CANCER DIAGNOSES AND HOUSEHOLD DEBT OVERHANG

This paper explores the effects of unanticipated health shocks on financial outcomes. We draw on data linking individual cancer records to administrative data on personal mortgages, bankruptcies, foreclosures, and credit reports. We present three findings: First, cancer diagnoses are financially destabilizing—as measured by defaults, foreclosure, and bankruptcy filing rates—even among households with public or private health insurance.

The instability is caused by out of pocket costs arising from work loss, transportation, and incomplete coverage of medical expenditures. Second, cancer diagnoses are destabilizing only for households that have high levels of debt, preventing them from using their assets to smooth consumption. Public policy should, therefore, pay close attention to household leverage in addition to insurance. Third, a patient’s financial response to a health shock depends on expected mortality. Default and foreclosure are chosen by patients who have received news that they have few years to live; bankruptcy and refinancing are chosen by patients with relatively long expected lifespans. This finding is consistent with the notion that both adverse shocks and strategic behavior explain why households exhibit particular financial outcomes.