The Trump administration on Thursday delivered two powerful blows to the Affordable Care Act, announcing that it would end controversial cost-sharing reduction (CSR) payments to health insurers even as the president signed an executive order meant to eliminate many of the requirements that the ACA imposed on health insurance policies.
While the obvious impact of these moves is likely to be on consumers in the nongroup insurance market, they also have the potential to carry very real consequences for anybody in the business of extending credit to consumers.
First, a little background.
In the best-case scenario, eliminating the CSR payments, which were designed to compensate insurers for providing discounts to their lowest-income customers, will cause premiums to spike. In the worst case, insurance companies will simply withdraw from the ACA exchanges entirely, leaving many consumers without any options at all for policies purchased with federal subsidies.
The executive order’s impact is more vague, but at its heart the proposal aims to alter the rules under which the ACA is implemented. One change the administration has telegraphed is that it wants to relax coverage requirements. That means insurers would be allowed to sell policies that don’t cover as many things as current policies do, or offer less cushion against financial disaster.
Some federal agencies, including the Congressional Budget Office and the Congressional Joint Committee on Taxation have questioned whether an insurance policy that doesn’t protect a consumer from catastrophic medical bills can rightly be called “insurance” at all.
And it’s more than just a debate over semantics, because there is good evidence for what happens to people when they get sick and don’t have that kind of protection: They go bankrupt.
This is where lenders come in. When people start facing serious financial straits, the pattern is well known. They max out their available credit, then they stop making payments on it. Then comes default on the car loan. Finally, the mortgage payments stop. At that point, the lenders find themselves in court, trying to salvage whatever they can of assets that are no longer performing.
That’s why dramatic changes to the ACA’s coverage requirements ought to concern lenders.
In 1981, only 8% of personal bankruptcies in the U.S. were attributable to medical expenses. Over the following two decades, though, that changed dramatically as fewer employers offered comprehensive medical insurance and more and more Americans were forced into the individual market, where skimpy and restrictive policies were often the only affordable option. Alternatively, some went without insurance entirely.
By 2001, the predictable consequences were plain to see. According to a study in the American Journal of Medicine the percentage of personal bankruptcies attributable to medical expenses had jumped to 46.2%. By 2007 a follow-up study found that they had spiked to 62.1%.
The AMA study, in analyzing the subjects in the study, found that “most medical debtors were well educated, owned homes, and had middle-class occupations. Three quarters had health insurance.”
In other words, they were probably the kind of people a lender would consider a good prima facie credit risk. But they went bankrupt anyway.
To be sure, there is always an element of uncertainty in loan underwriting, and that tends to get priced into the cost of credit. But there is strong evidence to suggest that passage of the ACA — particularly its requirements that insurers make certain types of coverage standard in all of their policies, and that they eliminate the lifetime limits that left many sick Americans no option other than the bankruptcy courts — contributed to the notable decline in personal bankruptcy filings.
For lenders, that’s the real rub. One of the benefits of the Affordable Care Act was that, even if it didn’t eliminate medical bankruptcy, it reduced the probability that any given borrower would face it. If the Trump administration succeeds in having many of the law’s protections taken away, lenders can expect at least two things to happen.
First, they can reasonably expect to see an increase in defaults among loans already on the books as a larger number of debtors start to face higher medical bills due to narrower insurance coverage.
Second, they will have to adjust their underwriting standards to reflect a new reality. Or perhaps more accurately, a return to an older one, in which medical bankruptcy once again becomes a major threat to the well-being of average Americans.