Large medical debt can weigh on your finances, hurt your credit score, and potentially bankrupt you.
No one is waving a magic wand to make all those IOUs go away, but the big three credit bureaus this month pledged to erase a significant amount of negative medical debt information from consumer credit files. This could make it easier for financially stressed people to access credit, housing, or even a new job.
The three bureaus — Equifax, Experian and Transunion — say the measures, to be phased in over the next year or so, will eliminate about two-thirds of the medical debt now listed as being in the collection process.
The changes don’t mean you can afford to ignore unpaid medical bills. They don’t let that debt go away either. But they will bring relief in other ways.
What changes are coming?
There are three main changes to the way unpaid medical debt is reported on consumer credit reports:
The first concerns medical debts that went into collection but were eventually paid. This debt will no longer show up on credit reports. This change will take effect on July 1st.
Second, unpaid medical collection debt will not show up on credit reports for a year, up from six months now. That will give consumers “more time to work with insurance and/or healthcare providers to resolve their debts before they are reported,” the credit bureaus said in a joint statement. It will also give health insurers more time to finalize billing and make adjustments.
Third, the three credit agencies pledged to stop including medical collection debt below $500 in consumer reports beginning in the first half of 2023.
Is this a win for consumers?
Consumer groups have generally praised these new guidelines.
“We are thrilled that credit bureaus are removing the vast majority of medical debt from credit reports,” said Chi Chi Wu, staff attorney with the National Consumer Law Center, in a statement. The Consumer Federation of America called the campaign a “major step forward” for consumers.
However, millions of Americans will continue to owe substantial medical bills, the latter organization found, and many will still have such debts listed on their credit reports.
Because medical debt that has been paid off no longer shows up as a negative on credit reports, patients have an added incentive to pay back what they can and creditors could end up collecting more overdue amounts, said Mike Sullivan, a consultant at Take Charge America, a debt and debt services nonprofit Financial education group in Phoenix.
“This really benefits those who can afford to pay it off versus those who can’t handle it,” Sullivan said. “I wonder how many people are really being helped.”
Why is this happening now?
Medical debt has become a bigger problem, and it sometimes comes out of nowhere. The COVID-19 pandemic has made things even worse.
According to the Federal Consumer Financial Protection Bureau, 20% of US households have medical debt, and medical debt collection problems appear on 43 million credit reports. As of Q2 2021, 58% of the receivables that were in collection and that showed up on loan documents were related to medical bills. Also, debt collectors are contacting people more about medical bills than anything else, the CFPB said.
The Covid-19 pandemic has exposed more Americans to testing, hospitalizations and related healthcare costs. The credit agencies said they studied the prevalence of debt collection in consumer reports and are making the changes to help people focus on their well-being and recovery.
As some individuals have delayed routine or other healthcare needs due to the pandemic, the CFPB expects total medical spending and debt to continue to rise.
Is this just about rising medical debt?
No. It is also related to the complex and often inaccurate medical billing system.
“The US healthcare system is supported by a billing, payment, collections, and credit reporting infrastructure where errors are common and patients often have difficulty correcting or recovering from those errors,” said Rohit Chopra, the new CFPB director, in a statement. The credit reporting system is “too often used as a tool to coerce and extort patients into paying medical bills they may not even owe,” he added.
The bureau released a report in February that detailed how bills are difficult to decipher and could include “complicated insurance or charity insurance coverage and pricing rules.”
In emergencies, patients may not sign a billing agreement until they receive treatment, the CFPB said. In other cases, patients who are injured or ill might feel they have no choice but to accept treatment at all costs, the agency added.
In addition, the CFPB claims that uninsured or off-network patients are often charged much more than on-network patients, although the former may be less solvent. “Markups are particularly high for emergency care, and investor-owned for-profit hospitals charge higher average markups,” the office said.
Why is the credit check important?
A low or “subprime” credit rating can affect a person’s ability to qualify for credit, consequently forcing them into more expensive options such as payday loans, while making it more difficult to sign up for utility services, get car insurance at a good price, rent an apartment, find a job and so on. Raising medical bills can also bankrupt a person.
The CFPB said the financial consequences are often worse for blacks and Latinos, low-income people, veterans, seniors and young adults.
The Presidium also referred to the effort involved in dealing with all of this. Errors on credit reports, whether related to medical or other debt, can take months to correct.
Will the changes disrupt lending?
That remains to be seen, but it doesn’t have to be. The whole point of a credit check (based on information in credit reports) is to help lenders quickly assess a potential borrower’s ability to repay a debt, e.g. For example, a car buyer who wants to get a car loan in minutes. The CFPB contends that medical debt is not a particularly good predictor of whether a person will be able to pay bills in general.
There are many types of credit scores in use. Recent versions of some rating systems are already emphasizing medical debt, allowing for rating improvements that may be enough to push some consumers from a “subprime” to a “prime” category.
So far, however, the most widely used scoring models are older, less accurate, and penalize people with medical debt problems, the CFPB claims.
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