ometimes, all it takes is one bad fall for a working person with health insurance to be pushed into bankruptcy. Hundreds of thousands of Americans file for personal bankruptcy each year because of medical bills - even though they have health insurance, according to a new study by Harvard University legal and medical researchers. Advertisement “It doesn’t take a medical catastrophe to create a financial catastrophe,” said Elizabeth Warren, a Harvard law professor who studies bankruptcy and is one of the authors of the study. The study, which is scheduled to appear today on the Web site of Health Affairs, an academic journal, provides a glimpse into a little-researched area connecting bankruptcy and medical costs. About 30 percent of people said they filed for bankruptcy because of an illness or injury, even though most of them had health insurance when they first got sick. Many lost their jobs - and their insurance - because they got sick, while others faced thousands of dollars in co-payments and deductibles and for services not covered by their insurance. One person cited in the bankruptcy study, for example, broke a leg, missed a couple of months of work and then had $13,000 in unpaid medical bills, though his employer-based health plan had already paid for much of his care, Ms. Warren said. Another respondent to the survey was able to pay for hospital stays for lung surgery and a heart attack but could not return to his old job. When he found a new job, he was denied coverage because of his pre-existing conditions, which continued to require costly medical care and contributed to his bankruptcy. Policy analysts say these findings underscore the limitations of the nation’s current system of providing health insurance largely through employers. Some argue that even for those with insurance, benefits can be ephemeral. “You can lose it because it’s tied to employment,” said Joseph Antos, a health policy researcher with the American Enterprise Institute, who said people were also at risk if their employers went out of business. To understand the effect of illness or injury on bankruptcy, the researchers surveyed 1,771 people who filed for bankruptcy in 2001 and interviewed 931 of them. They discovered a complex web of factors leading to bankruptcy, particularly as illness caused people to lose their jobs or cut back the hours they worked just as they were facing high medical bills. Many of those families, Ms. Warren said, then “endured a one-two punch.” The researchers examined those who specifically reported that their bankruptcies were precipitated by financial burdens caused by medical illness. They also included in a broader category of medical-related bankruptcy people who had more than $1,000 in unpaid medical bills at the time of the bankruptcy filing or had mortgaged their home to pay those bills. The researchers acknowledged that often there was no single reason why someone went bankrupt. “There’s definitely overlapping reasons,” said Steffie Woolhandler, an associate professor of medicine at Harvard and one of the authors of the report.
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People who seek bankruptcy lose many of their assets to creditors, but not their Social Security benefits, their company pensions or their 401(k) plans, which are all shielded by law. The question before the Supreme Court on Wednesday was whether the same protection extends to individual retirement accounts, the principal supplement to Social Security for millions of retirees. The bankruptcy law, drafted in the 1970’s before I.R.A.’s became such an important vehicle for retirement savings, is ambiguous, leading to contradictory rulings in federal courts around the country. The case argued before the court on Wednesday was an appeal by an Arkansas couple, approaching retirement age, who tried to shield the $65,000 in their two I.R.A. accounts when they filed a joint bankruptcy petition in 2001. The United States Court of Appeals for the Eighth Circuit, the federal appeals court with jurisdiction over Arkansas, ruled that the I.R.A.’s were not protected by the law. That court based its ruling on the wording of the statutory exemption, which preserves the debtor’s right to receive retirement payments “on account of illness, disability, death, age or length of service.” Since anyone willing to pay a 10 percent penalty can withdraw money from an I.R.A. for any reason, the appeals court said, these accounts do not fit in the category of retirement plans that pay “on account of” age or the other listed factors. Another federal appeals court, the Third Circuit, which sits in Philadelphia, has ruled that I.R.A. accounts are exempt from bankruptcy only when the account holder has reached 591/2, the age at which money may be withdrawn without penalty. Other courts have imposed no restrictions, reasoning that I.R.A.’s are similar enough to other retirement plans, all of which allow early withdrawals under at least some circumstances to fit within the definition and qualify for the exemption. Pamela S. Karlan, a Stanford Law School professor who argued for the couple, Richard and Betty Jo Rousey, urged the Supreme Court to interpret the statute in a “holistic” manner, in light of Congress’s evident purpose to preserve a secure retirement for people who declare bankruptcy. She noted that the Rouseys financed their I.R.A.’s with money they were required to withdraw from the pension plan at Northrop Grumman, where both worked until Mr. Rousey was forced into early retirement and Mrs. Rousey was laid off. Had they been able to remain in the pension plan, their retirement assets would have been protected. Colli C. McKiever, the lawyer representing Jill R. Jacoway, the trustee appointed to oversee the Rouseys’ affairs and pay off their creditors, said that “unfettered access” to an I.R.A. made it “much more like a savings account” than a retirement plan. Savings accounts are not shielded from creditors in a bankruptcy. The 10 percent penalty imposed by the Internal Revenue Service was “minimal” and did not operate as a bar to early withdrawals, she said. |