We’re paying off medical debt wrong 

Medical debt imposes a crushing burden on millions of Americans. More than 40 percent of Americans owe medical debt, with 18 percent owing $2,500 or more.  

Concerned by this issue, states and local governments have passed or are considering programs to fund debt relief. On Monday, Illinois Gov. JB Pritzker announced a plan to eliminate $1 billion in medical debt per year. This adds to more than $12 billion in passed or proposed medical debt relief by 20 other states or local governments over the last few years.  

Last week, we released the results of a large, randomized experiment on medical debt relief. Working with Undue Medical Debt (which on Monday changed its name from RIP Medical Debt), we randomly provided $169 million in medical debt relief to 83,401 people. We then tracked the finances and health of those who had their debt relieved and those who did not.  

The results of our experiment were surprising. And disappointing. Medical debt relief had no average effect on people’s finances, including on-time loan payments and access to new loans, and no average effect on healthcare outcomes, including mental health and the ability to get needed healthcare and prescription drugs.  

Simply put, the $169 million in debt forgiveness resulted in payments to debt collectors with no measured benefits to patients.  

Our results raise important questions for current and prospective funders of medical debt relief. How can medical debt relief be better designed to address the significant financial and health needs of this vulnerable population? How does medical debt relief fit into the broader toolkit of interventions and policy reforms that can target people at risk of crushing medical debt?  

We are academics who have been studying issues at the intersection of the healthcare system and financial distress for over a decade. Integrating the lessons from our study with other research, we have three lessons for policies targeting the medical debt problem: 

First, for debt relief to be effective, it will need to be provided more quickly after the precipitating medical event, when there is high demand for follow-up care and before patients become scarred by the debt collection process.  

In a recently published article, we studied Kaiser Permanente’s financial assistance program, which provides debt relief and cost-sharing assistance to patients shortly after they leave the hospital. Financial assistance caused significant increases in healthcare use, including greater detection and treatment of conditions like diabetes and depression. By contrast, the medical debt in our experiment was relieved more than a year after the medical event and after patients endured collection efforts by the hospital.  

Providing debt relief more quickly is logistically challenging because it requires working with hospitals on an individual basis rather than with large debt collectors that contract with many hospitals; to their credit, Undue Medical Debt is moving in this direction and setting up these hospital-level relationships. It may also be more expensive; hospitals may charge more for newer debt if they expect higher recovery rates. 

Second, there is no substitute for upstream efforts that prevent medical debt before it occurs, through expanded and more generous health insurance coverage. Randomized studies show that health insurance significantly improves household finances and mental health and reduces mortality for middle-aged adults. Analysis of state-level Medicaid expansions under the Affordable Care Act shows similar significant effects on household finances, access to care and mortality.  

Third, addressing the problem of medical debt will be easier if we can rein in high healthcare prices. Reducing price growth will make it easier to expand insurance coverage and generosity and will lessen the burden on patients when insurance does not pick up the tab. Mergers and acquisitions among and between insurers, hospitals and other healthcare providers have driven prices well above their competitive levels. Preventing further consolidation by strengthening antitrust laws and enforcement, and more generally promoting competition in healthcare, needs to be part of this agenda.  

Advocates for medical debt relief have always viewed their efforts as a stopgap solution. The founders of Undue Medical Debt often told us that, by working toward a healthcare system without medical debt, their ultimate goal was to put themselves out of business. Our finding of no benefits from downstream relief of medical debt should redouble the focus on upstream solutions that reduce prices and increase coverage to prevent people from getting medical debt in the first place.  

Undue Medical Debt, and other advocates, deserve credit for raising awareness about medical debt and pushing policymakers to reduce its burden. Spurred by advocates, the Consumer Financial Protection Bureau worked with credit bureaus to dramatically reduce the presence of medical debt on credit reports. Most people in our study were already benefiting from this reduced reporting and didn’t additionally benefit when their debt was relieved. However, for those where there was reporting, medical debt relief raised credit scores and increased credit limits, showing that these policies have yielded meaningful credit access benefits.  

Many experts and advocates were optimistic that medical debt relief could significantly improve health and finances at a cost of less than a penny on the dollar. While our study pours cold water on this prospect, the response should not be to give up, but, instead, to do the hard work to identify and advocate for more effective interventions and policies.  

For too many Americans, our healthcare system compounds the trauma of injury and illness with crushing medical bills. The solution cannot be to just treat the symptoms. We must rein in high prices and improve insurance coverage and hospital financial assistance so we can stamp out medical debt at the source.  

Raymond Kluender is an assistant professor of business administration at Harvard Business School.  

Neale Mahoney is a professor of Economics at Stanford University and incoming director at the Stanford Institute for Economic Policy Research. 

Francis Wong is an associate professor of economics at the Ludwig-Maximilians University of Munich.