give her the treatment she required. (This was due to a combination of industry buzzwords like “Co-Pays”, “Lifetime Limits”, “Procedure Limits” and their “20%”. All bullshit terms designed to maximize the private gain of the company at the expense of this child’s life.

        It was stomach turning to watch.

        A government “health insurance pool” wouldn’t have to be profitable; it wouldn’t have to provide a “Return On Investment” to a group of investors. That is a major reason why private, for-profit insurance companies will do everything possible to exclude those they don’t want to insure, and minimize any and all payments on claims. And it’s the reason why I feel all American citizens deserve to have a choice between the health insurance monopoly and a government program. Let each individual choose which they prefer.

        Comment by Jim Capatelli — November 28, 2009 @ 12:15 pm

      • Jim,

        The situation you describe is, unfortunately, far too common. It really isn’t insurance when you can’t keep it.

        I don’t know if a proper history of the insurance industry has yet been written but I suspect that when it is, we will discover that the industry did itself in by escalating these abusive practices, even as regulators increasingly tried to rein them in.

        Perhaps I ought to write the history myself? Actually, I know of a data set that might prove useful…

        Thanks for the inspiration.

        DD

        Comment by dranove — November 28, 2009 @ 2:15 pm


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