Medical Debtors Got Some Help — But More Needs to be Done
Andrew Touma (PPS ‘24)
Three of the nation’s largest credit bureaus announced changes to how medical debt will impact credit scores. Starting in July, unpaid medical collections will not impact one’s credit score until a full year has passed, up from the previous standard of six months. Additionally, medical debts under $500 will not appear on credit reports starting in 2023. While significant, the new benchmark can be reversed at any instant, meaning it is up to policymakers to enshrine these new standards into law.
Medical debt refers to the financial obligations one owes to hospitals or insurance companies following a procedure or hospital stay. While upwards of 90% of Americans have some health insurance, medical debt continues to be a widespread problem. Medical debt is unique because it is often involuntarily taken on following an unexpected treatment, unlike credit card debt which one consciously incurs. Over time, unpaid medical debt lowers one’s credit score, which makes it more difficult to receive loans or get a job.
An estimated 43 million Americans have around $88 billion in medical debt, with 23 million people owing less than $250. Medical debt tends to be more common in marginalized communities, with roughly 27.9% of Black households and 21.7% of Hispanic households in debt to healthcare providers or insurance companies. The new changes remove roughly 70% of medical debt from credit reports, giving Americans more time to pay back their outstanding medical bills without fear of lowering their credit score.
The changes in medical debt financing were long overdue, but they are far from permanent. The three main credit bureaus — Equifax, Experian, and TransUnion — adopted the new credit standard voluntarily because of pressure from the now Democrat-run Consumer Financial Protection Bureau (CFPB). Should the CFPB shift to Republican leadership, this pressure could disappear, opening the door for credit bureaus to reinstate the old and less lenient standard for repaying medical debt. At its core, this shift would eliminate the progress of the past few weeks, lowering the credit scores and changing the lives of millions of Americans.
Recently, Vice President Kamala Harris announced the Biden Administration’s plans to codify the new standards set by Equifax, Experian, and TransUnion into law. Beyond reducing the influence medical debts have on credit scores, the reforms pledge to hold healthcare providers and debt collectors more accountable, make medical debt financing more transparent, and provide relief to low-income veterans with medical debt. The statement from the White House is the first public policy attempt to resolve the medical debt crisis since the Medical Debt Relief Act of 2021, which was mysteriously unable to make it out of committee in the House of Representatives and the Senate.
It is worth noting the consequences that could come from easing the standard for repaying medical debt. Removing unpaid medical debts from credit reports disincentivizes consumers to pay their medical debts because the consequence is less significant. This side-effect could result in providers being less willing to lend to patients who are thought to have a higher risk of not paying back medical debts.
However, this economist mindset views healthcare as if it were a typical consumer product, which ignores the unpredictability of medical expenses. Oftentimes, expensive medical bills occur spontaneously, giving patients little time to prepare financially. Most medical debts are not large, with over 60% being below $500. It is not that patients are incapable of paying back providers, but they just need more time. Furthermore, one typically does not choose to go into medical debt; rather, they do so because they require treatment for an ailment. A Stanford University study found that nearly 50% of those with medical debt purposefully did not seek medical care. If the ultimate goal of healthcare is to help those when they need it most, financial barriers should not prevent people from seeking care in the first place.
Thus, there must be legislation to make the recent changes to medical debt repayment permanent, and the proposed policies by the Biden Administration are a strong step in the right direction. Without a law enumerating a more forgiving standard, credit bureaus could simply revert to their previous ways if the CFPB were to fall under Republican control. One falls into medical debt when they are at their lowest. The least that we can do to help is offer a speedy physical and financial road to recovery.
Andrew Touma (PPS ’24) is a Public Policy Undergraduate at Duke University’s Sanford School of Public Policy. This piece was submitted as an op-ed in the Spring ’22 PUBPOL 301 course. This content does not represent the official or unofficial views of the Sanford School, Polis, Duke University, or any entity or individual other than the author.