Economics

A Full-Scale Assault on Medical Debt, Part 1

By BOB HERTZ

The recent proposal by Sen. Bernie Sanders to cancel $81 billion of medical debt is a very good start—but it is only a start.

The RIP Medical Debt group—which buys old medical debts, and then forgives them—is absolutely in the right spirit. Its founders Craig Antico and Jerry Ashton deserve great credit for keeping the issue of forgiveness alive.

Unfortunately, over $88 billion in new medical debt is created each year; most of it still held by providers, or sold to collectors, or embedded in credit card balances.

Tragically, none of this has to happen! In France, a visit to the doctor typically costs the equivalent of $1.12. A night in a German hospital costs a patient roughly $11. German co-pays for the year in total cannot exceed 2% of income. Even in Switzerland, the average deductible is $300.

U.S. patients face cost-sharing that would never be tolerated in Germany, says Dr. Markus Frick, a senior official. “If any German politician proposed high deductibles, he or she would be run out of town.”

In Australia, a recent proposal to establish the equivalent of a $5 co-pay for primary care visits fueled such an outcry that the federal government was forced to withdraw the idea.

Americans may be forced to take second jobs just to pay medical debt; meanwhile, the highly-taxed Europeans get free medical care and are counting their weeks of paid vacation. What is wrong with this picture?

These nations have shown that cost sharing is not necessary to keep health care spending at a level well below that of the United States. They rely on higher taxes and price controls…and yet, are those really worse than widespread patient debt?

U.S. Medical debt comes primarily from these sources:

  • the uninsured
  • high deductibles
  • out-of-network bills
  • claim denials
  • specialty drugs
  • emergency room care
  • ‘zombie debts’ purchased by collectors

In this essay, I will show that a substantial number of these debts can be cancelled or greatly reduced.

Today, these groups run up the most medical debts:

Group No. 1. The poor and the uninsured, including those who still do not get Medicaid in red states.

 A Tennessee couple earning $13,000 annually gets no help whatsoever on medical bills. They can barely afford food or rent; so of course they incur medical debt every time they are sick.

Over 20% of these families do not have a checking or savings account. Over 30% are not working at all.If they do work, they cannot afford to join the employer’s plan.

Six full years after the ACA, there are still close to 30 million adults in the US who are uninsured. About seven million are undocumented immigrants. Another seven million are actually eligible for Medicaid, if they do get sick.

About four million could benefit from the ACA, but many are unaware of the exchanges. Up to five million are very poor, but are kept out of both Medicaid and the ACA in the red states described above. Another two to three million make too much for ACA subsidies.

This is a hard group to help. No states besides California want the undocumented to get insurance. No cities outside liberal enclaves like Seattle and New York care about health insurance for restaurant and service workers.

The poor rarely vote, so ignoring them does not trouble conservatives. Politics are often dominated by seniors—who will approve a conservative message about  ‘getting rid of socialized medicine’—while they themselves enjoy the federal socialism of Medicare.

(Not to mention Social Security, electricity, phone infrastructure, and the defense spending that comes to red state residents from the federal government,)

Group No. 2.  The under-insured, who have high deductible insurance but no savings.

Why are they walking around with deductibles they cannot afford?

At some employers, this is the only health insurance which is offered.

Even where there is a choice of plans, people with smaller incomes often select the cheaper high-deductible coverage.

If you are healthy, a high deductible plan to save money on insurance premiums may be a decent gamble at first.. But if you have a chronic illness, you will pay the entire deductible each year, and  will probably build up debt. Only a minority of employers offer  assistance to pay the deductibles.

Sometimes this group pays $500 a month or more for a porous health plan, which then leaves them with thousands in debt if they are hospitalized. 

Many families are living right on the edge financially, and they have trouble with all their debts, not just medical. Default rates are growing on their car loans and credit cards as well. They often face utility shutoffs and repossessions.

A recent study of insurance claims showed that 49% of patient out-of-pocket costs per healthcare incident were below $500; 39% were $501-$1,000; and 12% were more than $1,000. That generates an enormous amount of medical debt.

Group No. 3. The well-insured, who may still get huge out-of-network bills.

Some of their debts are out-and-out fraud. If a hospital says they are in-network, then all their contractors should be in-network – or else we have an illegal bait-and-switch. These surprise bills should be cancelled (details to follow).

  • In 2011, (9 years ago) New York studied more than 2,000 complaints involving surprise medical bills, and found the average out-of-network emergency bill was $7,006. Insurers paid an average of $3,228 leaving consumers, on average, “to pay $3,778 for an emergency in which they had no choice.”
  • Out-of-network assistant surgeons, who often were called in without the patient’s knowledge, on average billed $13,914, while insurers paid $1,794 on average.  Surprise bills by out-of-network radiologists averaged $5,406, of which insurers paid $2,497 on average.

Medical debt can be cruel and dispiriting—and it is also incredibly inefficient! The cost of creating a bill, sending a bill, following up, negotiating a settlement, paperwork for charity care, financial counseling, a possible lawsuit, and (rarely) getting repayments over years… The sheer administrative expense is staggering.

The average recovery on hospital bills sent to individuals is 15.3%. Non-hospital providers recover an average of 21.8% of each bill. No wonder some providers prefer Medicaid—it only pays about 50% or less of their normal charges, but that is far more than they will get in actual collections.

There are two overarching models for financing health care:

One is the Bernie Sanders model:

  • Paternalistic – you get insurance whether you choose it or not
  • Sympathy for the poor, minorities, and migrants (you never know when you might be among them)
  • Collectively bargained – usually with large payroll taxes
  • No pre-existing conditions clauses
  • Hospitals are financed mainly by taxes, not user fees
  • Patients are not in debt (though governments often are)
  • Cost control through price controls and rationing

The Sanders model accepts the use of coercion to pay for health care. (For that matter, the Singapore health model that is praised by conservatives is filled with coercion, including public hospitals, forced savings for HSA’s and taxes for catastrophic insurance.) At some point we are all going to get sick, so letting us decide when to buy insurance is somewhat of a fool’s paradise. Millions will always make bad choices and be left to suffer; we need to be protected against our own stupidity. Coercion is —the only real issue is when and where. Even wealthy societies can benefit from forced savings. For example, a mandatory HSA deposit of 3% of income would eliminate most of the medical debts discussed in this essay.          

The other is the Paul Ryan-Newt Gingrich model:

  • Based on Individual choice
  • No mandates on employers to provide quality coverage
  • No mandates on individuals to buy quality coverage; if they want to gamble going uninsured in order to save money, that is their call.
  • Hospitals financed by user fees, insurance premiums and private savings
  • No interference with anyone making money on health care – even those who prey on medical debtors
  • Medical bankruptcy is OK, because the fear of it motivates the purchase of health insurance.
  • Cost control (theoretically) through competition – faith in free markets
  • Taxes on workers are lower – although the savings seem to be siphoned off in premiums, co-pays, and deductibles.

The Ryan model is frankly Darwinian when you get close to it. The uninsured, frankly, are usually people who make mistakes – like poor budgeting, failing in school, losing their jobs, or being born to non-rich parents. Persons with no money get much less care, and will die sooner. Those who do not buy insurance when they are healthy will suffer later on. Eventually it all starts to sounds like “culling the herd.”

The Ryan model therefore expects a lot from private charity. (Begging is preferable to new taxes.) Democratic legislators have also established Medicare, Medicaid, and SCHIP to smooth out the inevitable rough edges.

Medical debt is an obvious consequence of the libertarian model. It can only be reformed by importing controls and rules from the Sanders model.

The ideal image of high-deductible insurance features a judicious patient with at least $10,000 in HSA savings, getting bids on each procedure and therefore driving down costs. They might even have non-urgent care done abroad, which would force American hospitals to compete on price. They might decline an unnecessary treatment or diagnostic test, to save money.

Even if hospitalized, they can say to the provider, “I am paying cash, what is your best offer?” The Amish – who do not buy insurance, but save prodigiously – actually use this method.

This has some basis in fact. Cash for medical care is more efficient and will over time lead to lower prices.

However, millions of Americans have no cash, and no bargaining skills. Some diseases may not wait for patient ‘shopping.’ A desperate patient goes to the nearest hospital and then juggles utility bills and high-interest charge cards to pay down medical bills, and then begs for help from relatives or (even sadder) from GoFundMe.

The average holder of an HSA account is under age 45, healthy, and with an average income of $75,000. Whereas in low-wage America, a ‘consumer-driven’ health plan is a ‘consumer-indebted’ reality. 

Financial casualties among patients do not seem to lead to lower health care prices. Providers are just as likely to raise their prices, in order to cover the bad debt they are taking on. (Drug companies certainly do not lower their prices when their customers suffer.)

Doctors may want to forgive some patient debts, but there is a limit how often they can do this and still cover the expenses of their practice. In some cases, it is actually (and idiotically) illegal for physicians to waive the deductibles.           

Bob Hertz is a retired insurance broker. He learned about health care from Uwe Reinhardt, Joseph White, Dr. Robert Evans, and George Halvorson a fellow Minnesotan.

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3 replies »

  1. Bob — I think medical debt caused by surprise bills is a solvable problem without new taxes. It would take making hospitals resolve the billing dispute with doctors who practice in their hospitals but patients generally have no role in choosing. These include radiologists, anesthesiologists, pathologists, emergency medicine doctors, assistant surgeons and, sometimes, surgeons for care that must be done on an emergency basis. I think it’s an outrage that some of these doctors deliberately refuse to join any networks so they can submit huge, unconscionable bills to patients who have no role in choosing them and need care that can’t be shopped or scheduled in advance.

    I’m not sure how best to handle the ambulance bills. A lot of the fire and first aid service around here is provided by volunteers who are getting harder and harder to find. Even if organized on a regional basis as opposed to a town by town basis, most of these people and equipment are likely to spend a significant percentage of their time sitting around doing nothing. Even in New York City, fires are WAY down from 40 or 50 years ago but a lot of their time is now spent responding to vehicle accidents and drug overdoses. Air ambulances are unbelievably expensive. Maybe it would be most appropriate for regional ambulance services to be owned by hospital systems and partly funded by subsidies provided by tax revenue but I just don’t know how best to handle that issue.

  2. Thanks for your thoughtful comments as always, Barry.
    The piece you just read is only about half of the article, more to come soon here in THCB.

    My point later on is that medical debt can be reduced without relatively little in new taxes.

    For example, cancelling balance bills that violate fair trade laws requires no taxes.

    Cancelling chargemaster bills for emergency care requires no taxes.

    Having a firm statute of limitations on old debts requires no taxes.

    Requiring all hospitals to respect charity care guidelines and cease patient lawsuits requires no new taxes.

    The only tax that I really want for now is about $20 billion a year for the government to take over the ambulance industry. That should be a public function just like fire and police.

    That will not get rid of all medical debt, because many Americans are just too broke to pay for all their care at the point of service.

    But my proposed legal reforms will wipe out many debts!
    Bob Hertz

  3. Bob — It sounds like what you are really proposing is a comprehensive social safety net like they have in Western Europe, Canada, Japan, and Australia among other places. The problem is that the American middle class is not willing to pay half of its gross income in combined income, payroll, sales and property taxes. People in other countries are because there is a consensus that believes it’s worth the money and there is sufficient social trust in the ability of governments in those countries to provide services efficiently. The diversity of the culture here doesn’t see it that way.

    I would also note that three factors that make our healthcare system much more expensive than those in other countries are defensive medicine driven by our overly litigious society, way too much marginally useful or even futile care at the end of life which is much less prevalent in other countries and the fact that everyone who works in healthcare from doctors, nurses and techs, to executives, IT specialists, administrators, food service workers and transporters make 50% – 100% more than their counterparts in other countries. Under the Bernie Sanders Medicare for all approach, none of that would change. High prices for brand name and specialty drugs are also a problem but I think it’s overstated in the scheme of things. Multiple insurance plans add some administrative complexity but that’s the price we pay to have choices instead of a monolithic one size fits all government plan. We like choices in our society and culture.

    Insurance plans with low deductibles and out-of-pocket maximum amounts would come with high premiums that most people and even many employers outside of the public sector can’t afford. There are sensible approaches that could address the problem of out-of-network surprise bills like having hospitals work it out with anesthesiologists, assistant surgeons and emergency medicine doctors. Most Americans don’t want to pay to provide health insurance to illegal immigrants. People just don’t want to pay the taxes it would take to address the issues you raise and there simply aren’t enough high income and wealthy people to soak to give everyone else a free or at least an inexpensive ride.

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