Medical Costs Help Drive United States to Highest Bankruptcy Rate in OECD

As I have discussed before, medical bills are one of the leading causes of bankruptcy in the United States. In fact a 2009 study by David Himmelstein et al. in the American Journal of Medicine (abstract here, news story here) shows that there was a sharp increase in the proportion of bankruptcies with significant medical causes (defined as debts over $5,000, loss of income due to health problems, or mortgaging of the debtor's home to help meet medical expenses) between 2001 and 2007. According to their study, 46.2% of bankruptcies in 2001 were medically-related, while by 2007 the level had grown to 62.1%, even though bankruptcy laws had become more restrictive in the interim.

These figures have sometimes been disputed by other scholars, for example this article by Dranove and Millenson in a 2006 symposium in the journal Health Affairs, which argued that the definition of medically related used by Himmelstein et al. was far too broad.

If  medical bills are contributing to a higher proportion of bankruptcies in the U.S., we should expect to see this reflected in a higher overall bankruptcy rate than for countries where universal health insurance makes medical bankruptcy impossible. It turns out that this hunch is correct.

In 2006, Rigmar Osterkamp of the Ifo Institute for Economic Research in Munich, Germany, analyzed select OECD countries that had bankruptcy data extending over many years and which clearly distinguished between personal and business bankruptcies. Between 1980 and 2005, the United States opened up a steadily widening margin over #2 Canada, which itself was significantly ahead of the other OECD members studied (Australia, Germany, the Netherlands, Sweden, and the United Kingdom). According to Osterkamp, the U.S. and Canada had the two most debtor-friendly bankruptcy systems, though he noted that Germany's had become much more debtor-friendly in 1999 (leading to a sharp increase in bankruptcy filings), whereas U.S. law had become more restrictive in 2005. He saw this relative debtor-friendliness as the explanation for why Canada and the United States had higher rates of bankruptcy. However, he did not consider what differentiated the two countries.

As we can see from the chart, in 1982 the U.S. and Canada had virtually identical rates of around 1200 per million population, whereas by 2005 the United States was around 6000 per million while Canada was just a little over half that rate. (As Michelle White notes, the 2005 figure was inflated by consumers wanting to file under the more favorable law. According to the American Bankruptcy Institute, the figure plunged to 597,000 in 2006 but by 2010 had again topped 1.5 million filings.)

Without a detailed statistical analysis, I can't prove that the rise in medical bankruptcies accounts for the growing gap between U.S. and other OECD bankruptcy rates. But besides the suggestive fact that the proportion of medical bankruptcies grew in at least the latter part of the 1980-2005 period, we also know that U.S. per capita health care spending opened up a very similarly shaped gap relative to the rest of the OECD over the entire time span. And the finding that the U.S. personal bankruptcy rate is so much higher than that of other rich countries suggests that Himmelstein et al. are more likely closer to the truth in their estimation of the level of medical reasons for bankruptcy than are their critics.

Tax Expenditures Don't Make America Europe

Via Calculated Risk, Dean Baker takes David Brooks to task for his claim that "America is Europe." Brooks tells us:

The U.S. does not have a significantly smaller welfare state than the European nations. We’re just better at hiding it. The Europeans provide welfare provisions through direct government payments. We do it through the back door via tax breaks.

 These tax breaks, more technically called "tax expenditures," are indeed large (Brooks cites an estimate of $600 billion for 2007) and not transparent. But they have more problems than that. As the influential Citizens for Tax Justice report linked above points out, tax expenditures have further drawbacks:

1. They are essentially entitlements: If you qualify for the tax break, you get it. Following on this,
2. They are generally uncapped. It is possible to specify a maximum overall amount that can be taken through a tax expenditure (many states do this with various tax credit programs which are first come, first served, until the annual allocation runs out), but in most cases at the federal level an entity takes advantage of the tax provision when it files its taxes, so no capping is possible.
3. Unlike on-budget programs, tax expenditures rarely undergo annual review, though again in principle one could specify a sunset date to force periodic evaluation.
4. The benefits go mainly to corporations and the rich. This is even true of such "middle-class" tax expenditures such as the mortgage interest deduction, from which those in higher tax brackets and larger mortgage balances benefit the most.
5. Tax expenditures are not designed for efficient program management: why should we expect the IRS to run subsidy programs any more than we would have the Defense Department oversee Food Stamps?

Moreover, as Baker points out, there is a big difference between what we pay for social benefits and what we actually get. He highlights our grossly inefficient health care system and notes that " if we add in ...the deduction for employer provided health insurance.., the government in the United States commits a larger share of GDP for health care than almost anyone." Despite this, he adds, the U.S. does not match the European countries in terms of universal insurance (nor, for that matter, life expectancy).

The preference for non-transparency in the U.S. extends beyond the welfare state. As I showed in my book, Competing for Capital, in the European Union, subsidies to industry and services tend to be paid in the form of grants (on budget), whereas in the United States, tax expenditures are the overwhelming mechanism for such subsidies by state and local governments. Moreover, because tax expenditures do not show up in national accounts data (i.e., adding up to gross domestic product) while on-budget subsidies do, looking at "subsidies" as a percentage of GDP makes the U.S. look like less of a subsidizer than it is compared to Europe.

As a result, in the U.S. we have a patchwork system of expenditures and tax expenditures for social welfare and industrial development that is more costly and less effective than what we see in Europe. This system, if you can call it that, is also less transparent and contributes to U.S. inequality being virtually the worst in the OECD. Bottom line: America isn't Europe.