Over half of the uninsured struggle to pay their medical bills. This suggest that expanding health care coverage may significantly mitigate financial distress faced by consumers, particularly those with lower incomes who have limited ability to bear the financial burdens that accompany adverse health shocks.
In ongoing research, joint with Daniel Grodzicki (Penn State) and Kenneth Brevoort (CFPB), Professor Martin Hackmann quantifies the effect of the recent Medicaid health insurance expansion under the Affordable Care Act (ACA) on financial health. The existing literature highlights that consumer welfare gains from health insurance arise from reductions in the mean and variance of out-of-pocket medical expenses. We argue that, although low-income uninsured individuals pay only about 20% of the cost of their care out-of-pocket, the overall benefit of insurance to them may be large. Specifically, we show that about 50% of unpaid medical bills are sent to collection agencies and reported to credit bureaus. In turn, this has a negative impact on credit scores and access to credit markets more generally. We calculate that the financial benefits of Medicaid double when considering these indirect benefits in addition to the direct reduction in out-of-pocket expenditures.
We evaluate the financial benefits to consumers in the context of one of the most controversial elements of the ACA: the Medicaid expansion. This reform sought to expand Medicaid eligibility to all individuals earning less than 138% of the federal poverty level. While this expansion was intended to apply nationwide, the Supreme Court ruled that the states had to be allowed to decide for themselves whether they would adopt the expanded Medicaid eligibility rules. As a result, only about half the states had signed on when the expansion went into effect in 2014, providing us with quasi-experimental variation in the Medicaid expansion.
Combining state-level variation from the Medicaid expansion with a nationally representative panel of over 5 million de-identified credit records, we find that the reform reduced the incidence of newly-accrued medical debt in collection by 30%. On average, the reform led to a large annual decline in accrued medical debt of $900 per treated person or 40% of health care utilization. This translates into an overall reduction of $3.4 billion in the two years following the reform.
Turning to the result on financial health, we find that the Medicaid expansion reduced the likelihood of becoming newly delinquent, improved credit scores, and reduced personal bankruptcies in particular among subprime borrowers. To measure the effects of improved financial health on the availability and pricing of credit, we add novel data on direct-mail credit offers from Mintel in conjunction with aggregated lender FICO rate sheets. Our estimates suggest large annual interest rate savings, predominantly on credit card debt and personal loans, of about $280 per treated person. This translates into $520 million in annual savings.
Finally, we turn to the effects on consumer welfare. To this end, we model uninsured individuals who derive utility from consumption and face a disutility from leaving medical bills unpaid. Disutility from unpaid medical bills captures costs like worsening credit options, the hassle of dealing with debt collectors, and the risk of legal action taken by creditors. The novelty of this framework is that Individuals choose optimally what portion of their medical expenses to leave unpaid. Combining the model with our empirical estimates, we find that the financial benefits of a mean and variance reduction in medical bills double when considering the indirect financial benefits.