These local governments are using federal aid to cancel medical debt
From Chicago to Toledo, more and more local governments are embarking on this simple economic stimulus strategy: buying and canceling medical bills en masse
The City Council of Toledo has just approved a map turn $1.6 million in public dollars into $240 million in economic stimulus, targeted at some of the most vulnerable residents in metro Ohio.
“It’s really going to help people put food on the table, help them pay their rent, help them pay their utilities,” says Toledo City Council member Michele Grim, who paved the way for the measure. “Hopefully we can prevent some evictions.”
The strategy couldn’t be simpler: it works by writing off millions of medical debts.
Working with the New York-based nonprofit RIP medical debt, the city of Toledo and surrounding Lucas County are each contributing $800,000 from their federal American Rescue Plan Act COVID-19 recovery funds. The combined funding of $1.6 million is enough for RIP Medical Debt to acquire and forgive up to $240 million in medical debt owed by Lucas County households who earn up to 400% of the federal poverty level .
“That could be more than a $1 to $100 return on investment from the government,” Grim says. “I really can’t think of a simpler program for economic recovery or a better way to use US bailout dollars because it’s supposed to save Americans.”
Under the RIP medical debt model, there is no application process to cancel medical debt. The nonprofit negotiates directly with local hospitals or hospital systems one by one, buying portfolios of debt owed by eligible households and canceling the entire portfolio en masse.
“Someday someone will get a letter saying your debt has been forgiven,” Grim says. It’s a simple strategy for economic well-being and recovery.
RIP Medical Debt was founded in 2014 by two former debt collectors and since its inception has acquired and written off more than $7.3 billion in medical debt owed by 4.2 million households, an average $1,737 per household. CEO Allison Sesso says they switched from bright yellow envelopes to standard white envelopes a few years ago.
“We did some AB testing and realized that the yellow envelopes make it look more like debt collection,” Sesso says. “We always have to work hard to make sure we don’t look like a collection agency. We have not recovered a single dollar of any debt that we have purchased.
The partnership with Toledo and Lucas County is RIP Medical Debt’s third example of public sector funding to cancel debt portfolios. Earlier this year, in the largest such example to date, the Cook County Board of Commissioners approved a plan to provide $12 million in ARPA funds for RIP medical debt to purchase and write off an estimated $1 billion medical debt held by hospitals in Cook County, which includes Chicago.
“Governments contract with nonprofits for various social interventions all the time,” Sesso says. “It’s not really that far-fetched or different from that. I would say between five and ten other local governments have reached out just since the Toledo story came out.
It is estimated that one in five households in the United States has some medical debt, and they are disproportionately black and Latino, according to the United States Census Bureau. The average amount owed is $2,000. And the problem is not limited to the uninsured. As Sesso points out, many households with health insurance still end up with unpaid medical bills because the only health insurance plans that are affordable to them are high-deductible plans.
“It’s like taking out a subprime mortgage,” Sesso says. “That’s a big deal, because the premiums for the most Cadillac plans, if you will, are out of people’s reach.”
Acquiring medical debt is relatively inexpensive: hospitals that sell portfolios of medical debt do so for pennies on the dollar, usually to investors in the secondary market. The purchase price is so low because hospitals and debt buyers know that medical debt is the hardest form to collect. Nearly 60% of all debt held by collection agencies is medical debt owed by some 43 million households, According to the Consumer Financial Protection Bureau.
Even more households have medical debt that hospitals haven’t sold to anyone yet. Upon its inception, RIP Medical Debt began acquiring medical debt only on the secondary market, from debt collectors or other investors who had previously purchased portfolios from healthcare providers. But two years ago, RIP Medical Debt began going directly to hospital systems and offering to buy back the debt they held on their balance sheets.
“I couldn’t tell you where it came from, but generally the figure that’s been circulating is that only 20% to 30% of hospitals overall are selling their debt,” Sesso says. “That’s a lot of hospitals that don’t sell their debt in the secondary market, but those same hospitals will sell their debt to us because we’re doing it for a different purpose. So we were able to open up some of the market to buy debt from hospitals that otherwise wouldn’t sell their debt. »
A year ago, Sesso says, about a quarter of the debt RIP Medical Debt had ever purchased came directly from hospitals. Today, nearly 50% of the nonprofit’s forgiven debt has been acquired directly from hospitals, and that segment of its portfolio is growing much faster than medical debt purchased on the secondary market. Sometimes hospitals themselves contact RIP Medical Debt before anyone else in their community.
The process is simple. After explaining RIP Medical Debt and its mission, they answer any questions, including reimbursement or regulatory issues, Sesso says. “And then we take it from there. We sign a non-disclosure agreement, we get a file from them, we analyze it, we come back to them and tell them what the analysis showed, how much is eligible, what we would pay, and then we sign a another agreement that transfers the debt to us, we send them a transfer and we start sending letters. Just like that, hundreds of lives are changed.
The big backend costs for RIP Medical Debt include the costs of automating the process as much as possible while maintaining compliance with all healthcare privacy laws and regulations regarding the secondary debt market. This includes paying for access to credit histories to verify that households fall below the 400% federal poverty line.
“We only want to buy the debt for eligible people, which usually end up being 80-90% of what hospitals give us to analyze in the first place,” Sesso says.
The amount of debt forgiven for a given household has ranged from $25 up to six-figure amounts. Under IRS regulations, debts canceled under the RIP Medical Debt model do not count as taxable income for households.
An important limitation so far has been to use public funds to acquire debt from public hospital systems; ARPA rules prohibit RIP Medical Debt from using these dollars to purchase debt from county or city-run hospital systems. But as he already did in Chicagothe association will continue to raise private funds to acquire and cancel the debt portfolios of public hospitals.
After not one but two donations from philanthropist MacKenzie Scott, totaling $80 million, RIP Medical Debt plans to expand. He uses some of those dollars to create an internal revolving line of credit to expand to places where he can find willing vendors before he has found willing lenders. The internal line of credit means the nonprofit now has new, albeit still limited, flexibility to first acquire debt portfolios from hospitals and then begin raising private or public funds locally. to replenish the line of credit later and make these funds available for other locations.
“People often ask, do you only work with non-profit hospitals or do you work with for-profit hospitals? And I’m like, I just want to get the debt, regardless of who created the debt. If it’s there, I want it,” Sesso says.
Fundamentally, they are not solving the problem of medical debt, but alleviating its pressure on as many lives as possible – while increasing the pressure on lawmakers and the health sector. “We intentionally take the stories of people whose debt we’ve resolved and air their stories out into the world with intention in a way that tries to push and create more of that pressure to fundamentally solve the problem,” she says.
Oscar is Next City’s Senior Economic Justice Correspondent. He previously served as Next City Editor-in-Chief from 2018-2019 and was a Next City Equitable Cities Fellow from 2015-2016. Since 2011, Oscar has covered community development finance, community banking, impact investing, economic development, housing and more for outlets such as Shelterforce, B Magazine, Impact Alpha and Fast Company.