A Solution to the Health Care Crisis

Imagine that a family of four having a median income and an average amount of debt gets hit with a $100,000 medical bill after Dad is injured in a car accident.  But for this medical bill, the family would otherwise be able to make their credit card payments, car payments, and mortgage payments without any problem.  But now, with a six-figure hospital bill to pay, and with debt collectors hounding them, the family can see only one real option:  bankruptcy.

Under the current bankruptcy law, in order to file a Chapter 7 bankruptcy (i.e. total liquidation) or a Chapter 13 bankruptcy (i.e. individual reorganization), the debtor must list all of his/her creditors.  The practical result of such a policy is that this family will receive a discharge of not only their hospital bills, but of all of their other debt as well (unless reaffirmation agreements are approved by the Court, which generally will not happen with respect to unsecured debts).  Therefore, not only will the hospital who saved Dad’s life see little chance of recovering their losses, so will the credit card companies who otherwise would have been paid had this accident not occurred.

The prodigious number of medical-related bankruptcies are having a detrimental effect on our economy.  Medical service providers are deprived of their rightful compensation whenever a patient files for bankruptcy.  To offset their losses, these medical service providers must pass their uncollected costs to other patients by augmenting the average prices for their services.  This, in turn, places additional financial pressure upon the other patients, increasing the probability that they, too, will file for bankruptcy. Alas, the cycle repeats itself, creating an economic maelstrom for the other creditors of these financially-strapped patients.

As finance companies and banks see their debts discharged as the proximate result of these medical-related bankruptcies, they must raise their finance charges to offset their losses, yielding more bankruptcies across-the-board, for non-medical debt as well.

The solution to this problem lies not in socializing medicine, nor in creating new regulations for health insurance companies, nor in keeping Obamacare in force.  Rather, the solution can be reached by amending the bankruptcy code.

Presently, there are six different types of bankruptcy protection afforded under federal law.  Chapter 7 is a total liquidation for individuals or businesses.  Chapter 9 is for municipalities.  Chapter 11 is for business reorganizations.  Chapter 12 is for farmers and fishermen.  Chapter 13 is for individual reorganizations.  Chapter 15 is for other special circumstances.

This proposal would create a new chapter, hereinafter referred to as “Chapter 10” (Since this chapter presently does not exist, I have italicized and underlined all references thereto to avoid confusion.).

Under the proposed Chapter 10 bankruptcy protection, only medical-related debt will be included in the filing.  Yes, the debtor will still have to file schedules listing all of his current debts to show what his/her current situation is like.  However, no creditor—save for those seeking compensation for medical obligations—will be listed on the creditor’s matrix.  Therefore, as a practical result, the automatic stay from collections, garnishments and litigation will not extend to anyone other than medical-related creditors, and no other debts will be discharged.  In effect, this creates a firewall, bifurcating medical-related debt from other consumer debt, affording a measure of protection to banks and other lenders.

After the Chapter 10 asset and liability schedules are filed and notice is sent to the various medical service providers, each medical service provider will have to file a proof of claim just as he/she/it normally would under a Chapter 7 or Chapter 13 filing.  In turn, the Court will determine what percentage of the medical debt, if any, will be discharged after evaluating the ratio of the debtor’s income to his expenses.  Although the Court will have broad discretion, the new Chapter 10 will set guidelines for such a determination.

From the standpoint of the debtor, the bankruptcy filing will be no different than a Chapter 13 individual reorganization.  The portion of the medical debt that is nondischargeable will be repaid over the course of five (5) years pursuant to the terms of a payment plan, which will be proposed by the debtor’s attorney in accordance with the aforesaid Chapter 10 guidelines. Once the payment plan is approved, the Court will enter a wage withholding order requiring the debtor’s employer to make periodic plan payments to the Chapter 10 trustee.

At first blush, this seems like a miniaturized Chapter 13 bankruptcy.  However, the Chapter 10 trustee will have one additional responsibility.  The new Chapter 10 trustee will act as a claims adjuster for a national insurance pool to reimburse medical service providers for a portion of their losses.

Backed by the Full Faith and Credit of the United States Government, the Chapter 10 insurance pool will be funded with an initial Congressional appropriation.  After Congress makes this initial infusion of capital, the Chapter 10 insurance pool will remain self-supporting as all plan payments collected under Chapter 10, as well as a portion of each Chapter 10 filling fee, will be placed directly into the insurance pool.  Finally, medical service providers will have the option of paying an annual premium to the insurance pool; those who voluntarily pay into this program will be afforded a greater reimbursement of their debts (i.e. a lower deductible) whenever their patients file for bankruptcy protection.

After the deadline for filing claims has passed and once the payment plan is confirmed, the Chapter 10 trustee will advance to the medical service provider a sum equal to the net-present-value of the future plan payments (less administrative fees) using a predetermined discount rate that will be indexed to the consumer price index.  This payment will be offset by the aforementioned deductible.

In exchange for this advance payment to the medical service providers, the Chapter 10 trustee will subrogate the medical service providers’ debt.  In other words, this debt will no longer belong to the medical service provider; it will now belong to the Chapter 10 trustee.  Then, if the debtor fails to make payments on time, the Chapter 10 trustee will be able to begin other collection activities, such as garnishments and attachment, for the full debt, just as if a Chapter 13 plan had “blown-up.”

When families  find themselves at the mercy of a towering hospital bill, they will still be able to seek protection from the bankruptcy court.  However, if they do, they will not perpetuate the present snowball effect we now see with rising health care costs.  Instead, as medical service providers get more of their charged-off bills paid, at a faster rate, average costs for healthcare will stabilize (at the very least) or decrease (at the very best), halting the vicious cycle of medical-related bankruptcies begetting other bankruptcies.

Incidentally, whenever a person files for Chapter 7 or Chapter 13 bankruptcy protection under this new system, an evaluation of their medical debt will be conducted.  To the extent that there is any medical debt, it will be governed under Chapter 10.

Each Chapter 10 trustee will be charged with the duty of compiling the number of filings each year grouped by the name of the debtor’s health insurance carrier, reporting the same to the Department of Health and Human Services.  HHS, in turn, will report this information to Congress.  Congress will then be able to evaluate whether private insurers are adequately providing for the needs of their insured.

Granted, this policy will not bring immediate relief to families such as the hypothetical one described above — at least not in the short term.  However, with all things being equal, this proposal will mitigate the rate of growth of aggregate health costs.

As the rate of health costs decrease, health insurance companies will require lower reserves to compensate for future health care outlays.  Eventually, these insurers, needing lower reserves, will have greater difficulty justifying high co-pays, deductibles, and/or premiums to government regulators. As such, new insurance products will be offered to reflect this positive trend.

As co-pays, deductibles, and/or premiums decrease, medical service providers will pass less of their unrecoverable costs to new patients, creating a positive snowball effect where costs are contained without the need for socialization of services.  Thus quality is maintained while accessibility and affordability are enhanced.