Why medical debt should be removed from credit reports.
We applaud the Consumer Financial Protection Bureau (CFPB) initiative to change how medical debt is treated by our credit reporting agencies.
Why medical debt should be removed from credit reports.
It seems like we all know someone who is struggling to pay a high medical bill. That’s not surprising, based on this recent survey which showed about 14 million adults owe over $1000 in medical debt and 3 million owe even more than that. One reason so many are finding themselves behind on their medical bills is that unlike many other forms of consumer debt, most people cannot avoid incurring medical debt.
That’s why we applaud the newest initiative of the Consumer Financial Protection Bureau (CFPB) to change how medical debt is treated by our credit reporting agencies. The new proposed changes will prevent credit reporting agencies such as Equifax, Experian, TransUnion and others from sharing medical debt information with creditors. We asked for this rulemaking in June 2023. Now we are cheering this important step towards protecting individuals from the unnecessarily harsh and long-term consequences of counting our medical debt against us when we try to get a loan.
For years, we’ve known that medical debt does not predict credit defaults, nor does it accurately predict a person’s desire and willingness to pay off loans.
Medical debt is different and less predictive of credit-worthiness because medical bills don’t pile up as a result of bad decision-making and irresponsible budgeting. Those bills are mostly unavoidable. Additionally, unlike consumer products, health care prices are almost impossible to know in advance.
Even with the federal hospital price transparency rule in effect, hospital noncompliance means most patients still have trouble using pricing tools to shop and budget for medical care. Our recent Post the Price report shows hospital prices are missing, unreliable and difficult to obtain in advance. And many of the highest bills in health care are a result of a health condition we couldn’t prevent, predict or plan for – such as emergency treatment for accidents or sudden onset of life-threatening medical conditions or disease diagnosis.
CFPB’s own research showed that medical billing data on a credit report is “less predictive of future repayment than reporting on traditional credit obligations.” When patients call us about their medical bills, they are grateful for their care and genuinely want to pay the bills sent by their life-saving health care providers. Especially when the bills are accurate and reflect the cost of the care they received.
Medical debt should be treated differently than debt incurred from overspending on other consumer products, such as taking out a loan for a car you can’t afford, or buying a house above your budget. Those kinds of purchases are usually optional. And even if they are necessary, consumers can choose budget-friendly versions of those purchases. And unlike medical bills, consumer products come with clear, upfront pricing in advance. The consumer knows their expected financial obligations on those kinds of loan transactions and when they purchase items on credit.
Why is medical debt often unavoidable?
Health status:
Our health status is mostly out of our control. Health care bills pile up without regard to the careful budgeting of a family. When you get sick or are injured in an accident, you will likely receive large medical bills. Couple those bills with loss of income from missed work days or an extended leave, and its no wonder people find themselves in debt.
Out-of-pocket obligations, even with insurance:
Most families have some type of insurance (Medicare, Medicaid, Veteran’s or commercial insurance) which covers many health bills. However, insured people are still responsible for significant out-of-pocket obligations for their care. Patients face the full cost of annual deductibles, co-pays, and co-insurance payments on many curative treatments and prescription medications. And if they need treatment for more significant care related to disease diagnosis or emergency health encounters, the amount patients owe to health care providers grows even larger. People in the U.S. on average spend $1,425 out-of-pocket on health care. Those with serious ailments owe more than average bills.
Claim denials:
Claim denials are happening more frequently with the use of technology. When an insurance claim is denied, the patient owes the full cost of the medical bill; insurance refuses to pay and yet the patient has already received the care. Insurers rely heavily on artificial intelligence (AI) to review claims, meaning fewer claims are reviewed individually by doctors. When claims are batched for the purposes of AI analysis, important information can be missed which might have prevented a claim denial. In 2020, almost 1 in 5 insurance claims were denied. Even though patients have the right to challenge those denials, less than one percent do. But insurance companies do make mistakes, even in claim denials. So when bills arrive for necessary care that has already been provided, patients are unfairly left with a large bill if the insurance company denies a claim. Appealing denials is a complicated and time-consuming business. Many don’t have the skills or time to manage an appeal, so the bill lands on them.
Billing errors:
Medical billing and coding errors inappropriately burden families with extra medical bills that they have to spend months or years fighting. Meanwhile, as patients dispute errors through complex insurance appeal systems, the bills pile up. The CFPB’s own study shows that collections on medical debt were significantly more likely than credit cards or student loans of being disputed. Billing errors are common and difficult to fight. Patients end up owing erroneous bills.
Timelines for paying off a medical bill:
Unlike most large consumer purchases such as cars and mortgages, medical bills are required to be paid off within 30, 60 or 90 days. Taking into account that about 28% of Americans have less than $1000 in savings, and average out-of-pocket costs for health care is $1,425, it is no wonder that many individuals find themselves struggling to come up with the extra money to pay those medical bills. Adding to the financial burden is the loss of income some may experience because of their illness or injury.
These are just some reasons why hardworking families who normally can meet their financial obligations suddenly find themselves in over their heads with medical bills, and falling into medical debt.
What can we do to stop medical debt from ruining our future.
We asked the CFPB to swiftly implement the rule to prevent credit reporting agencies from sharing medical debt information with creditors. And we urged the agency to expand the rule to prevent landlords and employers from getting our information on medical debt either. The existence of medical debt has never been shown to be a good indicator of someone who will be an unreliable employee or an irresponsible tenant. Some states have now banned medical debt from all credit reports. The CFPB should follow their lead.
We also asked the CFPB to take action against the purveyors of medical credit cards. We urged the agency in June 2023 to issue rulemaking to stop providers from marketing medical credit cards. Gone are the days where a hospital sets up a low- or no-interest plan for its patients. Now hospital billing websites often market financial instruments to patients who visit the hospital billing page hoping to pay their bills by setting up a payment plan directly with the hospital. Instead patients find their only pathway to payment is signing up for a medical credit card. Most patients are unaware of the consequences of these relatively new financial products. Medical credit cards are notorious for high interest rates, expensive late fees, and short time frames to fully pay the balance. Patients who can’t meet the payment timelines soon find themselves in arrears and owing significantly more than the original medical bills themselves.
We applaud the CFPB for proposing a rule that would minimize the long term impact of high priced medical bills. Bad credit scores follow people for years, impacting their ability to rent or buy a home. These lasting financial impacts further harm individuals who are battling a cancer diagnosis, managing a chronic disease or recently survived a car crash.
How to make sure your credit reports don’t include medical debt under $500 or already paid off
Topics
Authors
Patricia Kelmar
Senior Director, Health Care Campaigns, U.S. PIRG Education Fund
Patricia directs the health care campaign work for U.S. PIRG and provides support to our state offices for state-based health initiatives. Her prior roles include senior policy advisor at NJ Health Care Quality Institute, associate state director at AARP New Jersey and consumer advocate at NJPIRG. She was appointed to the Ground Ambulance and Patient Billing Advisory Committee in 2022 and works with patient advocates across the U.S. Patricia enjoys walking along the Potomac River and sharing her love of books with friends and family around the world.
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