Large medical debts can hurt your finances, hurt your credit score, and possibly push you into bankruptcy.
No one is waving a magic wand to make all those IOUs go away, but the big three credit reporting bureaus pledged this month to remove a substantial amount of negative medical debt information from credit reports. consumers. This could make it easier for people in financial difficulty to access credit, find an apartment or even land a new job.
The three bureaus – Equifax, Experian and Transunion – say the measures to be phased in over the next year will remove around two-thirds of medical debts now listed as part of the collection process.
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 concerns medical debts that have been collected but ultimately paid. These debts will no longer appear on credit reports. This change takes effect on July 1.
Second, unpaid medical debt will not appear on credit reports for a year, up from six months now. This will give consumers “more time to work with insurance and/or health care providers to settle their debt before it is 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 reporting agencies have committed to no longer include medical collection debts under $500 in consumer reports, beginning in the first half of 2023.
Is this a victory for consumers?
Consumer groups have generally praised these new policies.
“We are pleased that the credit bureaus are removing the vast majority of medical debt from credit reports,” said Chi Chi Wu, attorney at the National Consumer Law Center, in a statement. The Consumer Federation of America called the action a “huge step forward” for consumers.
However, millions of Americans will continue to owe large medical bills, the latter organization noted, and many will still have such debts listed on their credit reports.
Since repaid medical debts will no longer show up as demerits on credit reports, patients will have more incentive to repay what they can, and creditors may end up collecting more overdue amounts, Mike Sullivan said. , a consultant with Take Charge America, a nonprofit financial education and debt group in Phoenix.
“It really benefits people who can afford to pay, as opposed to people who can’t afford it,” Sullivan said. “I wonder how many people will really be 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 matters worse.
According to the Federal Consumer Financial Protection Bureau, 20% of US households have medical debt and medical debt collection issues appear on 43 million credit reports. In the second quarter of 2021, 58% of debts in the process of being collected and appearing on credit files 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, hospitalizations and related healthcare costs. Credit agencies said they have studied the prevalence of medical recovery debt in consumer reports and are making changes to help people focus on wellness and recovery.
As some people have postponed their routine needs or other health care due to the pandemic, the CFPB expects medical expenses and overall debt to continue to rise.
Is it just to increase medical debt?
No. This 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 struggle to have those errors corrected or resolved,” said Rohit Chopra. , the new director of the CFPB, in a press release. 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.
In February, the office released a report detailing how the bills can be difficult to decipher and may involve “complicated insurance or charity care coverage and pricing rules”.
In an emergency, patients may even sign a billing agreement only after receiving treatment, the CFPB said. In other cases, injured or ill patients might feel they have no choice but to accept treatment at any cost, the agency added.
Further, the CFPB argues that uninsured or out-of-network patients are often billed significantly more than in-network patients, even though the former may have less ability to pay. “Margins are particularly high for emergency care, and for-profit, investor-owned hospitals charge higher average margins,” the bureau said.
Why is credit scoring important?
A low or “subprime” credit score can hinder a person’s ability to qualify for credit and therefore force them to choose more expensive options like payday loans while making it more difficult to enroll. utilities, getting car insurance at a good price, renting an apartment, getting a job, etc. Rising medical bills can also push a person into bankruptcy.
The CFPB said the financial fallout is often worse for blacks and Latinos, low-income people, veterans, seniors and young adults.
The office also cited the hassle associated with it all. Correcting errors on credit reports, whether related to medical debt or other types of debt, can take months.
Will the changes mess up loans?
That remains to be seen, but not necessarily. The purpose of credit scoring (based on information in credit reports) is to help lenders quickly assess a potential borrower’s ability to repay debt, for example with a car buyer looking to get a car loan in minutes. The CFPB argues that medical debt is not particularly good at predicting whether a person will be able to pay their bills overall.
Many types of credit scores are used. New versions of some rating systems already minimize medical debt, allowing for rating improvements that may be enough to move 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 issues, says the CFPB.
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