NCPA - National Center for Policy Analysis

Do Medical Bankruptcy Laws Affect Health Insurance Rates?

July 9, 2015

Recently, the Supreme Court voted to uphold Affordable Care Act subsidies on state-run exchanges, but millions of Americans still go without health insurance.

The option to declare medical bankruptcy can serve as an alternative health insurance policy. This is due to a unique feature of the health care market: hospitals provide emergency care to those who cannot afford to pay. While relying on medical bankruptcy is an uncomfortable option for any family, it might be more attractive than paying unaffordable health insurance premiums.

The decision to purchase health insurance depends on many factors,

  • Families with a lot to lose in bankruptcy proceedings are necessarily wealthy to begin with, and more likely to purchase health insurance anyway.
  • Households with more exposure to bankruptcy due to state laws are also significantly more likely to purchase insurance. This effect size is significant, on par witha nationwide insurance premium discount of about 20 percent.
  • Evidently, lenient bankruptcy laws make health insurance somewhat less attractive.  In Nebraska, for example,      a bankrupt family can only protect $12,500 in home equity from seizure, but across the state line in Kansas that same family can retain all of their home equity. If Kansans forego health insurance more often than      Nebraskans, and if families in lenient states forego health insurance more generally, that would be evidence that bankruptcy protections do in fact affect insurance decisions.

The availability of medical bankruptcy creates a negative externality: the costs of unpaid hospital care and the administrative costs of bankruptcy proceedings are paid by creditors as well as the taxpayers at large.

The classic prescription for this would be a Pigouvian tax on people without insurance. The tax would:

  • Encourage more people to take up insurance.
  • Reduce the strain on the bankruptcy system.
  • But in this context, that tax would have the unusual feature of falling most heavily on the least wealthy.

The Affordable Care Act penalties for the uninsured, by contrast, are designed to be proportionately larger for those with more income. This suggests that the use of medical bankruptcy in lieu of formal health insurance is still inefficiently high and it also raises tough questions about how states can reduce the temptation to rely on the bankruptcy process without penalizing their poorest residents.

Source: Neale Mahoney, "Do Medical Bankruptcy Laws Affect Health Insurance Rates?" American Economic Association, June 29, 2015.


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