I’ll plug this story one more time because I think it’s important. First there was the Harvard study that found that about 50% of all U.S. bankruptcies could be attributed to medical bills. Then there was my critique of the study. In particular I raised the possibility that most of these bankruptcies were not in the very poor but in middle class families that had assets to protect. “Frank” disputes this in his comment.

“With all due respect, some of the observations on bankruptcy are just not reality based . . most petitioners are low/middle income, have significant medical expenses, single, with few assets to protect — Take an average wage earner-35-40K, 2 children, employer pays employee only insurance with moderate deductibles and co pays–figure how you would handle a significant health crisis/chronic illness, pay for lodging, travel, etc–it may be tempting to ask the person to reduce the other expenses but not as easy as it appears–now reduce the income to the mid 20’s which is the average income of bankruptcy petitioners in one study by the DOJ–take out 9-12 K for health insurance as many of these jobs do not include health insurance–Sorry if I sound a bit miffed but I run a good sized health care facilty (sic) and I daily see the personal and social chaos that characterizes our system of health care financing.”

So true. Sudden high medical bills can hit the unprepared like a ton of bricks. But who are the unprepared? Dr. Bob believes he has the answer.

“The medical dollar amounts — annual medical expenses over $1,000, multi-year expenses over $10,000 — certainly represent a significant burden to low or middle-income families. Yet to a far greater degree they reflect the extreme financial brittleness of those who end up in bankruptcy. The numbers cited are far less than many families spend on an automobile, or on car repairs, or to fix a leaking roof. How many of these families were living beyond their means, overextended by credit card debt or large mortgage payments, is not clear.

How many women were abandoned by husbands with children to raise, and little or no income to support them? Such issues are social in nature, reflecting the breakdown of marriage commitment, the indirect effects on families from an epidemic of drug and alcohol abuse, public policies discouraging savings, individual lack of financial discipline, and a potential host of other social pathologies unrelated to health care costs.

Indeed, the authors themselves admit that even universal health care coverage would not have prevented many of the bankruptcies. Medical expenses are certainly one factor, and medical catastrophe can and does result in financial devastation to some, but health care costs alone do not shoulder the responsibility of over half of all bankruptcies.”

Both social as well as financial ills contribute to the risk of bankruptcy. Americans are horrible at putting away money for savings. Despite having one the highest standards of living and one of the lowest tax rates of any industrialized nation, on average we save only about 1% of after tax income per family. This means that there are a significant number of Americans who are not only living paycheck to paycheck but who really are living beyond their means (particularly because of the vast amount of credit available in this country).

Many of these people are the “unprepared”. They save very little and because of their level of consumer spending and credit debt they have very little disposable income with which to cover sudden expenses. It is very telling that this study found (and as Dr. Bob pointed out) that the average out of pocket costs the year prior to bankruptcy were only $3,686! This is entirely different from the massive costs of a catastrophic illness that could reach 50 to 100 thousand or more!

The standard liberal response to this will be to claim that these people have very limited capacity to save for medical expenses. However, there is little proof for this. This claim comes from the widely held American belief that health care is something that is paid by someone else and hence most do not plan for nor save for future health care costs. Most Americans, regardless of their level of income, are entirely unprepared to face even the cost of the deductibles of their health insurance or those things not covered by their insurance.

In my opinion, the message of this study is that Americans need to add future health care expenses to retirement and education as things that they save and prepare for in life.