The Link Between Bankruptcies and Health Care Reform

Includes: AET, AXP, COF, UNH
by: Zacks Investment Research

According to a report released Friday by the American Bankruptcy Institute (ABI), there have now been 1.046 million personal bankruptcies since the start of the year. This is the highest number since the first nine months of 2005 when people were rushing to file before the draconian new bankruptcy act of 2005 took effect (still better than the Victorian days of debtor prisons, but not much).

The institute expects to see the total for the year top 1.4 million. I think they are being conservative, especially given the rise in unemployment, particularly the long-term unemployed. In September, there were 124,709 consumer bankruptcies, up 41% from a year ago. The graph below shows the history of bankruptcy filings since 1996 by quarter. The third quarter numbers come from the monthly ABI numbers; the quarterly numbers are from the administrative office of the U.S. courts.

If there is any good news in the report, it looks like the rate of increase in the third quarter was much slower than that of the second quarter. However, we are almost back up to the levels we saw under the old bankruptcy act, which was probably a bit on the "too-forgiving" side.

Increased unemployment, particularly long-term unemployment, is going to put pressure on this number to continue rising. Before people file, they will probably max out their credit cards, resulting in large losses to the big credit-card-oriented banks like Capital One (NYSE:COF) and American Express (NYSE:AXP).

People's primary houses are not protected under the bankruptcy act (although second homes and yachts are), so filing for bankruptcy does not really offer that much relief to people who are forced to file, but at least it provides some. Judges can adjust the terms of loans (including interest rates and principal) on yachts and beach houses, but they are specifically forbidden by federal law from doing so on owner-occupied houses. A majority of the U.S. Senate (including 13 Democrats) think there is nothing wrong with that.

The biggest single cause of personal bankruptcy is medical bills, and many if not most of these people have insurance. There is a common misperception that people without insurance can simply go to the emergency room to get treated. They can, but that does not mean it is free to them. The hospital can and will bill you, and turn over the bill to collection agencies to hound you if you don’t pay up. Yes, you will live, but you will live in a financial hell.

Serious health care reform would probably be the biggest single step toward reducing the number of bankruptcies in this country. Well, maybe getting unemployment back down would help more, but that is not going to happen anytime soon. The same Senators who love the idea of rich people being able to hold onto their ski chalets when they run into financial difficulty, but not letting those who get sick stay in the modest home that they have been living in for years, are the ones who are doing everything they can to undermine health care reform.

The most notable of these is Sen. Max Baucus (D-MT) who has put forward a "health care reform bill" that would force people, under the threat of fine and possibly even imprisonment, to buy health insurance. At the same time, the bill would offer inadequate subsidies to low-income people to do so and put no constraints whatsoever on what insurance companies could charge, and introduce NO new competition to the insurance industry Oligopoly. While the bill has a few worthwhile provisions like outlawing discrimination on the basis of pre-existing conditions, it is an open question if the Senate Finance Committee bill is better than no bill at all.

If anything like his bill passes, or nothing does, Aetna (NYSE:AET) and United Healthcare (NYSE:UNH) are going to be must-own stocks since they will be just about the only companies in the country that will still be solvent a decade from now (OK, a bit of an overstatement, but not much. Companies will just stop offering health insurance if no bill passes).