Medical Debts...and Their Forgiveness

This item was recently published through FiveThirtyEight’s newsletter:

Two New Yorkers in Ithaca raised $12,500 and sent it to a charity, which then purchased $1.5 million in medical debts for less than a penny on the dollar, and forgave them — 1,284 New Yorkers have had their debts forgiven thanks to these efforts. That’s wonderful and very nice and very Christmassy and all, but begs some larger questions, I think, about the state of health care in this country. [The New York Times]

If the claims have been ‘sold’ for a ‘penny on the dollar’, the seller considers them the least likely to be collected and at a high risk of not collecting any money to pay anything towards the debt.

What this also shows is that uncollected medical debts averaged $1,168 per person. This doesn’t seem like a huge amount, and if you’ve had any experience with medical bills, it seems really minuscule. Average medical expenditures are $10,000/person—and that’s why insurance premiums average about that amount. That’s the average, so the distribution of these debts is most likely that a majority are far less, and a minority of them are quite large. For example, we know most of the medical expenditures happen at end-of-life, which is less than 1 percent of all residents in the US.

If the majority of these uncollected medical debts are less than $1,000, why are they uncollected? According to the Kaiser Foundation, a third of the debt is based on chronic conditions and have built up over time and two-thirds is one-time (like end-of-life). Even so, the lower the household income, the less is its ability to pay from savings (and discretionary income if any considering the relatively low level of savings). Households with less than $25K income (about 25% of all households) had a median savings of $500–half of the average medical debt. Households in the next tier up to $45K (not quite 50% of all households) had a median savings of $1,500–about equal with the average medical debt. Even if the medical debt seems relatively small—or minuscule—it does mean that a significant portion of US households would struggle to pay them. The Federal Reserve Bank shows that 40% of adults couldn’t pay a $400 medical, car repair, house repair (and so on) bill.