Bond investors would be wise to consider the growing influence of soaring medical costs on personal bankruptcies, according to Rod Dubitsky, managing director and head of asset-backed research at Credit Suisse First Boston in New York. He is linking a recent Harvard University study, which shows medical costs are becoming a more significant factor in leading to bankruptcies, to the bond market as an indicator of consumer credit.
The study is relevant to all bonds backed by consumer credit but is a particularly noteworthy indicator for bonds backed by credit cards because bankruptcies are generally considered responsible for roughly half of all credit card chargeoffs. Medical-related issues could have an even greater impact on chargeoffs because presumably borrowers may default on cards due to the weight of medical bills but do not declare bankruptcy, Dubitsky said. "By extrapolation, you can make the argument this study means a quarter of all credit card chargeoffs are medical related," he noted.
Although the study does not make a direct link to the fixed-income market, Dubitsky said rising medical costs and their effect are certainly being felt in structured finance collateral. He said anecdotally, he has heard from servicers that medical costs are becoming more of a burden for obligors.
And it's not just sub-prime borrowers who are being pinched by higher medical costs. Dubitsky said of particular concern for bond investors is the study found more than 75% of those surveyed who filed for bankruptcy because of medical costs actually had health insurance, signaling the rising costs affect a broader swath of the borrowing public than one would think. "It's not just the bottom 10 or 20%, it's the sweet spot of the consumer lending market," Dubitsky noted, adding, "this is something that's creeping up on us."