How barring medical debt from credit scores could impact borrowers

A White House proposal to bar medical bills from being used in credit reporting won’t get rid of the debt itself or prevent future debts from being accrued, but the move could be transformative for many.

The Biden administration and debt advocates argue medical debt is not a good predictor of a person’s credit worthiness, hence why it should be excluded from the information creditors can use. 

And they say shielding the debt from credit reports could free up borrowers to make big purchases or cover basic expenses. 

Allison Sesso, CEO of the nonprofit RIP Medical Debt, said a person with good financial habits in every other aspect of their life can be stuck with an enormous bill they can’t pay off.

“The number one predictor of medical debt is not your insurance status. It’s whether or not you get sick,” Sesso told The Hill. “Which is pretty telling and really speaks to why you don’t have a lot of control over whether or not you’re in medical debt, which means it probably shouldn’t be an indicator of your credit worthiness.”

Under the administration’s proposed rule, medical information would be removed from credit reports, creditors would not be allowed to rely on medical bills for underwriting decisions, and debt collectors would be prohibited from using “coercive collection practices.”

Medical debt has long played an “outsized role” in credit reports, according to the Consumer Financial Protection Bureau (CFPB), with roughly 1 in 10 U.S. adults in arrears on medical bills. 

Inability to pay off these health care bills can drag down peoples’ credit scores, affecting their ability to obtain housing — whether it’s to get a loan or qualify for a lease — as well as secure an auto loan or open up other lines of credit.

“This would free up people’s credit,” Krutika Amin, associate director at KFF, told The Hill. “Medical debt is often described as something that affects peoples’ ability to afford food and housing and so this would free up their credit for other living expenses.”

Sesso’s organization buys out medical debt within communities, making an even more direct impact than the Biden proposal. But she said it would still help. 

“Even if they have additional debt still behind them, it’s one more that’s off their plate and it gives them sort of the ability to take on those other debts or to improve their credit so that they can buy a house or buy a car or have other lines of credit available to them,” Sesso said.

The CFPB is expanding on actions it took earlier this year when it told debt collectors and consumer credit reporting companies not to take action on invalid medical bills, to remove paid medical bills from credit reports and instructed the top three credit reporting companies to remove medical collections under $500. At the time, the agency estimated about half of those with medical debts would have their bills removed from their reports with this step.

The burden of medical debt is experienced disproportionately across demographics.

People of color, those who are middle-aged, people with disabilities and people who earn a lower income are more likely to have medical debt, according to Amin. In 2022, U.S. adults were estimated to collectively owe nearly $200 billion in health care bills in total.

“As people age, they’re more likely to accrue medical expenses. But what we see is at the age of 65 — where people become eligible for Medicare — the share of adults with medical debt actually drops,” Amin noted.

Stakeholders in the health care space say the administration should be aware of ways in which medical debt is obscured.

People often borrow money from friends and family or pay off their hospital bills with credit cards, essentially moving the debt from one place to another. Sesso said paying hospital bills with credit cards is a “mistake,” adding that credit card companies should provide recognition of medical debts in their records.

“We do rely on the credit reporting to understand the extent of medical debt, and so I think that’s something we’d like to see … another way of capturing the data on medical debt, which we think would be better to do in a different way,” Sesso said. “Because not all health care providers do report to credit currently, and so there probably is an undercount.”

Many Americans say it may take them years to pay off medical bills, while some say they will never get rid of the debt. 

A KFF report from 2022 found that about 1 out of 3 adults said they expected to be able to pay off a medical bill within one year and about a quarter said they could pay off their bills within two years. But 1 out of 5 adults said they don’t foresee ever being able to pay off their debt.

The report also found that a third of adults said they would be unable to pay an unexpected $500 bill, meaning they would need to go into debt. 

There are typically three obstacles stopping people from paying off their debts according to Braden Pan, CEO and founder of Resolve, a company that helps to negotiate down medical bills on behalf of customers.

Not surprisingly, the chief reason is the cost. The “exorbitant” fees that are incurred are simply too large for some people to pay off without some form of external intervention, Pan said. The other two reasons are “a lack of trust and a lack of understanding.”

“When consumers go get care at a hospital, they have insurance and they may still get an extremely large medical bill and they don’t understand why they’re getting a large medical bill,” Pan said. “And because the system is so confusing to consumers, they can’t figure out should insurance have paid more for it? Are there billing errors, or is this a legitimate bill? And so they don’t really trust the bill because they don’t understand what’s going on.”

Advocates hope the Biden administration’s latest proposal leads to more actions that also target the root of the problem.

“It’s one thing to not put it on someone’s credit report, but it’s better to not have it created in the first place,” Sesso said.