Expand Medicaid, Crush ‘Predatory Lenders’ – How Medical Debt Fuels Financialization


For the 12 GOP Governors reconsider their opposition Medicaid expansion of the Affordable Care Act (ACA), reducing household debt and combating financialization should be top priorities. Indeed, being trapped in debt because of a medical bill is hardly conducive to conservative ideals such as family formation, asset building, and entrepreneurship. The latest data on increasing gravity medical debt for their states’ citizens illustrates why expanding Medicaid is so important.

According to a new JAMA study, medical backlogs are now the largest category of debt in collections and in total more $140 billionan increase of more than two-thirds compared to previously accepted digit. Much of this debt is held in the form of short-term, high-cost loans provided by so-called “predatory lenders”. These lenders aren’t politically popular, but attempts to regulate products like payday loans often do more harm than good. Low-income households face real liquidity constraints and as such the availability of short-term borrowing produces real and tangible benefits for the poor.

Rather than regulating the supply of short-term lenders, policymakers would be better off tackling the risks that drive demand for expensive borrowing first. At the top of this list are financially ruinous medical expenses – the kind that would be eliminated altogether if America adopted our proposed basic universal health coverage. The expansion of Medicaid in the 12 recalcitrant states is an important first step, both to reduce household debt and to combat the financialization of the American economy that it has helped to fuel.

Medical debt threatens family economic security

Medical debt has long threatened the economic security of families in the United States. Although the ACA capped medical expenses and extended coverage, driving a 50% drop in bankruptcy declarations from 2010 to 2016it clearly did not eliminate the affordability problems of American health care. 26.1 million Americans still had no health insurance in 2019, and more than 137 million Americans in 2016 reported medical financial difficulties. Medical debt and financial distress are particularly acute in the 12 states who have not yet extended Medicaid under the ACA. For families just above the poverty line, living in a Medicaid-expanding state reduced the risk of incurring medical costs in 7.7 percent points, and reduces the risk of spending more than 10% of one’s income on personal expenses by 4.1 percent points compared to families living in a state of non-expansion.

Medical coverage and affordability have only gotten worse due to the COVID-19 pandemic. According to the Commonwealth Fundas many as 7.7 million workers who lost their jobs in the pandemic-induced recession had also lost employer-sponsored health insurance for themselves and 6.9 million dependents as of June 2020. Efforts to waive co-payments and deductibles to reduce the cost of COVID-19 testing, treatment and vaccination have stumbled. This has left thousands of patients and their loved ones facing unaffordable bills for desperately needed care. In fact, the situation has become so serious that many are asking for cancellation of medical debt.

Families faced with rising medical bills are faced only with difficult choices. Some have to choose between paying rent or paying their medical bills, while others seek help from friends and family. Savings accounts intended for college or retirement are diverted to pay off medical debt. Still others turn to the financial sector for high cost loans.

The financialization of the disease

Medical treatment is much more likely to be urgent or necessary than other consumer decisions. The lack of reliable healthcare coverage, combined with the unpredictability and non-discretionary nature of medical expenses, makes medical billing an easy target for lenders.

A Kaiser Family Foundation Report observed that 34% of Americans who reported having problems with their medical bills increased their credit card debt, 15% took out another type of loan, and 13% borrowed from a payday lender. Lending Tree, a popular online lender, reported that the share of people seeking personal loans for medical bills on the site was 50 percent higher in the last full week of 2020 than in the same period of 2019. Personal loans in particular constitute a significant financial burden for borrowers due to their extremely high interest rates, which can go up to 664 percent depending on the state. And while high-cost payday loans are often predatorythese expensive borrowing options are only available to people who already have basic assets, such as a bank account or a post-dated check. Those who lack such assets have few options beyond letting debt accumulate.

A first study of the problem compared the use of high-cost loans to pay off medical debt to the myth of Sisyphus. Workers stuck in low-wage jobs without health coverage face insurmountable challenges paying their medical bills and, when forced to resort to high-cost borrowing, fall into even deeper financial distress, just like Sisyphus was condemned to roll a rock to see it come down.

The problem is so circular because medical debt is just one example of the larger trade-off between social insurance and financialization. In other words, the less a country spends on social insurance, the more its residents are likely to go into debt. As Monica Prasad explains, “European systems subsidize [struggling households] more through the social insurance system, while the United States allows them to borrow money and declare bankruptcy more easily. The demand for medical debt exists because many Americans lack reliable and substantial medical coverage. In this context, the enormity of the medical debt that Americans carry makes sense. So how do you break the cycle? How can predatory lenders and the products they offer be driven out of the market?

Regulation: The false solution

Stricter regulation of short-term loans is unlikely to improve Americans’ economic security. Instead, policymakers should focus on efforts to expand access to affordable health coverage, including Medicaid. Providing health insurance would not only solve the medical debt problem at the root; it is also more politically feasible.

Consider that only 23 states have capped interest rates or ban payday loans altogether. And this despite strong public support for a crackdown on predatory lending: a 2016 national survey found that 73 percent of voters were in favor of stricter national regulations for payday loans. Whether desirable or not, reform tends to be stalled because payday lenders are a powerful and well-funded industry. For example, payday lenders contributed more than $400,000 to Tennessee lawmakers in the months leading up to and following the passage of 2014 legislation allowing loans with an annual interest rate of up to 279%. The diversity of political interests vested in the existence of high-yield payday loans is therefore a major impediment to regulatory reform.

Election measures to cap payday interest rates are also costly. the the average petition cost for collecting signatures for 2020 initiatives was $2.1 million, nearly double the average cost of petitions of $1.2 million in 2018. Holding referendums on such issues tends to be a last resort due to their demanding and costly nature and because policy-making is supposed to be the duty of legislators. These challenges to the regulation of predatory lending mean that it should not be seen as the primary method of keeping families out of the pitfalls of medical debt. Expanding access to health insurance is the way to lessen the impact of medical debt on family economic security.

Kill the weed at the root

Medicaid Expansion in the remaining 12 states or implementing some of the federal alternatives under consideration should be at the forefront of the discussion on reducing household debt. It wouldn’t just make debt more affordable, which would be a temporary fix at best. Instead, expanding coverage would completely remove the demand for expensive debt and thus prevent short-term lenders from capitalizing on illnesses.

In addition to improving health outcomes, these measures also improve consumers’ overall financial health and credit-related outcomes. the Expansion of ACA Medicaid in Michigan was “associated with large improvements in several measures of financial health, including reductions in unpaid bills, medical bills, credit card spending over the limit, and public records (such as evictions, judgments, and bankruptcies)”. Data from Oregon showed similar improvements. For example, a Medicaid expansion by lottery in Oregon found that the treatment group, which received Medicaid, had “lower medical expenses and medical debt (including fewer bills sent to collections).” The National Expansion of ACA Medicaid reduces the amount of non-medical debt sent to third-party collection agencies for up to $1,000 per Medicaid enrollee and reduces the risk of acquiring medical debt by 20%.

The financial benefits of expanding Medicaid have been around since the ACA was implemented in 2014, but states are saving even more now thanks to recent incentives highlighted by President Biden in the US Bailout Package (ARP). From 2014 to 2017, Medicaid expansion created up to a 4.7% reduction in state Medicaid costs. In addition to these existing benefits, the ARP would create a combined benefit of $9.6 billion for states who have not yet extended Medicaid through a combination of additional incentives if they joined beginning in fiscal year 2022.

There are clear financial reasons why expanding Medicaid benefits states, but it also benefits the nation as a whole. Medicaid expansions prevent families from prematurely dipping into retirement savings or taking out mortgages, reduce bankruptcy rates, and prevent families from resorting to other forms of public assistance. Tackling medical debt through the expansion of Medicaid, and eventually universal basic health insurance, can thus improve the health and upward mobility of struggling families while simultaneously fighting financialization.

Samuel Hammond is the director of poverty and well-being policy at the Niskanen Center.

Audrey Xu is a poverty and welfare policy intern at the Niskanen Center and a graduate student at Rutgers University.


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