The White House is proposing a revolutionary move to exclude medical bills from credit reporting, which could potentially transform the lives of many individuals. While this proposal won’t eliminate medical debt or prevent future debts, it aims to challenge the notion that medical debt should be used as a determinant for creditworthiness.
According to the Biden administration and debt advocates, medical debt is not an accurate predictor of a person’s creditworthiness. Shielding this debt from credit reports could provide borrowers with the opportunity to pursue significant purchases or cover their basic expenses.
Allison Sesso, CEO of the nonprofit organization RIP Medical Debt, highlights that individuals with sound financial habits in other areas of their lives can still find themselves overwhelmed by an enormous medical bill they cannot afford to pay. She argues that the occurrence of medical debt is not a matter of choice, and it should not be used to evaluate creditworthiness.
Under the proposed rule, medical information would be removed from credit reports, and creditors would be prohibited from using medical bills to make underwriting decisions. Additionally, debt collectors would be restricted from employing coercive collection practices.
It has long been acknowledged by the Consumer Financial Protection Bureau (CFPB) that medical debt influences credit reports to a disproportionate extent, with approximately 1 in 10 U.S. adults having overdue medical bills. These unpaid bills negatively impact credit scores, limiting access to housing, loans, and other lines of credit.
Krutika Amin, associate director at KFF, expresses that excluding medical debt from credit reports would free up individuals’ credit for other vital expenses. Medical debt is often associated with financial constraints, affecting individuals’ ability to afford food and housing.
Sesso’s organization, RIP Medical Debt, directly assists communities by purchasing medical debt. Although the Biden proposal may not eliminate all debts, it can provide individuals with the opportunity to address other financial obligations and improve their credit, potentially enabling them to purchase a house, a car, or access other lines of credit.
The CFPB is expanding on its previous actions taken this year. It has instructed debt collectors and consumer credit reporting agencies not to take action on invalid medical bills and to remove paid medical bills from credit reports. The top three credit reporting companies were also instructed to remove medical collections under $500. The agency estimates that approximately half of those with medical debts will have their bills removed from their reports through these measures.
Medical debt disproportionately affects certain demographics, such as people of color, middle-aged individuals, people with disabilities, and those with lower incomes. In 2022, it was estimated that U.S. adults collectively owed nearly $200 billion in healthcare bills.
KFF reveals that as individuals age, their likelihood of accruing medical expenses increases. However, at the age of 65, when individuals become eligible for Medicare, the percentage of adults with medical debt actually decreases.
Stakeholders in the healthcare industry emphasize that the Biden administration should be aware of the ways in which medical debt is obscured. Many individuals resort to borrowing money from friends and family or paying off their hospital bills with credit cards, essentially transferring the debt from one source to another. Sesso believes that credit card companies should recognize medical debts in their records, cautioning against paying hospital bills with credit cards.
Sesso explains, “We rely on credit reporting to understand the extent of medical debt, so I think that’s something we’d like to see—another way of capturing the data on medical debt, which we think would be better to do in a different way. Because not all healthcare providers currently report to credit, there probably is an undercount.”
Many Americans state that it may take them years or even a lifetime to pay off their medical bills. A 2022 KFF report indicates that approximately one-third of adults expect to pay off their medical bills within one year, while one-quarter believe they can settle them within two years. However, one out of five adults do not foresee ever being able to pay off their medical debt.
The report also reveals that one-third of adults would not be able to afford an unexpected $500 bill, indicating that they would need to accumulate debt. Braden Pan, CEO and founder of Resolve, a company that assists customers in negotiating down medical bills, highlights three main obstacles preventing people from paying off their debts: cost, lack of trust, and lack of understanding.
Advocates hope that the Biden administration’s proposal will lead to additional actions targeting the root issues surrounding medical debt. Sesso emphasizes the importance of not creating medical debt in the first place, urging further measures to address the problem comprehensively.
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