Research

Employee Financial Distress
Health, Financial Well-being, and Financial Practices of Financially Distressed Consumers, Consumer Interest Annual, 2005, O'Neill, Sorhaindo, Xiao, & Garman

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Abstract

This study examined relationships among the financial practices, financial well-being, and health of a sample of 3,121 financially distressed consumers who were new clients participating in the debt management program of a large national non-profit credit counseling organization. Respondents who reported having improved health since participating in credit counseling were more likely than others to engage in positive financial behaviors. In addition, self-reported improved health was somewhat associated with self-reported improved finances. For six out of ten financial behaviors, respondents who reported improved health were more likely to report that their finances improved. Implications are provided for financial counselors and educators.

Introduction

Sociological research data indicate that four factors strongly predict happiness and overall well-being in most cultures: health, economic status, employment, and family relationships (Bernstein, 2004). People are happier when they are healthy, employed, married or in a committed relationship, and financially secure. This article describes a study of relationships among financial practices, financial well-being, and health. Unlike many previous studies, however, this one focuses on a large sample of financially distressed consumers who contacted a national non-profit credit counseling organization to seek assistance with heavy outstanding debt. The purpose of this study is to add to literature documenting associations between various health and personal finance variables, characteristics of consumers who perceive that financial problems affect their health, and potential effects of perceived interactions between health and personal finances on the well-being of financially stressed consumers.

Health and personal finance issues, individually and in combination with each other, affect millions of U.S. households. Major societal trends that have been widely reported in recent years include an increasing incidence of obesity and diabetes, low household savings rates, and high household debt. The Credit Card Nation (Manning, 2000) and Fast Food Nation (Schlosser, 2002), titles of recent books that examine Americans' spending and eating habits, respectively, both describe complex, multi-faceted problems that, ironically, have become increasingly inter-connected (e.g., the ability to charge fast food purchases and health-related medical expenses on a credit card).

Many Americans are unhealthy physically and fiscally (e.g., overweight and over-indebted) and are seeking solutions to improve both their health and their finances. Evidence exists that there are many parallels between factors (e.g., environmental controls) that affect good health and foster financial success (Hollerith, 2004; O'Neill, 2004). Health and wealth are also related on a macro level. Modest reductions in the death rate from common killers, such as cancer and heart disease, can lead to trillions of dollars in economic benefits for all Americans according to economists Murphy and Topel (2003) from the University of Chicago. Just one major health problem alone, obesity, is estimated to cost $117 billion nationally in medical costs and lost productivity ("Citing Dangerous Increase," 2004). Obese people spend 36% more on health care services and 77% more on medications than average-sized people according to a study by the Rand Corporation (Geary, 2002; Olick, 2003). On an individual basis, the Centers for Disease Control and Prevention ("Preventing Obesity and Chronic Diseases," 2003) estimates that a 10% weight loss could reduce an overweight person's lifetime medical costs by $2,200 to $5,300.

Good health is a major factor in wealth creation. It is associated with increased workplace productivity resulting in higher earnings and savings, fewer wealth-eroding medical expenses, and longer life expectancies in which to earn compound interest on invested assets and collect Social Security and other retirement benefits (Lee & McKenzie, 1999). While good health is affected by many factors, some (e.g., genetics) of which are beyond a person's control, healthy lifestyle choices increase the likelihood of a long and healthy life and a better return on annuities and other retirement savings plans. Healthy people provide the foundation for a wealthier America (McKinnell, 2004).

Unfortunately, one in seven American families has problems paying health-care costs, which can lead to "juggling" of medical expenses with basic living costs and negative patient behaviors such as delaying necessary medical treatment and forgoing the use of prescription drugs (Kissel, 2004). The percentage of working-age Americans aged 18 to 64 without health insurance was 20.1% in 2003 and, in total, 46.3 million Americans, or 15.2% of the population, lacked health insurance (Dooren, 2004). This translates into roughly one in seven Americans (Regnier, 2003), a startling statistic. Even households with health insurance have had difficulty with rising out-of-pocket costs (e.g., deductibles and co-insurance) as employers increasingly shift more expenses to workers (Fuhrmans, 2004). Poor families, insured or not, have some of the heaviest medical bill burdens with nearly 20% of those below poverty level having trouble paying medical bills (Kissel, 2004).

Not surprisingly, unpaid medical bills are associated with a high number of personal bankruptcies. Approximately one in five bankrupt households described in The Fragile Middle Class (Sullivan, Warren, & Westbrook, 2000), a study of about 2,400 bankrupt households, listed a medical problem as a reason for their bankruptcy filing, making it the third most common reason listed, after job loss and family problems. A more recent study of 1,771 personal bankruptcy filers (Himmelstein, Warren, Thorne, & Woolhandler, 2005) found that medical problems contributed to about half (54.5%) of all bankruptcies. This included any medical cause such as a specific illness or injury, uncovered medical bills exceeding $1,000, or loss of work-related income due illness/injury. The number of medical bankruptcies increased twenty-threefold from 1981 to 2001. Medical bankruptcy filers were described by the study authors as "demographically typical Americans who got sick" and were more likely than other filers to be middle class and have experienced a loss of health insurance.

Needless to say, high household medical debt may also preclude recommended wealth creation strategies, such contributing to a 401(k) plan or Roth IRA, resulting in forgone savings opportunities and compound interest. Like home repairs and other "contingent" expenses that may or may not happen, many consumers do not plan for health care costs until a serious illness or injury occurs (Vitt, Siegenthaler, Siegenthaler, Lyter, & Kent, 2002). When unexpected medical bills arrive, the collective impact of unexpected medical expenses, interruption of income, and/or consumer debt can trigger financial distress (Sullivan, Warren, & Westbrook, 2000).

In addition to the cost of medical care, another way that health and finances are related is the sheer cost of unhealthy habits such as smoking and alcohol consumption over time, thereby resulting in lost household wealth. In states with high cigarette taxes, the cost of a pack of cigarettes today is as high as $7 for some brands, including sales taxes (Berls & Paolucci, 2004). In addition to the increased risk for lung cancer, hypertension, and other health problems, a pack-a-day smoker could spend over $2,500 annually to support their habit. With 8% interest over 40 years, $2,500 of annual savings would accumulate to almost $650,000. The American Heart Association estimates that 25.6 million men (25.2 %) and 22.6 million women (20.7%) in the United States are smokers (Cigarette Smoking Statistics, 2004).

Personal finances can negatively affect health (e.g., overdue medical debt resulting in delayed or inadequate treatment and anxiety). Personal finances can also be negatively affected by health (e.g., increased medical expenses resulting in lower lifetime asset accumulation and a poor credit history resulting from unpaid medical bills due to health problems). There are a number of health effects of poor financial behaviors, such as overspending and unpaid debts. First, there is the associated stress and anxiety (Drentea & Lavrakas, 2000). In addition, families that do not have health insurance or money to pay for medical treatment and/or owe money for past health care expenses may elect to forego treatment or be relegated to emergency rooms and clinics for primary health care (Vitt, Siegenthaler, Siegenthaler, Lyter, & Kent, 2002). Persons experiencing financial distress may also be unable to follow recommended health maintenance practices such as eating a healthy diet and receiving periodic screening exams (O'Neill, Sorhaindo, Xiao, & Garman, 2005).

It is clear from the above discussion that financial well-being and physical well-being are related in a variety of ways. For the most part, however, efforts to improve Americans' health and finances have operated on two separate, but parallel, tracks with separate literature and advocacy efforts. Often, health educators do not talk much about finances and financial educators do not concern themselves much with health care costs (Vitt, Siegenthaler, Siegenthaler, Lyter, & Kent, 2002). This study of relationships between financial practices, financial well-being, and health is an attempt to examine these factors together using a national sample of financially distressed adults, many of whom self-reported health problems related to their financial situation. The findings have implications for financial educators, credit counseling practitioners, and employee benefit personnel.

Literature Review

Several recent studies have explored specific relationships between health and financial well-being and/or practices (e.g., the financial cost of unhealthy habits), the financial impact of increasing health care costs, and links between financial stress and health. Zagorsky (2004) investigated the effect of smoking on an individual's financial situation. Using wealth and smoking data from the National Longitidinal Survey of Youth 1979 cohort, he found that the typical nonsmokers' net worth is roughly 50% higher than light smokers and roughly twice the level of heavy smokers. There was also a statistically significant negative relationship between net worth and smoking, which harms a smoker's wealth as well as his/her health.

While a causal relationship cannot be proven by the Zagorsky (2004) study, smokers appear to pay for cigarettes with income that could be saved by nonsmokers. Part of the explanation is, of course, due to education and income levels, as smokers tend to come from lower socioeconomic classes (Cigarette Smoking Statistics, 2004). Studies show that the frequency of smoking is more pervasive among those with 9-11 years of education (35.4 percent) than among those with more than 16 years of education (11.6 percent), and it is the highest among persons living below poverty level (33.3 percent). While lower income households obviously have less money to save than others, there is also no doubt that elimination of a smoking habit has the potential to greatly increase financial asset-building, especially among the poorest American households.

The 2004 Health Confidence Survey, sponsored by the Employee Benefit Research Institute (Helman & Fronstin, 2004), sheds additional light on heath-personal finance connections. As health care costs continue to climb at near-double-digit rates, more Americans are being forced to cut back on retirement savings contributions and make lifestyle changes to pay for medical care (Kim, 2004). The study found that more than 2 in 10 Americans consider health care to be the most critical issue facing the U.S. today, ranking evenly with terrorism/national security. In addition, one quarter of those experiencing increased health care costs reported decreasing their contributions to a retirement plan and almost half (48%) reported decreasing contributions to other savings. Nearly 2 in 10 (18%) said they had difficulty paying for basic necessities (e.g., food, housing) while 3 in 10 reported difficulty paying other bills. One-quarter (26%) indicated that they have used up all or most of their savings and 15% have borrowed money to pay health care expenses. The Health Confidence Survey was conducted in the summer of 2004 with a nationally representative sample of 1,203 adults.

Kim, Garman, and Sorhaindo (2003) studied 175 credit counseling clients of a large non-profit credit counseling agency who responded to data collections at two points in time, an initial survey and 18 months later. They found that those who had high levels of financial well-being and experienced fewer financial stressor events had better health than others. Using path analysis, these researchers found that, although credit counseling did not have a direct significant effect on health, it had indirect effects through post-counseling financial stressor events and financial well-being. Income, age, financial behaviors, financial stressor events, financial well-being, and credit counseling explained 27.3% of the variance in health. People who utilize the services of credit counseling agencies typically have recently experienced financial stressor events (Kim, Garman & Sorhaindo, 2003; Staten, Elliehausen & Lundquist, 2002). These may be chronic patterns of overspending and excessive charges on credit cards and/or calamitous events such as unemployment, reduction in overtime, uninsured medical costs, and divorce.

Xiao, Sorhaindo, & Garman (in press) used the same data set of credit counseling clients as the current study. They hypothesized that positive financial behaviors, measured objectively and subjectively, would reduce financial stress. A higher number of positive financial behaviors (e.g., "cut down on living expenses") and a higher score of self-evaluation of financial behaviors were associated with a lower stress level. Presumably a lower stress level has a positive effect on one's health as high levels of stress can cause or aggravate physical illnesses such as high blood pressure, migraine headaches, ulcers, ulcerative colitis, and insomnia (Plain Talk About Handling Stress, 1991). A stress-laden situation or an emotionally inadequate response can also "throw off the body's natural ability to heal itself" (Health Encyclopedia-Diseases and Conditions, 2004; Sapolsky, 2004), although the exact chain of causation is not known. Indeed, in this study, a lower level of financial stress was associated with having a lower debt load percentage and perceiving better health and family relationships (Xiao, Sorhaindo, & Garman, in press).

Kim & Garman (2003) studied 262 white-collar workers in three states to examine relationships between financial stress and absenteeism. They found that financial stress was negatively related to organizational commitment and positively associated with absenteeism. A hypothesized relationship between financial stress and stress-related illness or health was not supported by this study. Another study by Drentea and Lavrakas (2000), however, provided evidence of a link between financial stress, specifically credit card debt and stress regarding debt, and mental, as well as physical, health. Using a representative sample of over 900 Ohio adults, they found that individuals reporting higher levels of financial stress had higher levels of illness and physical impairment than others with lower financial stress levels. The higher an individual's debt-to-income ratio, the more likely they were to be in poor health. Similarly, a study of credit counseling clients by Bagwell (2000) found evidence that health was negatively affected by financial distress.

Lyons and Yilmazer (in press) used data from the 1995, 1998, and 2001 Survey of Consumer Finances (SCF) to examine the effect of financial strain on health status controlling for the fact that financial distress can be both a cause and consequence of poor health. Results from models for three different measures of financial strain indicated that poor health significantly increases the probability of strain but there was little evidence that financial strain contributes to poor health. Thus, the direction of causality is primarily from health to socioeconomic status, indicating that serious health conditions may result in larger financial burdens, but large financial burdens are unlikely to accelerate a decline in health status (Lyons and Yilmazer, in press).

While the Lyons and Yilmazer (in press) study did not find evidence that financial problems affect health, other researchers have with samples of financially distressed consumers. A November 2004 study of 1,590 consumers with credit card debts (25% with debts exceeding $10,000) by Impulse Research Corp. (Kidd, 2005) found that economic stress does impact physical health. Headaches, inability to concentrate, and nausea were the most common symptoms and eight percent of respondents reported seeing a doctor because of health problems related to financial stress. Women were more likely than men to report stress-related health problems. O'Neill, Sorhaindo, Xiao, and Garman (2005) explored specific health effects associated with financial distress. Using the same sample as the current study, they found that more than 4 in 10 (42.4%) of 3,121 respondents indicated that their health was affected in some way by their financial problems. The four most frequently reported health effects associated with financial distress were stress (46%), worry, nerves, and anxiety (12%), depression (10%), and insomnia and sleep problems (9%).

Smith and Kington (1997) examined the effects of income and wealth upon the self-reported health status of older Americans. Using data from Asset and Health Dynamics Among the Oldest Old (AHEAD) and the Health and Retirement Survey (HRS), they found a strong positive relationship between household income or wealth and the self-reported health status of household heads, especially among poor households.

A national survey by the Principal Financial Group ("From Sick Care to Health Care," 2005) found that many employers highly regarded for excellence in employee benefits utilize wellness initiatives. These include paying employees to live healthier lifestyles, providing flu shots, weight management and smoking cessation programs, and on-site fitness facilities. A search of "health finance" studies in the online archive of The Journal of Health Promotion found over a dozen articles describing associations between health intervention efforts (e.g., worksite wellness programs), healthy behaviors, and positive financial effects for individuals and employers (e.g., decreased health care costs). The findings in these studies, as well as most of those described above, indicate associations between poor health and poor financial well-being, but not causality. Causal factors are extremely difficult to isolate, and such a study is well beyond the scope of this paper.

Methodology

Data Collection

Previous research studies that sought to understand more about personal finance-health relationships among similarly situated adults were conducted with very small samples (Bagwell, 2000; Kim, Garman, and Sorhaindo, 2003). Therefore, the availability of a large national sample of financially distressed adults in this study provides a unique opportunity to more carefully describe any relationships that might exist among financial practices, financial well-being, and health. This study focuses upon perceived interactions between health and personal finance variables on the well-being of financially stressed consumers and effects that might result from participation in a credit counseling agency's debt management program (DMP). More specifically, this study seeks to learn how financially distressed adults perceive relationships between their health and financial problems.

The population for this study was a group of financially distressed consumers who telephoned a large national non-profit credit counseling organization, seeking assistance with outstanding debt and subsequently joined its debt management program (DMP). Thus, there is a selection bias in this study because this sample consists of adults who took the initiative to telephone a credit counseling agency stating that they were seeking assistance with their credit and money problems. This observation is confirmed by recognizing that, as a group, this sample of adults self-reported more serious personal financial distress than others in a separate national sample of the general population who reported high financial distress and low financial well-being (Garman, Sorhaindo, Prawitz, O'Neill, Osteen, Kim, Drentea, Haynes, & Weisman, 2005). Hence, the findings can be generalized only to those adults, primarily females in this group, who are experiencing serious financial distress.

In mid-June 2003, a 32-item Personal Finances Survey questionnaire was mailed to a sample of 7,200 people who joined the program between February and April 2003. Thus, the respondents were new clients having joined the DMP in the previous two, three, or four months. Four weeks later, a follow-up postcard was mailed to those who had not yet responded, reminding them to return the questionnaire. After two additional weeks, a second questionnaire and follow-up letter were mailed to non-respondents.

A total of 443 surveys were returned as undeliverable, typically because an address was incomplete, a person moved without providing a forwarding address, or the person was deceased. Thus, 6,757 questionnaires were mailed and 3,121 respondents returned useable questionnaires. The response rate is 46 percent (3,121/6,757), which is more than double the return in previous studies (Garman, Camp, Kim, Bagwell, Baffi, & Redican, 1999; Sorhaindo & Garman, 2002). The data were self-reported by the respondents on printed questionnaires and a careful review of each of the completed questionnaires suggested that there was no reason to believe that any respondents misreported responses to the questions. The characteristics of the sample closely matched the age, sex and geographic area of the population, and did not differ from the non-respondents.

Additional information on the debt load, debt load percentage, and credit card debt balance of respondents were obtained from client records maintained by the credit counseling organization. The number of observations with missing values for individual questions determined the sample size for specific analyses. Descriptive statistics about the total sample are listed in Table 1 below. Males comprised 29% of the clients and 71% were female, which is a typical distribution of gender for credit counseling clients (Garman et al., 1999; Bagwell, 2000; Sorhaindo & Garman, 2002; Staten et al., 2002). Approximately six in ten (63%) were either married (53%) or living with a partner (10%), and 37% were unmarried. Median annual family income was between $30,001 and $40,000. Four out of five (81%) were employed, with 69% working full-time, and 62% were age 45 or younger. Again, these sample characteristics are consistent with previous research studies of credit counseling clients (Bagwell, 2000; Kim, Sorhaindo & Garman, 2003; Staten et al., 2002).