Untangling Medical Debt From Credit Scores: Effects So Far and Next Steps

Since the major credit bureaus in the United States enacted changes to policies around reporting medical debt in collections, the share of consumers experiencing this debt has declined significantly and their credit scores have increased, according to an analysis from the Urban Institute.¹ However, patients can still be sued over unpaid medical bills, and further reforms are needed to alleviate these financial burdens.

Senior couple checking their bills | Image Credit: © WavebreakMediaMicro - stock.adobe.com

The credit bureau policy changes that have taken effect over the past 18 months include the following:

• July 2022: removing paid medical collections from credit reports and lengthening the grace period for reporting unpaid medical collections from 6 months to 1 year
• August 2022: removing medical debt in collections from calculation of Vantage Scores
• April 2023: preventing medical collections less than $500 from appearing on consumer credit reports.

Urban Institute authors noted that medical debt has accounted for most of the debt in collections on consumer credit reports for the past decade, and depressed credit scores can hurt one’s ability to access loans, obtain insurance, be hired for a job, or rent an apartment. The proportion of consumers with medical debt in collections was decreasing even prior to the credit bureau policy changes—from 16.0% in August 2018 to 12.6% in February 2022, and this decline intensified, leaving just 5.0% of adults with this type of debt in August 2023.

“We estimate more than 15 million consumers might have had all their medical debt in collections erased from their credit files in the past year,” the analysis authors wrote.

Those who had medical debt in collections in August 2022 have also seen their credit scores increase, from a mean of 585 at that point to 615 in August 2023. This rise lifts the mean score out of the subprime range, which denotes a riskier borrower and thus a higher interest rate, into the near-prime category, with tangible impacts on the terms of the loans they are able to secure.

These strides, however, have not completely eradicated medical debt from credit reports, as bills higher than $500 can still appear on reports. In September, the federal Consumer Financial Protection Bureau announced plans to develop rules that would eliminate this information from credit reports entirely, with rulemaking planned for 2024.² Experts predict fierce opposition to these measures from hospitals and health systems, as their collections departments often lean on the threat of credit reporting to prompt patients to pay their bills.

According to the Urban Institute authors, efforts to untangle medical bills from credit reports will help boost credit scores, but these steps will not on their own solve the problem of medical debt, which patients can still be sued for by hospitals and collection agencies. Medical debt also exacts practical and psychological tolls of consumers, with one-third of respondents to a recent Commonwealth Fund survey reporting they had medical or dental bills they were paying off over time.³ Of those who did, 78% reported that it caused them anxiety and worry and 39% said they had to cut back on basic needs like food, heat, or rent to pay off this debt.

Reducing this burden and the associated consequences would require larger-scale reforms to protect consumers from high out-of-pocket medical expenses, the Urban Institute analysis states. The authors also note the need to monitor health care providers’ billing and collection practices for changes intended to compensate for the medical debt reporting policies, such as requiring upfront payment prior to care or leaning on other collection strategies. Sources for analyzing the effects of these policy changes will include not only credit reports but also household surveys, court records, and hospital data, reflecting the wide-ranging implications of medical debt on Americans’ lives.

References

1. Blavin F, Braga B, Karpman M. Medical debt was erased from credit records for most consumers, potentially improving many Americans’ lives. Urban Institute. November 2, 2023. Accessed November 28, 2023. https://www.urban.org/urban-wire/medical-debt-was-erased-credit-records-most-consumers-potentially-improving-many

2. Levey NN. Biden administration to ban medical debt from Americans’ credit scores. KFF Health News. September 21, 2023. Accessed November 28, 2023. https://kffhealthnews.org/news/article/medical-debt-credit-score-ban-biden-administration/

3. Mattina C. Survey findings paint grim picture of health care affordability in the US. AJMC. October 26, 2023. Accessed November 28, 2023. https://www.ajmc.com/view/survey-findings-paint-grim-picture-of-health-care-affordability-in-the-us