How the Affordable Care Act Drove Down Personal Bankruptcy

By Allen St. John
Consumer Reports, May 2, 2017

As legislators and the executive branch renew their efforts to repeal and replace the Affordable Care Act this week, they might want to keep in mind a little-known financial consequence of the ACA: Since its adoption, far fewer Americans have taken the extreme step of filing for personal bankruptcy.

Filings have dropped about 50 percent, from 1,536,799 in 2010 to 770,846 in 2016. Those years also represent the time frame when the ACA took effect.

So did the rise of the ACA—which helped some 20 million more Americans get health insurance—cause the decline in bankruptcies?

The many experts we interviewed also pointed to two other contributing factors: an improving economy and changes to bankruptcy laws in 2005 that made it more difficult and costly to file. However, they almost all agreed that expanded health coverage played a major role in the marked, recent decline.

The American Bankruptcy Institute suggested that veteran Chicago bankruptcy attorney and trustee David Leibowitz could also help parse the reasons for the decade long decline.

First, he says, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made it more difficult for consumers to file for bankruptcy. The law required credit counseling and income verification and forced many consumers to seek protection under Chapter 13, which restructures, but does not eliminate, most debt. The piles of paperwork also meant most filers needed a lawyer, which made bankruptcy more costly and therefore not an option for many poor consumers.

Then there was the economy. After a slow and steady recovery following the housing crisis of 2008, Leibowitz explains that American consumers generally had fewer problems with their mortgages, better employment prospects, and greater access to credit, which made them less likely to file.

The final factor, according to Leibowitz, has been the ACA, which afforded health coverage to many more consumers and expanded protections for all.

Over the past decade, determining the cause-and-effect relationship between medical debt and bankruptcy has become a political football, particularly during the years the Obama administration was trying to pass the ACA through Congress.

The truth is that it’s not that easy to determine how many bankruptcies are caused by medical debt. Examining the paperwork doesn’t always offer insight because debtors often juggle their indebtedness, for example, using a credit card to pay an outstanding medical bill while leaving other debts unpaid.

At its most basic level, health insurance allows consumers to pay for the medical care they need. Each year, the Centers for Disease Control and Prevention determines how well the system is working by surveying Americans and asking a simple but powerful question: Did you have problems paying medical bills in the last 12 months?

The percentage of those reporting problems has dropped from 21.3 percent of households when they first asked the question in 2011 (56.5 million) to 16.2 percent in 2016 (43.8 million). That’s almost 13 million fewer Americans no longer facing collection notices from a doctor or hospital.

In CR’s Consumer Voices survey in January 2017, 55 percent of consumers said they lacked confidence that they or their loved ones would be able to afford insurance to secure that care.

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It is reassuring to learn that personal bankruptcies are declining, but we should not extrapolate the conclusion that the Affordable Care Act is responsible for largely eliminating the problem of medical debt. It is still very much with us.

In 2016, about 43.8 million Americans had problems paying medical bills in the past 12 months. A Consumer Reports survey in January of this year revealed that “55 percent of consumers said they lacked confidence that they or their loved ones would be able to afford insurance to secure that care.” Affordability of health insurance and health care remains a major problem in the United States.

It is likely that the expansion of Medicaid and the introduction of generous subsidies for low-income individuals reduced the rate of medical debt amongst the 20 million people who gained coverage under ACA, but the reduction in the rate of personal bankruptcy for the other 300 million Americans was more likely due to a combination of an improved economy and the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 which made it much more difficult to file for personal bankruptcy. (The albatross of life-long debt is another story.)

When over half of Americans lack confidence that they can afford health insurance and almost 44 million are already having difficulties paying their medical bills, we have a problem. It could be virtually eliminated by enacting a well designed single payer national health program – an improved Medicare for all – that automatically includes everyone while removing financial barriers to care. Celebrating ACA is not enough.