Health care bills are about to become much less of a threat to the financial well-being of millions of Americans.
The three major credit bureaus are erasing most medical debt from people’s credit reports, and the Biden administration is reducing or eliminating medical debt as a factor in government lending decisions.
Here’s what you need to know about medical debt now.
1 IN 5 HOUSEHOLDS HAVE MEDICAL DEBT
About 1 in 5 American households has medical debt, according to the Consumer Financial Protection Bureau. Some are uninsured, while others struggle to pay deductibles and other cost shares. Insurance billing is byzantine to say the least, and it’s easy to lose track of a bill while your insurer decides how much or whether to pay.
Many of these unpaid bills end up on people’s credit reports. The CFPB found medical debt on 43 million credit reports last year, and medical debt accounted for 58% of all bills in collections in the second quarter of 2021. Collections can lower your credit scores, which can make it harder to get loans or require you to pay higher interest rates. Bad credit can also get you turned down for a job or an apartment and force you to pay more for car and home insurance.
Newer versions of credit scoring formulas treat medical debt less harshly because research shows that health care bills aren’t as reliable as a credit indicator compared to other types of collections. But most lenders still use older credit scores that don’t distinguish medical debt from other overdue bills.
Rather than waiting for lenders to update the latest credit scores – a process that could take years, if it ever happens – the CFPB announced on March 1 that it would investigate whether medical debt should be included in credit reports.
Seventeen days later, the three credit bureaus – Equifax, Experian and TransUnion – responded, promising to remove nearly 70% of medical debt from consumer credit reports over the next year.
DISAPPEARANCE OF MOST MEDICAL DEBTS
From July 1, all paid medical collections will be purged from people’s credit records, and no unpaid bills will be reported until 12 months have passed – an increase from the current six months. By June 30, 2023, all three offices will also stop reporting unpaid medical debts under $500.
Consumer advocates welcomed the changes, but noted that those with larger debts would still suffer credit damage. About 16 million people (6% of American adults) owe more than $1,000 in medical debt and 3 million (1%) owe more than $10,000, according to KFF, the nonprofit health research organization formerly known as the Kaiser Family Foundation.
Recent moves by the Biden administration could help improve access to credit. On April 11, Vice President Kamala Harris announced additional reforms, including reducing or eliminating medical debt as a factor in government lending decisions. This should make it easier to get many home and business loans. Additionally, Veterans Affairs, which has already cleared $1 billion in copayments owed by veterans, has promised to streamline the process so more low-income vets can get their VA bills forgiven. The VA also stopped reporting most veterans’ medical debt to credit bureaus.
WHAT YOU CAN DO
Soon you won’t have to worry about a minor medical bill causing your credit scores to plummet. But catastrophic medical bills could still upset your finances. Consider taking the following steps to reduce your vulnerability to medical debt:
• Stay covered, if possible. Insured people enjoy greater consumer protection and better access to health care than uninsured people. People who are not covered by workers’ compensation insurance or government plans such as Medicare can find coverage through Affordable Care Act exchanges. Start your search at health.gov. Most uninsured people qualify for subsidies to make premiums more affordable.
• Check all medical bills for errors. Billing errors are common, so ask for itemized bills for hospital stays and complex procedures. Challenge any mistakes you find.
• Ask for help. Hospitals and other health care providers may have financial assistance programs that could reduce or eliminate your bills. (Non-profit hospitals are required to have such programs but cannot offer assistance unless you request it.)
• Avoid using credit cards if you cannot pay in full. Credit cards tend to have high interest rates which make debt harder to pay off. Many healthcare providers offer interest-free payment plans that allow you to pay your bill over time.