For the 12 GOP governors reconsidering their opposition to the Affordable Care Act’s (ACA) Medicaid expansion, reducing household debt and combatting financialization should be top priorities. Indeed, being trapped in debt over a medical bill is hardly conducive to conservative ideals like family formation, asset building, and entrepreneurship. The latest data on the growing severity of medical debt for the citizens of their states thus illustrates why expanding Medicaid is so important.
According to a new JAMA study, medical arrears are now the largest category of debt in collections and total over $140 billion, an increase of more than two-thirds over the previously accepted figure. Much of this debt is held in the form of short-term, high-cost loans provided by so-called “predatory lenders.” Such lenders are not politically popular, however attempts to regulate products like payday loans often cause more harm than good. Low-income households face genuine liquidity constraints, and as such the availability of short-term borrowing produces real, tangible benefits for the poor.
Rather than regulate the supply of short-term lenders, policymakers would be better off addressing the risks that drive the demand for costly borrowing in the first place. At the top of that list are financially ruinous medical expenses — the sort that would be eliminated outright if America adopted our proposal for universal basic health coverage. Expanding Medicaid in the 12 hold-out states is an important first step, both to reduce household indebtedness and to combat the financialization of the U.S. economy it has helped fuel.
Medical debt threatens family economic security
Medical debt has long threatened family economic security in the United States. Although the ACA capped out-of-pocket medical expenses and expanded coverage, driving a 50 percent drop in bankruptcy declarations from 2010 to 2016, it has clearly not eliminated affordability issues in American health care. 26.1 million Americans still lacked any kind of health insurance in 2019, and more than 137 million Americans in 2016 reported medical financial hardship. Medical debt and financial distress are especially acute in the 12 states that have not yet expanded Medicaid under the ACA. For families just above the poverty line, living in a Medicaid-expansion state reduced the chance of incurring any out-of-pocket medical expenses by 7.7 percentage points, and reduced the chance of spending more than 10 percent of income on out-of-pocket expenses by 4.1 percentage points compared to families living in a non-expansion state.
Medical coverage and affordability have only worsened as a result of the COVID-19 pandemic. According to the Commonwealth Fund, as 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 copayments and deductibles to reduce the cost of COVID-19 testing, treatment, and vaccination have stumbled. That has left thousands of patients and their loved ones facing unaffordable bills for desperately needed care. In fact, the situation has become so dire that many are calling for medical debt forgiveness.
Families facing mounting medical bills confront only difficult choices. Some have to choose between paying rent or paying their medical bills, while others seek help from friends and family. Savings accounts earmarked for college or retirement are siphoned off to pay down medical debt. Others still turn to the financial industry for high-cost loans.
The financialization of illness
Medical treatment is far more likely to be urgent or necessary than other consumer decisions. The lack of reliable health care coverage, combined with the unpredictability and nondiscretionary nature of medical costs, makes medical billing an easy target for lenders.
A Kaiser Family Foundation report observed that 34 percent of Americans who reported struggling with medical bills increased their credit card debt, 15 percent took out another type of loan, and 13 percent 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. Payday loans in particular constitute a major financial burden for borrowers because of their extremely high interest rates, which can be as high as 664 percent depending on the state. And although high-cost payday loans are often predatory, those expensive borrowing options are only available to people who already have basic assets, like a bank account or postdated check. Those who lack such assets are left with few options beyond letting the debt mount.
An early study of the problem likened the use of high-cost borrowing to pay off medical debt to the myth of Sisyphus. Workers stuck in low-wage jobs without health coverage face insurmountable challenges in paying for medical expenses and, when forced to resort to high-cost borrowing, fall into even deeper financial distress, just as Sisyphus was doomed to roll a boulder uphill only to see it roll back down.
The problem is so circular because medical debt is just one instance of the larger trade-off between social insurance and financialization. That is, the less a country spends on social insurance, the more likely its residents are to fall 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 substantive health coverage. In this context, the enormity of the medical debt that Americans carry makes sense. So how can the cycle be broken? How can predatory lenders and the products they offer be pushed out of the market?
Regulation: The false solution
Tighter regulation of short-term lending is unlikely to enhance Americans’ economic security. Instead, policymakers should focus on efforts to expand access to affordable health coverage, including Medicaid. Providing health insurance would not only tackle the problem of medical debt at the root; it’s also more politically feasible.
Consider that only 23 states have capped interest rates or prohibited payday loans altogether. This is despite the strong public support that a crackdown on predatory lending enjoys: a 2016 national survey found that 73 percent of voters were in favor of stricter national payday loan regulation. Whether desirable or not, reform tends to be stymied because payday lenders are a well-funded and powerful industry. For example, payday lenders contributed more than $400,000 to Tennessee lawmakers in the months before and after they passed 2014 legislation allowing loans with an annual interest rate of up to 279 percent. The variety of political interests that are invested in the existence of high-profit payday lending thus constitute a major barrier to regulatory reform.
Ballot measures on capping payday interest rates also are expensive. The average petition cost of signature collection for 2020 initiatives was $2.1 million, almost double the average petition cost of $1.2 million in 2018. Holding referendums on such issues tends to be a last resort because of their high-effort, high-cost nature and because policymaking is assumed to be the duty of legislators. These challenges to regulating predatory lending mean that it should not be viewed as the main method by which to keep families out of medical-debt traps. Expanding access to health insurance is how to mitigate the impact of medical debt on family economic security.
Kill the weed at the root
Expanding Medicaid in the remaining 12 states or implementing some of the federal alternatives under consideration should be at the forefront of the discussion around reducing household debt. This would not simply make debt more affordable, which would be a temporary fix at best. Instead, coverage expansion would remove the demand for costly debt altogether, and thereby prevent short-term lenders from capitalizing on illnesses.
In addition to improving health outcomes, such measures also improve overall consumer financial health and credit-related outcomes. The ACA Medicaid expansion in Michigan was “associated with large improvements in several measures of financial health, including reductions in unpaid bills, medical bills, over-limit credit card spending, and public records (such as evictions, judgments, and bankruptcies).” Data from Oregon showed similar improvements. For example, a lottery-run Medicaid expansion in Oregon found that the treatment group, which received Medicaid, had “lower out-of-pocket medical expenditures and medical debt (including fewer bills sent to collection).” The national ACA Medicaid expansion reduced the amount of nonmedical debt sent to third party collection agencies by up to $1,000 per Medicaid enrollee and reduced the chance of acquiring medical debt by 20 percent.
The financial benefits of Medicaid expansion have existed since the ACA was implemented in 2014, but states save even more now because of recent incentives pushed by President Biden in the American Rescue Plan (ARP). From 2014 to 2017, Medicaid expansion created up to a 4.7 percent reduction in state Medicaid costs. In addition to these existing benefits, the ARP would create a combined $9.6 billion benefit to states that have not yet expanded Medicaid through a combination of additional incentives if they joined up starting in FY 2022.
There are clear financial reasons why expanding Medicaid is beneficial for states, but it also benefits the nation as a whole. Medicaid expansions direct families away from dipping into retirement savings prematurely or taking out equity loans on mortgages, reduce bankruptcy rates, and make it unnecessary for families to rely on other forms of public assistance. Addressing medical debt through Medicaid expansions, and ultimately through universal basic health insurance, can thus improve the health and upward mobility of struggling families while combatting financialization simultaneously.
Samuel Hammond is the director of poverty and welfare policy at the Niskanen Center.
Audrey Xu is a poverty and welfare policy intern at the Niskanen Center and a rising senior at Rutgers University.