Consumer agency moves to ban medical debt from credit reports

October 2, 2023

People struggling with unpaid medical bills may soon have the debt erased from their credit reports, reports The New York Times.

The Consumer Financial Protection Bureau said in September that it was developing new rules that would prevent past-due medical debt from appearing on credit reports, where it can hurt people’s ability to qualify for loans, as well as for housing and jobs; because landlords and employers sometimes check applicants’ credit history. Even getting approval for a cellphone plan may depend on having good credit.

Still, it could be many months before the consumer agency finalizes the rules. The plan could face opposition from industry groups. “We have concerns that some of the proposals may push the limits of the bureau’s authority under federal law,” Dan Smith, president and chief executive of the Consumer Data Industry Association, which represents the credit bureaus, said in an emailed statement.

Some states, meanwhile, are already acting to scrub medical debts from credit reports. Colorado passed a law that took effect in August, and New York passed a law in June that awaits the governor’s signature. (A spokesman for New York Governor Kathy Hochul said on Wednesday, September 27, that she “will review the legislation.”)

Julia Char Gilbert, a policy advocate with the Colorado Center on Law and Policy, a nonprofit group that championed the Colorado law and backs the federal consumer bureau’s changes, said: “It’s hard to overstate the impact these changes will have on Americans’ lives. There is a growing understanding that medical debt is reaching emergency levels.”

About 6% of adults—or about 16 million people—owe more than $1,000 in medical debt; and 1%, or three million people, owe more than $10,000, according to a 2022 analysis by two nonprofit health research groups, the Peterson Center on Healthcare and the Kaiser Family Foundation (KFF). People with disabilities and Black Americans are more likely to have significant medical debt, the analysis found.

Having health insurance doesn’t necessarily protect patients from medical debt, the groups found in a separate analysis, because insured people often cannot afford their out-of-pocket costs, like co-pays and deductibles—the amount you pay for health care services before your insurance coverage starts to pay. The average annual deductible in 2021 for single workers with job-based insurance was almost $2,400 at small firms, and about $1,400 at larger companies.

Doctors and hospitals typically don’t report medical debts directly to credit bureaus. Rather, after a patient fails to pay, the bill may go to a collection agency, which may report the delinquency to the credit bureaus.

In 2021, more than half of third-party debt collections on Americans’ credit reports were for medical debt, Rohit Chopra, the consumer bureau’s director, said in prepared remarks.

Many people with medical debt are those with chronic illnesses who need continuing care or those with a one-time injury that required treatment in the emergency room, said Jennifer Holloway, a fellow at Tzedek DC, a nonprofit group in Washington that offers free legal help for low-income people in debt. “They fell and broke their ankle, they have a high deductible, and now they’re thousands of dollars in debt.”

The consumer bureau’s research, however, has shown that medical bills are “less predictive” of future repayment risk than credit card, mortgage ,or other debt. That’s partly because medical debt is often unplanned and also because medical billing is complex. Mistakes on bills are common, as are disagreements between providers and insurance companies about coverage. In some cases, the consumer bureau said, debt collectors may use the prospect of damaged credit to strong-arm patients into paying what may be “spurious or false” medical bills that they don’t really owe.

“Folks are being penalized for something they didn’t do,” said Kaye Pestaina, a co-director of KFF’s program on patient and consumer protections. If a medical debt is placed on a credit report by mistake, she said, “it doesn’t reflect your ability to pay back debt.”

The consumer bureau’s proposals wouldn’t eliminate medical debt—but removing it from credit reports would help protect patients from the negative effects of having unpaid medical collections on their credit history, Pestaina said.

Last year, the three major credit reporting bureaus—Equifax, Experian, and TransUnionagreed to exclude from credit reports any medical collection debts that had been paid, as well as those less than a year old. And as of April 11 of this year, the bureaus no longer include medical collections for amounts under $500 on credit reports.

That action means that about half of all people with medical debts on their credit reports will have it removed from their credit history, the consumer bureau said. But it still left millions with larger unpaid medical debts at risk of marred credit, the consumer bureau says.

The agency’s proposed changes come as it faces a legal challenge to its authority before the U.S. Supreme Court. Arguments in the case are expected to be heard this coming week, with a decision sometime next year.

Research contact: @nytimes