Large medical debt can take a toll on your finances, damage your credit score, and possibly bankrupt you.
No one is waving a magic wand to make all those IOUs disappear, but the Big Three credit reporting agencies pledged this month to remove a substantial amount of negative information about medical debt from consumers’ credit files. That could make it easier for financially strapped people to access credit, secure an apartment or even get a new job.
The three bureaus, Equifax, Experian and Transunion, say measures that will be phased in over the next year will eliminate about two-thirds of medical debt now listed as in collections.
The changes don’t mean you can afford to ignore unpaid medical bills. Nor do they make those debts disappear. But they will bring relief in other ways.
What changes are coming?
There are three key changes to how unpaid medical debt will be reported on consumer credit reports:
The first involves medical debts that were collected but ultimately paid. These debts will no longer appear on credit reports. That change goes into effect July 1.
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 health care providers to address their debt before it’s 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 bureaus have committed to no longer listing medical collection debt of less than $500 on consumer reports, beginning in the first half of 2023.
Is this a win for consumers?
Consumer groups have generally praised these new policies.
“We are delighted that the credit bureaus are removing the vast majority of medical debt from credit reports,” Chi Chi Wu, an attorney with the National Consumer Law Center, said in a statement. The Consumer Federation of America called the action a “major step forward” for consumers.
However, millions of Americans will continue to owe substantial medical bills, the latter organization noted, and many will continue to have such debts on their credit reports.
Because paid medical debts will no longer show up as demerits on credit reports, patients will have an added incentive to pay what they can, and creditors could end up collecting more past due amounts, said Mike Sullivan, a consultant with Take Charge America, a nonprofit debt and financial education group in Phoenix.
“This really benefits people who can afford it, as opposed to those who can’t handle it,” Sullivan said. “I wonder how many people will actually be helped.”
Why is this happening now?
Medical debt has become a bigger problem, and sometimes it comes out of nowhere. The COVID-19 pandemic has made things worse.
According to the Federal Consumer Financial Protection Bureau, 20% of American households have medical debt, and medical debt collection issues show up on 43 million credit reports. As of the second quarter of 2021, 58% of the debts that were in collection and that appeared in the credit records were related to medical bills. Also, debt collectors contact people more about medical bills than anything else, the CFPB said.
The Covid-19 pandemic has subjected more Americans to testing, hospitalization, and related health costs. The credit bureaus said they have studied the prevalence of medical collection debt in consumer reports and are making the changes to help people focus on wellness and recovery.
Because some people have delayed routine or other health needs due to the pandemic, the CFPB expects general medical expenses and debt to continue to rise.
Is it just the increase in 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, collection and credit reporting infrastructure where errors are common and where patients often have difficulty correcting or resolving these errors,” Rohit said. 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 don’t even owe,” he added.
The office in February issued a report detailing how bills can be difficult to decipher and could involve “complicated pricing rules and insurance or charity care coverage.”
During emergencies, patients may not even sign a billing agreement until after they receive treatment, the CFPB said. In other cases, patients who are injured or ill may feel they have no choice but to accept treatment at any cost, the agency added.
In addition, the CFPB maintains that uninsured or out-of-network patients are often charged much more than in-network patients, even though the former may be less able to pay. “Margins are especially high for emergency care, and investor-owned, for-profit hospitals charge higher average margins,” the bureau said.
Why is credit score important?
A low or “subprime” credit score can affect a person’s ability to qualify for credit and, as a result, force them to opt for more expensive options, such as payday loans, while making it difficult to contract utilities , getting car insurance at a good price, renting an apartment, getting a job, etc. Rising medical bills can also bankrupt a person.
The CFPB said the financial consequences are often worse for Black and Latino people, people with low incomes, veterans, seniors and young adults.
The office also mentioned the hassle of dealing with all of this. Correcting credit report errors, whether related to medical or other debt, can take months.
Will the changes ruin the loans?
That remains to be seen, but not necessarily. The main purpose of credit scoring (based on information contained in credit reports) is to help lenders quickly assess a potential borrower’s ability to repay a debt, such as with a car buyer looking to obtain a car loan in a matter of minutes. The CFPB maintains that medical debt is not a particularly good predictor of whether a person will be able to pay bills overall.
There are many types of credit scores in use. Newer versions of some scoring systems already de-emphasize medical debt, allowing score improvements that may be enough to push some consumers from a “subprime” category to a “prime” category.
Until now, however, the most widely used scoring models are older, less accurate and penalize people with medical debt problems, the CFPB maintains.
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