Is Medical Debt Wrecking Your Life? (Help May Be Coming)

Credit.com

There’s at least one thing Congressional Republicans and Democrats agree on, and it’s that medical debt is a problem. Members of Congress and their staff recognize that medical bills are confusing and prone to errors — and the debts can hurt creditworthy consumers by constraining their access to credit.

In recent years, attempts at much-needed reforms have fallen flat.  Fortunately, the cause is gaining support on a number of fronts and a Senate Subcommittee hearing scheduled for today could finally lead to help for consumers who are drowning in medical debts.

There are few times when a person is more vulnerable than when they are sick and worried about their prognosis — and then the confusing medical bill statements begin arriving. Many months may go by before a consumer realizes a bill is overdue. And medical bills that fall through the cracks, whether large or small, can be sent to collection. Add to the fact that billing errors are also a common problem for consumers, and you have a recipe for disaster. Last year, the American Medical Association’s Health Insurer Report Card found that the error rates for private health insurers on paid medical claims was 10%.

However, whether due to an oversight or an error, once a medical bill is in collection, if it is reported to the credit bureaus it is seen as an adverse account and one’s credit is ruined . How big is this problem? Take a look at this fresh-off-the-press report from the Commonwealth Fund . They found 41 million Americans were contacted by collection agencies about medical bills in 2012. The report estimates 7 million American adults reported that a billing error had prompted a collection agency to contact them and that 32 million Americans had credit scores lowered due to medical debt.

According to FICO, a medical collection — even for a very small amount — can lower a score by “100 points or more” for someone with a good credit history. These consumers can see higher interest rates charged on loans if they are able to get one at all.

Gaining support

Medical debt is quite possibly the issue that could revive the Congressional bipartisan spirit. The leading indicators that this may happen are none other than the chair and ranking member of the House Financial Services Committee.

In April, Rep. Maxine Waters (D-Calif.), the Committee’s ranking member, recently introduced H.R. 1767 –  the Medical Debt Responsibility Act of 2013. The legislation would help Americans who have seen their credit scores drop due to medical bills. It would require the removal of fully settled or paid medical debt information from a credit report within a 45-day timeframe. “Illness or injury may strike any of us at any time, and often results in expensive treatment leaving millions of Americans to wrestle with medical debt,” said Rep. Waters.

Committee Chairman Jeb Hensarling (R-Texas) and his Vice Chairman Gary Miller (R-Calif.), are said to be hatching their own plan to deal with the problem of medical debt. Whatever the approach, they also feel that medical debt is a problem in need of attention.

Sen. Jeff Merkley (D-Ore.) also introduced S. 2149 — the Medical Debt Responsibility Act of 2012 — which, like the House bill, would prohibit using paid off or settled medical debt in assessing consumer credit scores. “Unforeseen accident or illness can happen to any one of us,” Merkley said. “We can’t change that fact, but we can change the law so that responsible working families aren’t hit with unfair credit reports for years after medical debt has been paid off.”

Not only does Congress recognize that medical debt is a problem, the Consumer Financial Protection Bureau does too. The CFPB has been looking to help consumers and further stimulate our economy, and medical debt has been in their field of vision. They appear to be questioning whether medical debt is helpful in determining one’s credit-worthiness. At a Senate Banking Subcommittee hearing in December, CFPB Assistant Director Corey Stone announced, “we actually have purchased a panel of anonymized consumer data from one of the credit reporting agencies that will have this medical data and from which we will be able to make a determination about the productiveness of this data.”

There is one other federal agency looking at outstanding medical bills, the Internal Revenue Service. Early last summer, the IRS proposed rules that hospitals granted federal tax exemption would be prohibited from taking “extraordinary collection actions” until they have made a reasonable effort to determine whether a patient qualifies for charity care (financial assistance granted to low-income patients by the hospital in exchange for tax exempt status). The IRS included the reporting of medical collections to the credit bureaus in their list of proposed extraordinary collection actions.

A hopeful development

Congressional Republicans and Democrats, the CFPB, and the IRS all seem concerned about medical debt and medical collections. When that much law making and regulatory power lines up on an issue, it seems likely that change is in the air.

Maybe it’s time that the consumer data industry itself explores the appropriateness of including medical collection data on credit reports. Interestingly, some in the industry are taking action to ensure that their credit scoring algorithms do not unfairly penalize consumers. In March, VantageScore announced that it will remove paid collection accounts from their credit scoring model.  Though this is not limited to medical collections, the industry knows that medical bills comprise more than half of all collection accounts on credit reports. (Update: VantageScore, when announcing this change, said that there are better alternatives to paid collections accounts when predicting credit risk.)

“Using the more granular data in unique combinations that emphasized unpaid collections, we created variables that delivered greater predictive strength than paid collection variables,” the company said in a stament.

The changes are a long time coming, but it looks like we’re getting closer to the medical debt reforms we need.


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