Abstract

Using household-level data from the Panel Study of Income Dynamics, we estimate the extent to which medical expenses are responsible for driving households to bankruptcy. Our results suggest that an increase of 10 percent in medical debts would cause a 27 percent increase in the filing propensity of households with primarily medical debt, and an approximately 36 percent increase in filing propensity of households where medical debts co-exist with primarily credit card debts. Studying the post-bankruptcy scenario, we find that filers are 19 percent less likely to own a home even several years after the filing, compared to non-filers. However, the consequences are less adverse for medical filers i.e. those who filed due to high medical bills compared to other filers.

Introduction

Since 1990, consumer bankruptcy filings as a percentage of total filings have been steadily increasing. In 1990, the number of filings was approximately 718,000 (92 percent of all filings), which doubled in 2009 to 1.4 million filings (accounting for 96 percent). Over the same time period, aggregate health care expenditures have risen from around 12 percent of GDP to about 17 percent of GDP1. By 2017, the Center for Medicare and Medicaid Services projects that health care will account for about 20 percent of GDP. This paper questions the extent to which consumer bankruptcy filings and health care expenditures are correlated, and whether there is a causal relationship between the two. In particular, the paper tries to identify the extent to which a household's medical debts cause a personal bankruptcy filing.
Our results suggest that in households where medical debts are not the primary form of debt, there is a 36 percent increase in the probability of filing for bankruptcy when the debt level goes up by 10 percent, while in households with primarily medical debts, the probability of filing goes up by 27 percent. Hence medical debts influence bankruptcy filings differently depending upon the total debt composition of the household. We use household level data from the Panel Study of Income Dynamics (PSID) to estimate the impact of illnesses and medical debts on the probability of filing for bankruptcy. This is the first paper to use longitudinal household data to identify the impact of medical bills (and other health related factors) on bankruptcy. We extend our analysis to further study the post-bankruptcy situation for individu- als. Using data on home ownership and labor supply in the PSID, we conclude that individuals who have filed for bankruptcy are significantly less likely to own homes, while they are significantly more likely to increase labor supply to accumulate savings.

The empirical literature on this topic is mixed. Studies based on surveys of bankruptcy filers, such as Himmel- stein, Warren, Thorne, and Woolhandler using data from the Consumer Bankruptcy Project, claim that fami- lies with medical problems and medical debts account for more than half of all bankruptcy filings3. However, their classification of a medical bankruptcy is too broad.

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