By Daniel Gordon, Managing Director, GLD Partners
As pain and suffering caused by COVID-19 continues to expand, there is now talk out of Washington, D.C. of a fourth stimulus package to help financially imperiled workers and small businesses that face imminent financial annihilation. Much like any large legislative undertaking, extraneous special interest financial requests are circulating among the halls of Congress. But unlike special interest and industry bailout requests, one area that is deserving of Congress’ attention is the tremendous burden of medical debt in the United States and the growing threat that it poses to a large swath of the American population and the chance for future economic rebound.
Medical debt is unique from other consumer debt in many respects. Unlike almost any other financial obligation, it is most often involuntary. Rather than “signing up” for medical indebtedness, it is typically foisted upon people who require hospitalization and medical treatment for emergencies, accidents, or sudden illness. Surprisingly, medical debt is not reserved for the uninsured. In fact, recent surveys reveal that one in five of those with health insurance have had difficulty paying their medical bills.
A recent study by the Kaiser Family Foundation revealed that of those surveyed who reported having health insurance, 75 percent claimed that the amount they had to pay for insurance copays, deductibles, or coinsurance was more than they could afford. After all, when a patient arrives unconscious in an emergency room, the last thing that anyone asks is whether the ER doctor is considered “in network” for their insurance plan. The demographic breakdown of medical debtors is diverse and disturbing. Not surprisingly, those with lower to moderate incomes report having problems paying their medical bills. Millennials comprise a significant portion of the medical debtor cohort, as do single women. Much like COVID-19, medical debt threatens the entire population but causes significant damage to those who are most vulnerable.
One of the insidious challenges of medical debt is not that people consume medical services and don’t pay for them but rather that medical billing is notoriously convoluted, confusing, and inaccurate. Doctors and other service providers whose fees are billed by hospitals are rarely aware of the amounts being assessed. Hospitals, too, recognize that most of the balances due from patients after insurance reimbursement are uncollectible. But hospitals rarely want to be collectors of the debt for which they bill out of fear of jeopardizing their reputations as providers of care (and risking that questions might be asked about billing practices and calculations).
Instead, they often sell these balances for pennies on the dollar to a cottage industry of medical collection firms. These firms pursue the balances with aggressive tactics often including harassing collection calls, litigation, and wage garnishment. Shockingly, the most aggressive collector of medical debt is not a private collection agency but the United States government. The federal government collects on medical debt owed by civilians treated at U.S. military hospitals – treatments that often arise because U.S. military hospitals have trauma centers that treat emergencies that cannot be managed by small, local hospitals. Federal law prevents U.S. military hospitals from compromising medical debts. Once the military hospital has exhausted its collection efforts, the balances are transferred to the U.S. Treasury, which then seizes tax refunds and uses other efforts to collect monies due.
Such collection practices by hospitals and the U.S. government are misguided and actually end up placing further burdens on America’s health care and economic systems. According to an ADP report, 1.5 percent of American employees suffer a wage garnishment due to unpaid medical expenses. The Urban Institute reports that the average amount of medical debt that is owed in the United States is $681; in a country where 40 percent of Americans lack $400 in savings to cover financial emergencies, the pain of medical bills is felt every day.
The burden can be so overwhelming that it forces a medical debtor into bankruptcy. A study by then Professor Elizabeth Warren looked at the relationship between medical debt and bankruptcy filings. The study concluded that in 2009, over 60 percent of consumer bankruptcies were related to medical debt. As a result of medical debt burdens, nearly 70 percent of those surveyed by the Kaiser Family Foundation reported that they reduced spending on food, clothing, and basic household items. And many of those with medical debt reported delaying spending on health care, forgoing preventative care and placing themselves at risk in the future for emergency treatment (and even more medical debt).
COVID-19 threatens to explode existing medical debt balances. With the exponential growth in the number of infections and resulting hospitalizations, many COVID-19 survivors will end up owing large amounts of medical debt. The Trump administration recently announced that the federal government would cover the cost of COVID-19 treatment for uninsured Americans. This is an important first step but wholly inadequate when compared to the magnitude of the problem.
There exists a unique opportunity for the federal government to address the scourge of medical debt as part of a future stimulus package. First, as part of any “bailout” or supplemental funding for hospitals and medical centers, these institutions should be required to forgive any balances arising from COVID-19 treatment beyond what is paid for by insurance companies. Second, federal law needs to change with respect to how medical debt is treated and collected. Hospitals and medical institutions – including pharmaceutical companies – that receive any form of government funding should be precluded for selling medical debt balances and should be incentivized to “write off” debt as soon as it is deemed uncollectible. If they wish to try to collect these balances, they should be required to do so themselves, understanding full well the reputational risk and burden that such collection efforts impose.
There should also be new federal laws designed to ensure the accuracy of medical billing and imposition of liability for institutions that over-bill or bill inaccurately. The statute of limitations for collection of medical debt should also be limited, and the maximum amount of medical debt that can arise from a given procedure or treatment should be capped based on a patient’s income. This would significantly reduce the financial burden on lower- and middle-income households and reduce the number of medical debt bankruptcies and related collection efforts.
We all long for the COVID-19 pandemic to come to an end and for economic and social life in the United States to return to normal. The economic devastation that has been imposed on working class families in this country is incalculable. They will need extensive assistance, relief, and financial support in order to recover. A significant and appropriate way to offer such support would be to address the burden of medical debt. To disregard it risks a financial pandemic that no one can afford.
Daniel Gordon is a Managing Director at GLD Partners LP, an investment firm based in Los Angeles, California.
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