Medical bills prompt bankruptcy in 62% of cases

A new study shows a steady increase in the number of personal bankruptcies prompted by overwhelming medical bills. The report, published this month in The American Journal of Medicine, shows more than 62 percent of all bankruptcies in 2007 were due to medical debts. That compares to around 46 percent in 2001 and only 8 percent in 1981.

According to the study, many of the medically bankrupt started out with health insurance. A common assumption is that many people – by choice or necessity – go without insurance. “For a large segment of the population, with no insurance and no savings, their health insurance is Chapter 7 bankruptcy,” said Richmond attorney David K. Spiro. “And we all pay,” he added.

The study, however, found more than 60 percent of those driven into bankruptcy by medical bills had private health insurance at the onset of their illness. The survey showed families with private insurance reported average medical bills of $17,749 while uninsured families faced an average of $26,971.

“The cost of medical care continues to skyrocket, the cost of medical insurance continues to skyrocket,” said Spiro.

The report noted that some people lost their private coverage when they became too sick to work, as employers may be quicker to drop employees who become disabled. “That is a problem, particularly with real significant medical issues,” said Richmond’s Patrick T. Keith.

The study, conducted before the recent market failures, was based on a survey of 2,314 randomly selected individuals who filed for bankruptcy during the 2007 fiscal year. Danville attorney Luis A. Abreu was surprised that medical bills counted for so many bankruptcies, compared to credit card bills.

“I can see where if someone had a lot of credit card debt and then you have that uninsured portion of a health care debt, the two might combine to push someone over the edge.”

Abreu noted that health care providers in economically stressed Southside Virginia have developed programs to work with patients who can’t pay their medical bills right away. The Danville hospital, he said, has even allowed patients to work off part of their bills by volunteering at the hospital.

Because the survey is a snapshot of bankruptcy filings before the economic downturn, recent developments may overshadow the significance of the findings. For Lynchburg-based bankruptcy lawyer David Cox, whose practice extends north to Staunton and south to Danville, the biggest trend last year is job loss. “Anything related to the real estate sector obviously has been hit very hard,” he said.

According to the 2007 survey, hospital bills accounted for half of the average expenses (48 percent) for both insured and uninsured debtors, while prescription drugs (18.6 percent) and doctor’s bills (15.1 percent) rank as the second and third most common causes of medical bill-induced bankruptcy, respectively.

The study authors largely blame the 2005 bankruptcy reform law for instituting “procedural barriers that made filing for bankruptcy, especially because of unpaid medical services, a more difficult and expensive task.”

Filings have increased steadily every quarter, causing a boom in consumer bankruptcy law practice, since the passage of the Act.