By Michael Batty, Christa Gibbs, and Benedic Ippolito
Health Affairs, July 25, 2018 (published ahead of print)
Health policy is often designed to help protect patients’ financial security. However, there is limited understanding of the role medical debt plays in household finances. We used credit report data on more than four million Americans to study the age profile of people whose medical bills were sent to a US collections agency in 2016. We found that, unlike health care use and spending, medical collections decreased substantially with age. The average size of medical debt decreased nearly 40 percent from patients age twenty-seven to sixty-four, with increases in health insurance coverage and incomes likely playing important mediating roles. However, the frequency of medical collections—that is, the proportion of people with a collection by age—was less closely tied to insurance coverage rates. A potential explanation is that most medical collections were relatively modest in size, with more than half of them less than $600 annually. As a result, medical collections could still occur under typical insurance plans. We discuss how these results could inform policies targeting medical debt and insurance regulation, such as restrictions on age rating.
From the Introduction
Using deidentified credit report data on more than four million people, we found that the frequency (proportion of people with a medical collection by age) and size of medical collections peak in the late twenties and decline as age increases. This pattern is similar to that of the percentage of people without health insurance by age, but it differs markedly from the sharp rise in medical spending by age.
Furthermore, while the average size of medical collections exhibits a close relationship with uninsurance rates by age, the portion of people who actually incur any medical debt within a given year does not decline as much at older ages as uninsurance rates do. We augment these findings by showing that many annual medical collections are relatively modest in size (more than half under $600). Insurance typically reduces what patients are asked to pay, but if it includes nontrivial cost sharing, patients may still face bills they cannot afford or do not pay. This may both limit consumers’ demand for insurance and temper expectations for how much all but very generous forms of universal coverage would reduce the medical debt we observed.
From the Policy Implications
As prior research has shown, our results suggest that health insurance is associated with medical debt. In addition, we found that younger adults are more likely than their older peers to have medical collections, despite having lower medical spending. Thus, policies that promote insurance coverage for younger adults may have the greatest effect on reducing medical collections. One such policy is the oft-debated limitation on age rating in the ACA Marketplaces for individual insurance coverage. An actuarially fair system would charge the oldest enrollees premiums closer to five times those of the youngest, compared to the current three-to-one age rating cap. Relaxing this limitation could lower premiums for younger consumers and boost coverage in a group that currently incurs the most medical debt, though at a cost of higher premiums and potentially increased medical debt for older people. The extent to which this would alter the total amount of debt or simply redistribute it in part hinges on consumers’ responsiveness to health insurance premiums and wealth differences across age groups.
While our results suggest that insurance is important for reducing the dollar amount of unpaid debts, they also imply that consumers could still incur a substantial amount of debt even under universal coverage, if such coverage required nontrivial cost sharing. This is consistent with data from the 2016 National Health Interview Survey, which show that 72 percent of the patients ages 20–65 who reported not being able to pay medical bills were insured. Thus, one option is for policy makers to further limit allowable levels of cost sharing (for example, restricting the availability of “catastrophic” plans or requiring higher actuarial values more broadly). However, all else equal, this would increase the price of insurance, potentially discouraging the most price-sensitive consumers from purchasing coverage and raising concerns about moral hazard. Policy makers could increase subsidies to offset the price increases, but this may face political opposition, given recent evidence.
If policy makers are committed to the provision of insurance with substantial cost sharing, as has become increasingly common in many employer-sponsored plans and in the ACA individual market, reducing medical collections would require policy efforts to increase funds available to pay bills—either by increasing after-tax incomes or by promoting savings. Although health savings accounts are the most prominent health-specific savings vehicle, their tax-advantaged structure is considerably less valuable to the lower-income people who likely constitute more of the population with medical debt than higher-income people do. As a result, a continued focus on this type of policy would likely have muted effects on the medical debt of lower-income people.
Finally, consideration of the size distribution of medical debt is important for policies aimed at increasing insurance coverage. For example, Amy Finkelstein and coauthors argue that the availability of uncompensated care reduces the cost of being uninsured (though not fully) and may cause people to not purchase insurance even when the subsidized price is far below their own expected medical expenses. Similarly, Neale Mahoney argues that bankruptcy offers some implicit health insurance for those without formal insurance. Our results indicate that most medical debts are relatively modest in size, which means that they could be incurred before the insured person meets their deductible. Thus, the channels that decrease demand for insurance may be in effect for a wider range of medical expenses than previously thought.
Health Affairs Comment:
By Don McCanne, M.D.
The discussion of policy implications really needs to be expanded.
The two primary causes of medical debt that results in collections include being uninsured, which calls for policies that would make coverage truly universal, and underinsurance with excessive patient cost sharing resulting in medical debt.
Most policy discussions of the latter seem to accept consumer directed health care as a given – making the patient sensitive to health care spending through higher deductibles and other cost sharing. This results in policy recommendations that do not eliminate the medical debt issue but rather use trade-offs that only shift the problems, often inequitably.
As an example, setting premiums closer to age-related risk would increase medical debt problems for older individuals, not really a desirable policy. Another example is that increased use of medical savings accounts increases tax expenditures that benefit the wealthy – a highly inequitable method of financing health care that is unfair to our taxpayers. Solutions that are directed to moral hazard and consumer price sensitivity do not solve the problems but merely shift them around.
Exhibit 3 provides a very important lesson. At age 65 there is an abrupt decline in the numbers of uninsured, obviously due to increased enrollment in Medicare. But also within a couple of years medical collections become almost negligible, most likely due to the fact that the deficiencies in Medicare coverage are filled in by other coverage including retiree plans, Medigap plans, Medicare Advantage plans, or dual coverage with Medicaid. This suggests that, instead of increasing administrative complexity and costs through the use of these various supplemental plans, Medicare benefits should be expanded to fill in the gaps in coverage if we want to protect patients from medical debt.
Improving Medicare and expanding it to cover everyone would not only address the medical debt issue, it would also make coverage truly universal, and it would be funded equitably through progressive tax policies. Regarding affordability, the policies characteristic of a well-designed single payer system would use other more patient-friendly measures to control spending such as reduction of our profound administrative waste, use of publicly administered pricing such as negotiated rates and bulk purchasing, and planning and separate budgeting of capital improvements to ensure efficient distribution of our health care delivery resources.
These policies would change the cost trajectory to make it sustainable, not only to benefit individuals but society as a whole. That does not remove the major barrier to reform that the authors also allude to – the political opposition to government financing, even though the decrease in private financing, especially employer-sponsored plans and plans in the individual market that disproportionately burden individuals with modest or low incomes, is a major reason that public insurance systems work so well. To enact the beneficial policies that we need for an equitable, affordable health care financing system for all, we need to change the politics.
By Don McCanne, M.D.
An important theme that runs throughout this article: “consumers could still incur a substantial amount of debt even under universal coverage, if such coverage required nontrivial cost sharing.”
Nontrivial cost sharing is the primary cause of medical debt in insured individuals. Deductibles, coinsurance and often copayments are usually more than trivial in today’s private insurance products.
Several other nations have shown that cost sharing has not been necessary to keep health care spending rates at a level well below that of the United States. Cost sharing in the United States has not kept us from spending the most on health care, and it has created unnecessary exposure to medical debt.
We really can provide health care to everyone for free at the point of service while controlling costs though single payer policies that are much more patient friendly and much more effective than consumer-directed cost sharing, and we can pay for the system painlessly through equitable, progressive public financing.
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