Obamacare May Lead to Drop in Bankruptcies

President Obama and Vice President Biden react as the House passes the health care reform bill.

As the Patient Protection and Affordable Care Act gears into full implementation over the next two years, health insurance will be extended to millions of Americans who couldn’t previously afford it. With medical bills one of the largest causes of bankruptcy, will health care reform bring a reduction in people who resort to bankruptcy court to seek debt relief?

About 1.35 million people filed for bankruptcy last year, with the number poised to rise in 2012. It’s unclear exactly how many filings are due to health care bills, but it’s a lot. According to a 2009 study in the American Journal of Medicine, bankruptcies due to medical bills rose from 42 percent to 62 percent of all bankruptcies from 2001 through 2007. A 2005 Harvard study found that around half of all bankruptcies were related to medical expenses.

Keep in mind that bankruptcy is often due to multiple factors working in concert. Illness can cause loss of employment. The loss of a job can mean loss of health insurance so medical bills skyrocket. Either factor or both together could lead to missed mortgage payments and the threat of foreclosure.

Will Obamacare help? The controversial 2010 Affordable Care Act has a number of consumer-friendly provisions either already in place or scheduled to be implemented in the next two years that could reduce the financial strain on families struggling to pay doctor bills. Already, children up to age 26 can be on their parents’ insurance plan, insurers can no longer deny people coverage for pre-existing conditions and the practice of insurers dropping people as soon as they get sick (known as recission) is outlawed.

Arriving in 2014 will be a massive expansion of Medicaid, federal subsidies for people who can’t afford insurance on their own and a cap on out-of-pocket consumer spending. The upshot of the policies will be as many as 33 million people insured than would be otherwise. It stands to reason that with broader insurance coverage, fewer people will be hit with catastrophic bills and be forced to file for bankruptcy. However, since most of the provisions of the act have not yet come into effect, it’s impossible to predict exactly how if at all the ACA will change the bankruptcy climate in the country.

Prohibitive Insurance Cost

Robert J. Rock

In his own practice, Robert Rock, a bankruptcy attorney in New York, says so far he hasn’t seen any change in medical bankruptcies since the ACA was signed into law. “I think the percentage has probably stayed fairly consistent,” Rock says. “I have not seen any appreciable or significant difference in the number of cases being filed due to outstanding medical care bills after the act then before it.”

However, he notes, some of the provisions could help keep people out of trouble. “I think where it has the biggest potential impact for helping out is the extension to people up to age 26 to be covered under their parents’ plan,” says the attorney. “People who are 24, 25, 26 who have completed their college and in a lot of cases graduate work and are not employed or are underemployed to the extent where they cannot afford to live on their own. If they can’t afford an apartment they certainly aren’t going to be able to afford health care because the cost of insurance is prohibitive to most people.”

Another place the law could help is with increased benefits to seniors on Medicare. “I have recently seen an uptick in the number of older persons who are filing,” Rock says. “To the extent that there is any expansion in Medicare benefits to them, it’s going to help put a little bit of extra cash into their pockets and into the economy.”

On the other side of the coin, Rock points out, employers who now must offer coverage or pay a penalty could actually reduce their workforce, with the newly laid off joining the ranks of the bankrupt in a potential unintended consequence.

Obamacare may prove to help– but the biggest factor that would reduce bankruptcies overall would be a healthier economy in general, the attorney says. “I think the bigger issue is jobs,” says Rock. “If people are employed, by and large they have coverage by their employers.”