Medicaid and Financial Health Kenneth Brevoort*

Daniel Grodzicki**

Martin Hackmann***

* Consumer Financial Protection Bureau (CFPB) ** The Pennsylvania State University & CFPB ***University of California at Los Angeles & NBER

July 2017

The views expressed are those of the authors and do not necessarily reflect those of the Consumer Financial Protection Bureau or the United States.

Health Insurance & Financial Wellbeing • An important goal of health insurance is to provide financial risk protection (Zeckhauser 1970).

Health Insurance & Financial Wellbeing • An important goal of health insurance is to provide financial risk protection (Zeckhauser 1970). • Often Americans report difficulty paying their medical bills (Hamel et. al. 2016) and the uninsured end up paying less than 20% of health care costs out of pocket (Finkelstein 2007).

Health Insurance & Financial Wellbeing • An important goal of health insurance is to provide financial risk protection (Zeckhauser 1970). • Often Americans report difficulty paying their medical bills (Hamel et. al. 2016) and the uninsured end up paying less than 20% of health care costs out of pocket (Finkelstein 2007). • Although some of the cost is forgiven as charity care, a substantial portion is billed to consumers.

Health Insurance & Financial Wellbeing • An important goal of health insurance is to provide financial risk protection (Zeckhauser 1970). • Often Americans report difficulty paying their medical bills (Hamel et. al. 2016) and the uninsured end up paying less than 20% of health care costs out of pocket (Finkelstein 2007). • Although some of the cost is forgiven as charity care, a substantial portion is billed to consumers. • Medical providers, who must provide emergency treatment (EMTLA 1986), often seek repayment via collections agencies.

Health Insurance & Financial Wellbeing • An important goal of health insurance is to provide financial risk protection (Zeckhauser 1970). • Often Americans report difficulty paying their medical bills (Hamel et. al. 2016) and the uninsured end up paying less than 20% of health care costs out of pocket (Finkelstein 2007). • Although some of the cost is forgiven as charity care, a substantial portion is billed to consumers. • Medical providers, who must provide emergency treatment (EMTLA 1986), often seek repayment via collections agencies. • Unpaid medical bills sent to collections affect uninsured individuals’ broader access to affordable credit (Brevoort and Kambara 2015).

Research Questions In this paper we study the financial effects of health insurance in the context of the ACA’s Medicaid expansion:

Research Questions In this paper we study the financial effects of health insurance in the context of the ACA’s Medicaid expansion: 1

How did the expansion directly impact the accrual of medical debt (collections)?

2

What role did the expansion play in reducing delinquency and insolvency among the uninsured?

3

How did diminished financial distress improve individuals’ access to credit?

4

What is the (relative) value of these better credit options to newly insured individuals?

Contribution & Related Literature 1

Our paper looks closely at the financial effects of insurance.

2

Using novel data in the context of a large national reform, we systematically assess the impacts of unpaid medical bills on consumer welfare.

3

We introduce an indirect credit channel and show that it is quantitatively as important as the direct effect on payments.

Contribution & Related Literature 1

Our paper looks closely at the financial effects of insurance.

2

Using novel data in the context of a large national reform, we systematically assess the impacts of unpaid medical bills on consumer welfare.

3

We introduce an indirect credit channel and show that it is quantitatively as important as the direct effect on payments.

Medicaid and Financial Outcomes: Finkelstein et. al. (2012); Mazumder and Miller (2016); Gross and Notowidigdo (2011); Hu et. al. (2016); Celerier and Matray (2016). Value of Insurance: Finkelstein(2007); Finkelstein and McKnight (2008); Finkelstein et. al. (2015); Cabral and Cullen (2016); Zeckhauser (1970). Medical Debt and Financial Distress: Dobkin et. al. (2016); Domowitz and Sartain (1999); Warren et. al. (2000); Mahoney (2015).

Unpaid (UP) Medical Bills (MB) & Welfare U =

max

0≤UP ≤MB

¯ + UP ), g 00 < 0, h00 > 0 g (Inc . − (MB − UP )) − h( D |

{z

Consumption

}

| {z }

MedicalDebt

¯ + UP ) = g (Inc . − CV ) − h(D ¯) CV : g (Inc . − (MB − UP )) − h(D

The Medicaid Expansion • Since its enactment in 1965, the Medicaid program mandated participating States to provide health insurance to low income individuals.

The Medicaid Expansion • Since its enactment in 1965, the Medicaid program mandated participating States to provide health insurance to low income individuals. • Prior to the Affordable Care Act (ACA) mandatory coverage groups principally included pregnant women, children, and their caretaker parents.

The Medicaid Expansion • Since its enactment in 1965, the Medicaid program mandated participating States to provide health insurance to low income individuals. • Prior to the Affordable Care Act (ACA) mandatory coverage groups principally included pregnant women, children, and their caretaker parents. • Under the ACA, the program expansion mandated States to provide insurance to all non-elderly individuals earning less than 138 percent of the federal poverty level.

The Medicaid Expansion • Since its enactment in 1965, the Medicaid program mandated participating States to provide health insurance to low income individuals. • Prior to the Affordable Care Act (ACA) mandatory coverage groups principally included pregnant women, children, and their caretaker parents. • Under the ACA, the program expansion mandated States to provide insurance to all non-elderly individuals earning less than 138 percent of the federal poverty level. • Initially, the ACA directed all states to adopt the new mandate.

The Medicaid Expansion • Since its enactment in 1965, the Medicaid program mandated participating States to provide health insurance to low income individuals. • Prior to the Affordable Care Act (ACA) mandatory coverage groups principally included pregnant women, children, and their caretaker parents. • Under the ACA, the program expansion mandated States to provide insurance to all non-elderly individuals earning less than 138 percent of the federal poverty level. • Initially, the ACA directed all states to adopt the new mandate. • NFIB vs. Sebelius upheld States’ rights to opt in to the program.

The Medicaid Expansion • Since its enactment in 1965, the Medicaid program mandated participating States to provide health insurance to low income individuals. • Prior to the Affordable Care Act (ACA) mandatory coverage groups principally included pregnant women, children, and their caretaker parents. • Under the ACA, the program expansion mandated States to provide insurance to all non-elderly individuals earning less than 138 percent of the federal poverty level. • Initially, the ACA directed all states to adopt the new mandate. • NFIB vs. Sebelius upheld States’ rights to opt in to the program. • The expansion became effective on January 1, 2014 with 19 states adopting at that time. Map

Empirical Design

Data Credit Reporting Data: CFPB Consumer Credit Panel (CCP)

• 1-in-48 sample of de-identified credit records (∼5 million). • The CCP contains information on individual trade lines. • Observe date obligations appear on records • Identify debt (collections) from medical providers & quantify flows into/out of delinquency.

• We focus on non-elderly adults quarterly from 2011Q3-2015Q4. Summary Statistics

Data Credit Reporting Data: CFPB Consumer Credit Panel (CCP)

• 1-in-48 sample of de-identified credit records (∼5 million). • The CCP contains information on individual trade lines. • Observe date obligations appear on records • Identify debt (collections) from medical providers & quantify flows into/out of delinquency.

• We focus on non-elderly adults quarterly from 2011Q3-2015Q4. Summary Statistics

Pricing Data: Mintel & MyFico • Mintel Comperemedia (Cards & Personal Loans) • Nationally Representative (monthly) survey of credit offers • Includes repeated cross section of 2,000 households, monthly. • Captures all direct-mail credit offers made to those households.

• MyFico (Mortgages & Auto loans) • Rate sheet data from Fair Isaac Co. (FICO) • Aggregation of large lenders’ pricing of secured loan products.

Decline in Medical Debt

The expansion reduced the accrual of medical debt in treatment states on the order of 30-40 percent. Non Medical Collections

Federal Exchanges

Heterogeneous Treatment

The decline in medical debt was more pronounced in Census Tracts with a great proportion of newly eligible adults. Distributional Effect

Overall Decrease in Bills & Repayment All 1st Quartile (1) (2) Annual Decrease in Accrued Medical Collections Average Per Person ($) 46.53 12.42 Total ($Billions) 2.39 0.26

2nd Quartile (3)

3rd Quartile (4)

4th Quartile (5)

28.97 0.41

61.57 0.59

128.65 0.88

Proportion of New Medical Collections Repaid After 2 Years (p.p) Repaid 9.03 10.55 10.12 Repaid or Removed 51.46 48.07 49.49

10.27 52.40

6.90 53.01

Expected Decrease in Per Person Medical Debt Payment ($) Lower Bound 4.20 1.31 Upper Bound 23.94 5.97

2.93 14.34

6.32 32.26

8.88 68.20

CCP Population 18-64 (Millions)

14.10

9.56

6.82

51.34

20.87

• The expected annual decline in accrued medical debt 46.53 .04 ≈ $1, 135 per newly treated person. • Only a small portion of this decline translated to a decrease in payments. Reduction in Credit Card Debt

Indirect Effect: Delinquencies

The expansion also led to a decline in the propensity to become delinquent, with a stronger effect among already distressed individuals.

Bankruptcies

Bankruptcy filings declines by about 8 percent among already distressed individuals, leading to 25,000 fewer filings per year. Bankruptcy Table

Credit Scores

Given fewer delinquencies and bankruptcy filings, credit scores among individuals in treatment states improved as a result of the expansion. Distribution

Changes in Credit Terms Using data on credit offers and pricing, we measure the impact of the reform on the credit terms faced by borrowers:

DiD

Pre-Expansion Mean

Mintel Comperemedia Credit Cards Personal Loans Pr(Receive) Interest Rate Pr(Receive) Interest Rate (1) (2) (3) (4) 0.0153 -0.5825 -0.0405 -1.0821 (0.0110) (0.2000) (0.0111) (0.2883) 0.67

15.19

0.1100

8.8800

MyFico (Imputed) Auto Loans Mortages Interest Rate Interest Rate (5) (6) -0.0075 -0.0024 (0.0046) (0.0005) 7.3311

4.2003

Due to improved financial health, credit terms among individuals in treatment states improved substantially.

Value of Financial Health: Simulation To place a dollar value on improved financial health, we simulate a debt refinancing for individuals in treatment states given improved terms of credit. For unsecured loans we also net out any benefits from increased repayment.

Per Person ($) Total ($ Millions)

Credit Cards (1) 14.33 735.65

Personal Loans (2) 3.79 194.64

Auto Loans (3) 0.38 19.50

Mortgages (4) 1.27 65.02

Total 19.77 1,014.81

Our simulation suggests that improved financial health resulting from the policy saved individuals about $20 annually in interest payments, $20 .04 ≈ 480 per treated person, or $1 billion overall. Simulation Details

Rate Sheets & Delinquency

Annual Financial Benefits of Medicaid

Mean Effects Credit Channel (Indirect) Out-of-Pocket (OOP) Spending (Direct) Compensating Variation (CV) CV Ratio: OOP

Variance Effects Risk Premium (RP) Rick Premium OOP Benchmark (RP OOP) Ratio: RPRP OOP Total Benefit Total Spending (Coughlin 2014) Ratio: Benefit/Spending

Revealed Preference (1)

Direct Approach (2)

576 480 1,056 2.2

482 480 962 2.0

600 240 2.5

(600) (240) (2.5)

1,656 2,400 0.69

1,562 2,400 0.65

RP Approach Details

Conclusion • We find that the Medicaid expansion reduced medical bills as well as the propensity of individuals to become delinquent and/or insolvent, especially for those already financially vulnerable. • Lower delinquency risk, and higher credit scores, resulted in better access to cheaper credit, the credit channel, which we value at $482 per newly insured individual, or $1 billion, annually. • We estimate this channel roughly doubles the financial value of insurance to individuals. • This estimate is likely conservative given that we do not consider hassle and psychological costs of collections, the cost of legal fees related to collections disputes, or bankruptcy costs (∼ $3,000 per filing.)

Thank You!

Backup Slides

Institutional Details: Map VT

WA MT

ME

ND

NH

MN OR

SD

ID

MI

WY IL UT

CO

CA

IN

OH WV

KS

CT RI NJ DE MD

PA

IA

NE NV

MA

NY

WI

MO

VA

KY

DC

NC TN AZ

OK

NM

SC

AR MS

TX AK

AL

GA

LA FL

HI

Early Adopters (6 States including DC)

Adopted 1st of January 2014 (19 states)

Late Adopters (7 States)

Not Adopting as of January 2017 (19 States)

Back

Empirical Design We exploit the quasi natural experiment provided by states’ option to expand Medicaid and apply a DiD approach. We use the following basic specification k yict = αkc + ηkt + βk · (Postk · Adopts(c ) ) + εkict k Here, yict denotes the respective outcome k for record i in census tract c in year-quarter t. The specification includes census tract fixed effects αkc and quarter-year fixed effects ηkt . Postk and Adopts(c ) are indicator variables that turn on in the post-reform period and expansion states (census tracts), respectively. Standard errors are clustered at the tract level.

We cannot identify newly insured individuals given our data. As a result, we interpret our Difference-in-Difference results as Intent-to-Treat (ITT) effects. Back

All (1) New Medical Collections Receiving (p.p.)

4.72

Average Number

1.66

Average Value ($)

1,187

Pre (2)

Post (3)

Not Adopting Adopting Not Adopting Adopting Not Adopting Adopting

5.87 3.48 1.68 1.62 1,229 1,041

5.82 3.06 1.70 1.60 1,317 956

Delinquency Rate (p.p.) Any

6.33

Not Adopting Adopting

6.55 6.19

6.47 5.98

Bankruptcy Filing Rate (p.p.) Any

0.16

Not Adopting Adopting Not Adopting Adopting Not Adopting Adopting

0.19 0.18 0.11 0.14 0.08 0.04

0.14 0.13 0.08 0.10 0.07 0.04

Not Adopting Adopting

667 683

671 688

Not Adopting Adopting Not Adopting Adopting Not Adopting Adopting Not Adopting Adopting Not Adopting Adopting Not Adopting Adopting

3,702 4,323 777 614 45,868 56,459 5,496 4,845 1,461,238 1,180,228 13,309,290 10,605,020

3,871 4,296 909 733 46,917 57,613 6,759 5,775 1,441,995 1,145,167 10,712,450 8,422,899

Chapter 7

0.11

Chapter 13

0.06

Consumer Risk Credit Score (Fico)

677

Non-Medical Debt Obligations ($) Credit Cards 4,013 Personal Loans Mortgages Auto Loans Records Observations

761 51,034 5,702 2,724,784 43,049,659

Back

Robustness 1: Non-Medical Collections

Notes: The figure shows trends in the incidence, frequency, and value of newly accrued non-medical collections. Data are from the CFPB’s Consumer Credit Panel. Trends are quarterly means of newly accrued non-medical collections for treament and control states, respectively, and are normalized by the pre reform mean for each group. Vertical lines highlight the implementation date of the expansion - January 1st , 2014. Back

Robustness 2: Federal Exchange States

Notes: The figure shows trends in the incidence, frequency, and value of accrued medical debt. Data are from the CFPB’s Consumer Credit Pane. Trends are quarterly means of newly accrued medical loans for treament and control states, respectively, and are normalized by the pre reform mean for each group. Vertical lines highlight the implementation date of the expansion - January 1st , 2014. Back

Distributional Effect

Back

Reductions in Credit Card Debt

Back

Bankruptcy Table

Percent Filing with Medical Debt Medical Debt at Filing Mean if Medical Debt >0 Median 75th Pctl. 90th Pctl. 99th Pctl.

All (1) 32.87

(Base Credit Score < 620) (2) 40.58

(Base Credit Score > 620) (3) 13.41

1,980 556 1,559 3,954 23,927

2,117 578 1,632 4,148 23,385

1,698 387 1,032 2,820 24,844

Other Debt at Filing Credit Cards Personal Loans Auto Loans Mortgages

8,360 1,169 4,853 48,557

7,351 1,002 4,173 42,258

10,905 1,592 6,567 64,451

Back

Credit Score: Distribution

Back

Simulation 1: Details For each of the four products, we assume that consumers could have refinanced their existing balances at the average interest rate over the pre-expansion period covered by our data (the ”baseline” interest rate). Based on this assumption, we calculate the required monthly payment (Pm ) to refinance balances at the end of 2013Q4 Pm = B0 ·

r · (1 + r )m

(1 + r )m − 1

We assume fixed-payment loans with fixed interest and loan terms: 1

5 years for auto loans ($10k-$20k new auto loan)

2

30 years for mortgages ($150k single family home - LTB = 80%)

3

3 years for unsecured loans Back

Simulation 2: Rate Sheets & Delinquency

Credit Score Bin Auto Loan APR Credit Score Bin Mortgage APR

Credit Cards Personal Loan Auto Loan Mortgage

Rate Sheets for Auto Loans and Mortgages (1) (2) (3) (4) Auto Loan Pricing Tiers 500-589 590-619 620-659 660-689 15.117 13.970 9.653 6.948 Mortgages Pricing Tiers 620-639 640-659 660-679 680-699 5.484 4.938 4.508 4.294

(5)

(5)

690-720 4.863

>720

700-759 4.117

>760

3.514

3.895

Delinquency Rates By Product Estimation Results Delinquency Rates Baseline Simulated Coefficient Std. Error Quarterly (q) Monthly (d) Quarterly (q) Monthly (d) -0.0003407 0.0001452 0.0128010 0.0042670 0.0124603 0.0041534 -0.0004008 0.0002083 0.0066177 0.0022059 0.0062169 0.0020723 0.0000025 0.0000534 0.0026334 0.0008778 0.0026359 0.0008763 -0.0000410 0.0000265 0.0035294 0.0011764 0.0034884 0.0011628

Back

Model Details 1: Calibration Details • We normalize income to $3,800 (Finkelstein et. al. 2015) and assume individuals pay 20% of medical bills and 40% of bills forgiven as charity care. • We plot model implied ratio of CV to medical bill. We use reduction of $1,100, 40% of which is paid, to get bill of $2,500 and ratio of 2.2. 0.7 Theta=2 Theta=3 Theta=4

0.6 0.5

𝐶𝐶𝐶𝐶 𝑀𝑀𝑀𝑀

0.4 0.3 0.2 0.1 0 0

1000

2000

3000

4000

5000

Medical Bill (MB) ($)

Back