Medical Debt is a System Issue

Two reports last week point to the same result: healthcare is on a collision course with household finances.

  • A Kaiser Family Foundation study released Wednesday found that 6.3 million Americans could see their insurance premiums spike due to a lapse in their coverage if the American Health Care Act passes. It allows states to authorize insurers to charge enrollees 30% higher premiums if they go without insurance for at least 63 days and have a pre-existing condition. The researchers assumed that as many as half of these might qualify for Medicaid coverage with the balance going without.
  • A new report from the Federal Reserve Bank of New York showed that total household debt climbed to $12.73 trillion in the first quarter, 2017 reaching the 2008 peak before the housing  market crash and economic downturn. The report found consumers are delinquent on 4.8% of their total debt vs. 11.9% of debt at least 30 days late at the end of 2009. But while mortgage debt is a smaller percentage than in 2008 (73% vs. 68% currently), obligations for auto loans, healthcare, credit card and student loan debt have trended up.

So, what’s the connection? Medical debt. Though our economy has rebounded from the 2008 downturn and Americans have reduced their mortgage debt, the healthiness of household finances is still fragile and healthcare is the main culprit. Unlike other categories of debt, medical debt is different. We generally plan our purchases of necessities like food, housing and transportation and budget for clothes, entertainment and recreational expenditures, but not so with healthcare.

Healthcare spending is unexpected, even for those with health insurance. Last year, 70% of Americans faced a problem paying for their healthcare. (NY Times/Kaiser Family Foundation). One in six households had an unforeseen medical problem that cost at least 3% of their adjusted income (JP Morgan Chase). Half without insurance and 20% who are covered currently have medical debt that’s overdue and medical credit card debt is 38% of all credit card debt--above student loans (25%) and every other category. Medical debt takes its toll: two in three with medical debts forego additional treatments and delay getting their prescriptions filled. And medical debt is the number one cause for Chapter 7 bankruptcy filings in the U.S. (NerdWallet). As Congress anticipates changes that could increase premiums for the 27% of our population under the age of 65 who have a pre-existing condition, there’s little doubt medical debt in their households will spike.

For insurers, medical debt is closely monitored. Non-payment of a premium is cause for suspension of services. It’s a business decision. Their only wrinkle is how fast the issuer can recognize the lapse and notify the providers in their networks to deny access if they expect to be paid. Issuers can walk away from individual markets, cancel contracts with groups that expose them to too much risk and chalk it up to the instability of the insurance market itself. That simple. Medical debt is a manageable but menacing problem for insurers.

For employers, medical debt is a perplexing workforce issue. Pushing employees into high deductible plans (HDHPs) to encourage price sensitivity and lower utilization exposes them to higher risks for medical debt.  And curtailing coverage altogether, which almost half of all employers have done, further pressures employees to juggle health costs with other household obligations. Thus, employers worry that medical debt has the potential to destabilize their workforces, hurt their companies and harm their communities. It’s a concern.

For hospitals, with operating costs increasing 1% more than revenues year over year (Moody’s Investor Service 2016 vs 2015), medical debt translates to increased bad debt if not addressed but it’s tricky. The $21 billion/year medical debt collection option looms as a hedge but exposes hospitals to criticism if too aggressive. One in five households heard from a medical collector last year and 63% got a bill that was higher than they’d expected, so hospitals have to manage medical debt sensibly but compassionately as their reputations are at risk.  

And for policymakers currently debating health reforms, medical debt is complicated and politically tricky. The questions are heavy: Is insurance accessible if not affordable? Are high risk pools the right place for those whose conditions and circumstances disallow their participation in private coverage?  Should medical debt be treated differently in the Chapter 7 bankruptcy rules or remain stacked like all other non-priority debts? Can the government do more to advance price transparency by standardizing total costs of care for comparison? Should the government protect consumers against surprise charges and unnecessary care that result in unmanageable medical debt? If the federal and state governments limit participation in and cuts reimbursement for Medicare and Medicaid, how will the spike in household medical debt be absorbed? And many more. Sticky questions.

What we know for sure is this: health costs are going up and household medical debt is going up even faster. Medical debt is a systemic issue.

We operate a system in which costs and pricing bear no resemblance to the other and neither is readily accessible. We have a system wherein powerful middlemen—Group Purchasing Organizations and Pharmacy Benefits Managers-- negotiate between drug and device producers and providers and insurers with thin transparency. We expect our physicians to become champions of efficiency in their practices (via MACRA) while limiting their access to readily-verifiable costs associated with the items and facilities they use. Our medical schools teach science but not medical economics to equip clinicians to manage costs and quality. And we reinforce the public’s conception that healthcare cost is too complex to be understood and its costs on households un-calculable.  The problem of growing medical debt in our households is a consequence of these systemic flaws.

While the next chapter in health reform plays out, medical debt is piling up in American households. It’s taking a toll. It’s not a Republican or Democratic issue; it’s a system issue. Health costs can be constrained, household financial security protected and the system’s clinical innovations enhanced if there’s will on the part of community-spirited employers, providers, clergy, and policymakers who commit to eradicate the medical debts that are paralyzing our families.

Paul

P.S. Today, the Congressional Budget Office will release its much-awaited score for the House passed American Health Care Act, and tomorrow, the Administration will release its proposed FY18 federal budget wherein major cuts to Medicaid and other healthcare programs is expected.

Also, must reading: “The World is Not Ready for the Next Pandemic” Bryan Walsh, Time May 4, 2017 which outlines the global threat of the H7N9 virus that spreads easily resulting in 88% of people infected with pneumonia, three­quarters ending up in intensive care and 41% who later died.

Additional Sources for Today’s Report:

Alderman, Lesley (June 5, 2009). "When Medical Bills Outpace Your Means, Seize Control Swiftly". The New York Times.

Himmelstein, David U.; Thorne, Deborah; Warren, Elizabeth; Woolhandler, Steffie (August 2009). "Medical Bankruptcy in the United States, 2007: Results of a National Study". The American Journal of Medicine. 122 (8): 741–746.

Kalousova, Lucie; Burgard, Sarah A. (June 2013). "Debt and Foregone Medical Care". Journal of Health and Social Behavior. 54 (2): 204–20. 

O'Teele, Thomas P.; Arbelaes, Jose J.; Lawrence, Robert S.; Baltimore Community Health Consortium (July 2004). "Medical Debt and Aggressive Debt Restitution Practices: Predatory Billing Among the Urban Poor". Journal of General Internal Medicine. 19 (7): 772–778. 

Daly, Rich (October 21, 2005). "Working-Age Americans Bear Brunt of Medical Debt". Psychiatry Online. June 22, 2009.

Bulkat, Baran. "Medical Debt in Chapter 7 Bankruptcy". Nolo. April 26, 2016.

“Why Americans Are Drowning in Medical Debt” Olga Khazan The Atlantic October 8, 2014.

“What Does a Deductible Do? The Impact of Cost-Sharing on Health Care Prices, Quantities, and Spending Dynamics” Zarek C. Brot-GoldbergAmitabh ChandraBenjamin R. HandelJonathan T. Kolstad Working Paper No. 21632, October 2015.

“How to Ease the Burden of Medical Debt” DaveRamsey.com