The medical debt crisis

Kamala Harris offers relief for old debts. Trump/Vance "concept of a plan" would make things worse. There is a solution.

It is disheartening to get slapped with a large, unaffordable hospital bill after a serious illness. It is even worse to get sued for unpaid bills.

Anxiety, anger, fear, depression. Those of us who are well off and well-insured can only imagine the emotional distress felt by the estimated 20 million people, mostly poor or poorly insured, who are burdened by an estimated $220 billion in medical debt. KFF Health News, in its ongoing reporting on the medical debt crisis, estimated over 100 million people are burdened with unpayable health care bills.

Medical debt is not just an economic problem for these families. It’s a health care problem. Emotional distress makes illness recovery more difficult; it lengthens its duration; and it often exacerbates the underlying chronic conditions that led to illness and hospitalization in the first place.

Roots of the crisis

The causes of excessive medical debt are rooted in the nation’s inadequate health insurance system. First, the U.S. still has 27 million people or about 8.2% of the population without health insurance. When someone uninsured winds up in the hospital and can’t afford the bill (where the average cost per stay in 2019 was over $14,000, according to the CDC), they either go into debt, get sued for non-payment or become a charity case, which is an impolite way of saying the cost of their care is spread across the bills of the hospital’s insured customers.

Second, most private insurance plans and Medicare’s basic plan do not cover the full cost of a hospital stay. Medicare’s Part A (hospital care) deductible is $1,632 in 2024. About one in 10 Medicare beneficiaries do not purchase supplemental plans to cover some or all of those costs.

Meanwhile, over half of private industry workers with employer-sponsored health insurance are now in high-deductible plans, which the IRS defines as having an annual deductible of $1,650 for an individual or $3,300 for a family. In a country where 40% of the population does not have sufficient cash to pay a $400 bill, those deductibles are unaffordable. Even when employers offer health savings accounts to cover unexpected bills, most HSAs depend on regular employee contributions, which leaves them woefully underfunded. This isn’t surprising given that most people sign up for high-deductible plans because of their low upfront premiums without giving much thought to how they’ll pay the deductibles.

Most efforts to deal with the medical debt crisis ignore these root causes. The Kamala Harris campaign has called for medical debt forgiveness, which might solve yesterday’s problems but does nothing to stop the accumulation of future debts. J.D. Vance’s attempt this past week to fill in the blanks of Donald Trump’s “concept of a plan” for replacing Obamacare would make the medical debt crisis worse: It would allow healthy individuals to buy skimpy plans, which would leave them with even larger, more unaffordable bills when illness requiring hospitalization strikes.

A handful of states are moving forward with their own backwards-looking versions of debt cancellation. For instance, North Carolina, in a move praised by candidate Harris in a joint appearance with Democratic Gov. Roy Cooper last month, has offered hospitals nearly $4 billion in Medicaid expansion money over the next two years in return for cancelling a comparable amount of medical debt and setting up a low-income assistance program.

Progressive politicians in Washington have their own backwards-looking take on the issue. They are pushing the Internal Revenue Service to crack down on non-profit hospitals that fail to provide adequate debt relief when discharged patients can’t afford their bills. A study on the JAMA Network website this week estimated the nation’s nearly 3,000 non-profit hospitals received over $37 billion in tax benefits in 2021 from their tax-exempt status, with over half coming from their exemption from state and local property, sales and income taxes.

The empire strikes back

The American Hospital Association, which represents non-profit hospitals, fired back this week with a study conducted by the consulting firm EY (the former Ernst & Young). It claimed non-profit hospitals derived just $13.2 billion in tax benefits in 2020, yet provided $129 billion in “community benefits,” which is the IRS’s amorphous phrase for what hospitals must provide to justify their continued tax-exempt status. The AHA called it “a great return on investment.”

The study is disengenuous on two counts. First, it only counted the value of the federal income tax exemption. It ignored the value of state and local tax breaks, which are significantly larger.

Second, nearly half of its community benefits came in the form of financial assistance, unreimbursed Medicaid, and “other unreimbursed costs from means-tested government programs.” This claim for community benefit reflects the fact that Medicaid and other government programs pay less than the actual cost of care, while private insurers and self-insured employers on average pay a lot more.

But what is the actual cost of care and does the difference between that and what government programs pay actually lead to losses?

The government through its “notice and comment” rulemaking process tells hospitals and doctors what it will pay for particular services. These are usually the lowest rates. Providers negortiate rates with insurers. Each gets a different rate with preferential rates being given to payers that bring in a lot of patients. On average, though, they pay about 2 1/2 times what Medicare pays, according to studies that Rand performs periodically. Hospitals also have a “charge master” rate, which is like the rack rate in a hotel: No one pays it; it only exists so the hospital can tell all of its payers what a great deal they’re getting compared to the rack rate.

In other words, hospital pricing is like airline pricing. Everyone pays a different price. But all those payers combined pony up enough cash to cover the total cost of care. Since most non-profit hospitals in most years earn a surplus (that is, their revenue exceeds costs), those lower payments from Medicaid and other government programs do not lead to “unreimbursed costs.” The shortfall is being paid by the privately-insured, who pay higher rates. The same is true for financial assistance programs and debt relief. As long as the hospital remains profitable, the government programs paying less are not being subsidized with charity care.

The one group of hospitals that deserve to declare unreimbursed care as a community benefit are so-called safety net hospitals, usually in cities, which serve mostly Medicare and Medicaid patients and have few privately-insured customers. But they don’t receive the lion’s share of the tax exemption benefits. The tax exemption is universal. It goes to well-heeled non-profits serving rich enclaves and middle-class suburbs as well as inner cities.

When I was new to reporting on the hospital sector, I learned from consultants in the field that the vast majority of non-profit hospitals didn’t have cost-accounting departments. Their financial officers often had no idea which particular service lines (cardiology, oncology, urology, nephrology, etc.) were making money or losing money. If that’s still the case, how can they know what the actual cost of care is?

The IRS’ rules for calculating unreimbursed costs encouraged this willful blindness. It says “use the organization's most accurate costing methodology (cost accounting system, cost-to-charge ratio, or other) to calculate the amounts entered.” I suspect some hospitals may even use the charge master rates in calculating their “unreimbursed costs” from Medicaid and other government programs. If I was still an editor, I would have some young investigative health care reporter looking to make their mark in the field look into it.

Ending medical debt is the only solution

If the flaws of the existing health insurance system is the cause of the problem, then ending the medical debt crisis will depend on greater regulation of health insurance.

High deductible plans have been a fiscal disaster for millions of low- and moderate-income families burdened by a costly disease. The entire purpose of insurance (health, fire, accident) is to prevent financial calamity when disaster strikes. High-deductible plans only make sense for people who can afford to pay the deductible out-of-pocket. Most people can’t.

This is true for Medicare just as much as it is for private insurance. Medicare either needs to expand benefits to eliminate the need for supplemental plans; or, it can regulate and/or subsidize supplemental plans so that there is universally take-up.

Private employers and insurers who cover the under-65 population need to cover a far higher percentage of the total cost of care. The government should set rates for their plans and subsidies for Obamacare plans that never allow the total paid out-of-pocket in any year for premiums, deductibles and co-pays to go over a fairly low percentage of annual income.

Only when we have federal oversight of the entire health insurance system can the nation begin addressing the ultimate root cause of the medical debt crisis, which is the high cost of care. That is a subject I’ll turn to next week.

To all my readers who’ve gotten this far, have a great weekend!