According to the Kaiser Family Foundation, medical debt plagues over 100 million people in the U.S. and 41% of all adults owe money for healthcare this year so far. However, those numbers could soon change as The Consumer Financial Protection Bureau (CFPB) and the Biden Administration have proposed new rules to eliminate medical debt from credit reports. This would be a significant change, as medical debt is currently the largest source of debt on credit reports (58% of all third-party debt collection on consumer credit reports was for medical bills.) This article will address the monumental changes this proposal could make to not only the healthcare industry but to the financial futures of millions of Americans. It will specifically address:
- Creditors would no longer be able to use medical debt to make decisions about whether to approve loans or offer credit.
- Debt collectors would no longer be able to use the threat of damaging someone’s credit score to collect medical debt.
- How these proposed rules could positively impact the financial stability and health of Americans
- Zina Kumock, Certified Financial Health Counselor
- Thomas H. Brock, CFA, CFP with over 20 years of experience in investments, corporate finance and accounting
The basics of the CFPB’s proposal around medical debt
The CFPB has estimated that one in five Americans have medical debt on their credit reports, and that this debt disproportionately affects low-income and minority communities. Middle-class Americans are also more likely to have medical debt (about 17 million of them do.) Last month they proposed rules that would prohibit credit reporting companies from including medical debt on credit reports, unless the debt has gone to collections and is unpaid for more than a year. The rules would also require credit reporting companies to remove medical debt from credit reports that has been paid off, or that is inaccurate or incomplete. As of July 2022, Equifax, TransUnion and Experian no longer included medical debt in collection under $500 on credit reports, due to CFPB proposals. However, these new rules would be applied to all medical debt.
The CFPB and the Biden Administration have argued that eliminating medical debt from credit reports would help millions of Americans improve their financial standing and achieve their financial goals. It could do this by:
- Increase economic activity: People with better credit scores are more likely to borrow money and spend it, which can boost the economy.
- Reduce financial stress: Medical debt can be a major source of financial stress for individuals and families. Eliminating medical debt from credit reports could help to reduce this stress and improve people’s overall financial well-being.
- Improve health outcomes: Research has shown that people with medical debt are more likely to delay or forgo needed medical care. Eliminating medical debt from credit reports could help people to get the care they need, which could improve their health outcomes.
How the CFPB proposal could alter creditors’ underwriting decision processes
The proposal outline could potentially help the tens of millions of families in America burdened with medical debt to no longer be paralyzed by these expenses. Contributing to this change would be that creditors would have to change their underwriting decision process. In a 2022 CFPB study it was found that about 20% of U.S. households reported medical debt and 43 million credit reports showed medical collections. However, recent research shows that medical debt is not a reliable predictor of overall financial health, which is why the impact on underwriting would be significant. The new rules acknowledge that medical debt does not necessarily reflect an individual’s ability or willingness to repay other types of debt, such as credit card debt or loans. By removing this factor, creditors can make lending decisions based on more relevant and predictive criteria. This can also remove a lot of the fear around seeking medical care for people who are afraid of the cost and can lead to better health outcomes and a more financially responsible approach to healthcare.
Stopping coercive collection practices
Medical bill collectors, like other debt collectors, sometimes engage in coercive and aggressive practices to compel individuals to pay their medical debts. While these practices may vary in intensity and frequency, they can have a significant impact on the debtor’s emotional and financial well-being. Common coercive debt collection practices in the medical field include: threats and intimidation, harassing phone calls, impersonating law enforcement, threats of lawsuits, etc. But if medical debt was eliminated or reduced significantly it would lessen the need for collection agencies.
Without the burden of medical debt, individuals may be in a better position to negotiate with creditors or collection agencies. They can work out more reasonable payment plans or settlements without feeling coerced into accepting unfair terms. This proposal could reduce the power collection agencies have over individuals and make them less scared to seek healthcare when they really need it.
It should be noted that the proposal could lessen transparency into the borrowers which makes it harder for creditors to assess risk. Thomas Brock, CFA, CFP, and with over 20 years of experience in investments, corporate finance, and accounting, told Credello, “On the surface, this sounds like a good thing, given the financial hardships borne by many individuals in today’s highly inflationary economic environment. However, it is not a cut-and-dry matter. To be clear, I am a proponent of any actions that reduce incidents of unscrupulous medical billing and coercive collections efforts. However, it is not sensible or fair to limit creditors’ visibility into the financial condition of existing and prospective borrowers. Creditors need as much visibility as possible, given the credit risk they assume when lending money. If I am considering whether to make a loan, I want access to all information available. I will analyze the information and determine what is important and what is irrelevant. I do not want the government getting involved in my underwriting process.”
The CFPB’s proposal to eliminate medical debt from credit reports offers a ray of hope for countless Americans burdened by the weight of healthcare-related financial stress. This pivotal step could revolutionize the way individuals navigate their financial journeys, offering them a fairer chance at accessing credit, lower interest rates, and reduced financial barriers. By alleviating the reliance of creditors on medical bills for underwriting decisions, the proposal not only promises immediate relief but also encourages a more equitable and inclusive financial system. Ultimately, it recognizes the need for financial healing, providing a path towards financial security, reduced stress, and greater economic well-being for individuals and families across the nation.”No one in our nation should have to go into debt just to get the quality healthcare that they need,” Vice President Kamala Harris said in a statement.