(Bloomberg View) — A recent article in Consumer Reports said that the Affordable Care Act, better known as Obamacare, has helped reduce personal bankruptcies, which have fallen by about half since 2009. The article also cites a bankruptcy lawyer who reported a dramatic decline in the number of clients who turn to the courts because they’re unable to pay their medical bills.
It’s important to take conclusions like this with a grain of salt. There were other factors that probably had a lot to do with the fall in personal bankruptcy. Chief among these was the recovery from the Great Recession. Economists who study personal bankruptcy tend to find that recessions are one of the biggest drivers. Also, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, a law intended to make it harder to file for bankruptcy, might be exerting a slow, long-term effect.
Still, it would be a mistake to discount the ACA. Personal bankruptcy filings hovered at about 5 per 1,000 Americans from the mid-1990s through 2010, but Consumer Reports’ numbers imply a current rate of less than 2.5 per 1,000 — a decrease of more than half that probably can’t all be explained by good economic times:
What’s more, economists have found that Medicaid expansion under the ACA reduced unpaid bills and debt-collection balances. So Obamacare really does seem to be reducing economic risk for a large number of Americans.
That’s important, because reducing personal risk is an idea that has been sorely neglected by economists and policy makers alike.
We now know that middle-class incomes have been stagnating during the past few decades. But personal risk means that even that trend is understated. Because most people are risk-averse, economic insecurity represents a real cost that makes people poorer than their wages alone would suggest.
Economists often dismiss the idea that risk represents a real cost to the average family. They draw a distinction between aggregate risk, which affects the whole economy, and so-called idiosyncratic risk, which affects only specific individuals. The latter kind of risk, many economists will tell you, can be eliminated by insurance markets — everyone can agree to pay money into a pool when they’re doing well, and take money out of the pool in bad times. Voila — goodbye personal risk.
But there are two problems with this line of thinking. First, insurance markets aren’t always available. For example, having your pay cut is a real risk, but we don’t see companies offering wage insurance. Nor do people buy unemployment insurance beyond what the government forces companies to provide. Problems such as adverse selection and moral hazard mean that even where insurance markets do exist, such as in health care, those markets will not always be available to all buyers — a problem that the ACA was intended to correct, by forcing insurers to cover those with pre-existing conditions.