Bankruptcy as Implicit Health Insurance

By Neale Mahoney
The National Bureau of Economic Research, May 2012

Abstract

This paper examines the implicit health insurance households receive from the ability to declare bankruptcy. Exploiting cross-state and within-state variation in asset exemption law, I show that uninsured households with greater seizable assets make higher out-of-pocket medical payments, conditional on the amount of care received. In turn, I find that households with greater wealth-at-risk are more likely to hold health insurance. The implicit insurance from bankruptcy distorts the insurance coverage decision. Using a microsimulation model, I calculate that the optimal Pigovian* penalties are similar on average to the penalties under the Affordable Care Act (ACA).

5.2 Effect on Costs

To summarize, I find a strong positive relationship between seizable assets and out-of-pocket payments for households with higher utilization, a slightly downwardly sloping relationship for households with lower utilization, and zero effect on the extensive margin. Thus the impact of bankruptcy on financial risk is exactly what you would expect from a high-deductible health plan.

Conclusion

Understanding why households are uninsured is fundamental to positive and normative analysis of health insurance policy—yet the insurance-coverage decision is not well understood. The objective of this paper is to examine how the implicit insurance from bankruptcy bears on this decision.

In the first part of the paper, I argue that the fact that most medical care is provided on credit coupled with the fact that this debt can be discharged for seizable assets in bankruptcy provides households with implicit high-deducible health insurance.

I next evaluated the quantitative importance of this mechanism. Exploiting cross-state and within-state variation in asset exemption law, I show that uninsured households with greater seizable assets make higher out-of-pocket medical payments, conditional on the amount of care received. In turn, I find that households with greater wealth-at-risk are more likely to hold health insurance coverage. Health insurance is wealth insurance, to a certain degree, and is less valuable to those with fewer assets.

The final part of the paper examined ways in which the implicit insurance from bankruptcy might inform the design of health insurance policy. Because households do not pay for bankruptcy insurance, too many households choose to be uninsured on the margin. Using a utility-based, microsimulation model of insurance choice, I estimate that the optimal Pigovian* penalties are similar on average to the penalties under the ACA.

* A Pigovian tax is a tax levied on a market activity that generates negative externalities. The tax is intended to correct the market outcome. In the presence of negative externalities, the social cost of a market activity is not covered by the private cost of the activity. In such a case, the market outcome is not efficient and may lead to over-consumption of the product. A Pigovian tax equal to the negative externality is thought to correct the market outcome back to efficiency. In the presence of positive externalities, i.e., public benefits from a market activity, those who receive the benefit do not pay for it and the market may under-supply the product. Similar logic suggests the creation of Pigovian subsidies to make the users pay for the extra benefit and spur more production. (Wikipedia, accessed 5/29/12)

NBER:
http://papers.nber.org/papers/w18105?utm_campaign=ntw&utm_medium=email&utm_source=ntw

Full paper (highly technical):
http://www.stanford.edu/~nmahoney/Research/Mahoney_Bankruptcy.pdf

At the risk of oversimplification, this paper demonstrates that personal bankruptcy can serve as a form of health insurance in individuals who are otherwise uninsured and have negligible wealth that is at risk and negligible assets that can be seized in a bankruptcy proceeding.

What a terrible thesis this is to study – suggesting that bankruptcy can suffice for health insurance in people with no wealth and no seizable assets. Maybe that is acceptable if impaired health care access due to lack of funds is not important, or if we accept that the costs of uninsured care should be shifted to insured individuals, or, above all, if we assume that the indignity of personal bankruptcy is small price to pay for this perverse form of “insurance.”

Perhaps one of the most alarming sentences in this paper is the following: “Thus the impact of bankruptcy on financial risk is exactly what you would expect from a high-deductible health plan.”

Wow! On financial risk, bankruptcy works as well as a high-deductible plan!

Instead of trying to figure out whether or not Pigovian penalties are similar to penalties under the Affordable Care Act, why don’t we instead move forward with a health care financing system that doesn’t ever involve bankruptcy, or Pigovian penalties for that matter – a single payer national health program. Not only would that be much simpler, we would all get the health care that we need.