A Little More About Medical Bankruptcy

I want to talk a bit more about why I dislike the Himmelstein et. al. study that found more than half of all bankruptcies were due to medical reasons.  There are a few reasons that I don't find their work very convincing.  First, the rate of respondants attributing the bankruptcy to medical problems was more in line with other studies I've seen, at 30-40%.  The extra folks come from their addition of, for example, people who had medical bills that total 5% of income.  Now, having medical problems is one of the most socially acceptable reasons for bankruptcy (compared to other major causes like divorce, overspending, or a gambling or drug addiction, so we'd normally expect people to overemphasize the medical problems compared to other factors.

They also had a pretty low response rate, which isn't exactly surprising, but of course, when you've got a response rate well under 50%, you have to worry quite a bit about selection bias.

But the biggest problem is the timing.  They conducted the study over a period that roughly corresponds with the first quarter of 2007.  This probably doesn't mean anything to most of you, but in 2005, Congress enacted a bankruptcy reform that went into effect in late autumn.  Partly due to the press hype, which exaggerated how hard it was going to be to file bankruptcy in the future, people freaked out.  Anyone who even thought they might file bankruptcy, rushed to do so before the law took effect.  The result was a giant spike, and then an even more giant drop.

The paper sort of deals with it, but all they say is that there's no difference between the people who filed in 2007, and previous filers.  I have no idea how they can say this, since this is actually the subject of their study--if we had really good data on the average percentage of medical bankruptcies, they wouldn't be studying the question.

Here's their explanation:

BAPCPA's effects appear nonselective(7).  Current filers differ from past ones mainly in having struggled longer with their debts.  New restrictions fall equally on medical and nonmedical bankruptcies, with no preferences for medical debts or sick debtors.

But that's not quite what the paper they cite says; it only studies income and assets, not other characteristics of the debtors.  And there are a number of reasons that the law might have favored sick debtors:  sick debtors might have found it easier to meet the means test; the new law tinkered with the rules surrounding secured debt like auto payments, which made it relatively more attractive for people with unsecured debts like medical bills to file; and people with medical bills might find it harder to time their bankruptcies.

Now, maybe none of these things did affect the sample.  But I don't think you can look at the first quarter of 2007 and say this is a period from which you want to draw broad generalizations about bankruptcies:Bankruptcies.pngYou're still in an atypical period after a huge shock to the system.  Now, maybe there was no difference between those who rushed to file, and those who didn't.  But I wouldn't want to bet on that.  And I can tell a plausible story where the people with medical problems can't or won't engage in the kind of strategic behavior that lets people either predict, or stave off bankruptcies . . . which makes me wonder why they chose the period they did.  Everyone I interviewed at the time made it very clear that they thought we were in an atypical period . . . this was the pro-debtor story, because if bankruptcy rates stayed low, it meant that there had indeed been a fair number of strategic bankruptcies, as the banker's associations had been arguing.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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