Credit Where Credit is Due: Why Congress Must Act Now to Prevent Americans from Being Financially Devastated by Medical Bills – N.Y.U. Journal of Legislation & Public Policy

By: Kaitlyn McMillan

March 15, 2022

One in six Americans with a credit report has an overdue medical bill on their report.¹ That’s more than 39 million people.² Two-thirds of consumers filing for bankruptcy cite medical debt as a reason for their financial distress. Moreover, people of color and lower-income communities are disproportionately affected by medical debt, as they are less likely to have health insurance and more likely to have past-due medical bills.³

For millions of individuals and families around the globe, the coronavirus pandemic has brought newfound, personal awareness to the distressing and disruptive impacts of medical emergencies and chronic illness. Acute and chronic health conditions can have tremendous consequences in all aspects of a person’s life, ranging from the more obvious physical, emotional, and mental effects to the devastating familial, social, and professional impacts of health problems.

For many patients in the United States though, the financial consequences of illness and injury can become as detrimental as the underlying health issues themselves. In 2019, the Federal Reserve found that about 40% of American adults do not have sufficient savings to cover a $400 emergency expense without selling something or going into debt.⁴ As a result, if an American is hospitalized due to coronavirus, even with employer-sponsored insurance, they may be unable to afford the out-of-pocket cost of their treatment, which is estimated to be $788 on average for privately-insured individuals.⁵ Like the countless Americans who suffer from other medical conditions, coronavirus patients who are unable to pay promptly may find their medical bills passed into the hands of third-party debt collectors.

Policymakers have recently focused on student debt forgiveness as a means of stimulating the economy and narrowing the racial wealth gap. Yet, consumers with medical debt exercise virtually no choice in acquiring their debts and receive far less benefit from the debt than college graduates. They are arguably even more deserving of policymakers’ attention than student borrowers for those reasons. Fortunately, in a country where the healthcare system fails many consumers at every step, there is plenty of opportunity for Congress to deliver meaningful, equity-enhancing relief to consumers in the wake of the coronavirus pandemic by improving our national management of medical debt.

I. Medical Bills are Fundamentally Different from the Other Consumer Debts Serviced by Third-Party Debt Collectors

Third-party debt collectors (“debt collectors”) use tools that are designed to elicit repayment for extensions of credit. Creditors retain debt collectors to recover a variety of types of consumer debt, including credit card debt, personal loan debt, utilities debt, government debt, and medical debt. In order to prompt payments from consumers, they may employ a variety of tactics, such as making phone calls, sending letters and emails, filing lawsuits, and furnishing information to credit reporting agencies. Healthcare providers and debt collectors apply the same collection tactics to medical bills as creditors do to other types of consumers debt, such as credit card and utilities debt. Yet, medical bills are fundamentally different.

First, the market in which medical debt is incurred is far from ideal. In a perfect market, no individual participant has an outsized influence on prices, buyers and sellers can enter and exit the market freely, and complete price information is readily available to all.⁶ When these conditions are met, competition among participants can root out inefficiency and improve consumer welfare.⁷

Healthcare providers and insurers, however, maintain significant market power and have the ability to set prices.⁸ There are significant barriers to entry, and information asymmetries and deficits abound. Medical providers have more information than patients, who have to trust that their providers will serve their best interests.⁹ The panoply of insurance networks and variation among plans and cost-sharing arrangements make it difficult for providers to estimate out-of-pocket costs upfront and even more difficult for consumers to predict costs and comparison shop among providers. The bills that result from medically necessary treatment cannot be said to reflect a true consumer preference to undergo the treatment at the unknown cost on the bill that will arrive in the mail weeks or months later.¹⁰ Perhaps even more important is that, regardless of market imperfections, many decisions that patients face are matters of life and death, and most are at least a matter of quality of life. The weight of these consequences renders the decision to incur medical debt hardly a choice at all.

Second, the process of acquiring medical debt is distinct from that of other types of consumer debt. Unlike a patient who acquires a medical debt, a consumer who applies for a credit card, for example, is presented with terms and conditions of use, including fees and interest rates, and ideally understands them. Consumers can then make use of their credit cards as they desire. Of course, consumers in financial distress may feel compelled to utilize their credit cards more often than they might otherwise prefer in order to cover essential expenses. However, they know the amount that they are charging, and they can ascertain the amount of interest and fees that will be assessed if they do not repay the charge on time. Patients receiving medically necessary treatment, on the other hand, may have no desire to go into debt and ordinarily have no forewarning about the amount they will be billed.¹¹

Medical debt is also distinguishable from utilities debt, which is often referred to third-party debt collectors.¹² Generally speaking, utility bills are more predictable. Typically, consumers can expect to receive a monthly bill for their home utilities. The amount is usually stable from month to month, with predictable spikes in electric bills during the summer and heating bills during the winter. Additionally, consumers have some degree of control over the amount: if they use less electricity, water, or other utilities, they can expect to receive lower bills. Much like credit cards and other loans, the basic principle is that if the consumer uses it, the consumer pays for it. This degree of control is not present in the case of medical bills. In many cases, less utilization of healthcare services can result in higher costs when a patient becomes so desperately in need of care that they can no longer forego treatment and require more extensive treatment than if they had sought care sooner.¹³ All of these differences underscore why medical debt should not be subject to standard debt collection techniques.

II. Medical Debt Rivals the Student Debt Problem in Terms of Scope and Racial Disparity

Members of Congress have repeatedly called upon President Biden to relieve borrowers of the burden of their student loan debt by canceling up to $50,000 of debt per person.¹⁴ Their rationale is that student debt “weighs down American families and disproportionately burdens Black and Latinx households” and “prevent[s] people from starting families, purchasing homes, pursuing professions, and fully participating in the economy.”¹⁵ Therefore, providing relief would “provide a massive stimulus to our economy.”¹⁶ All of these justifications apply with equal, if not greater, force to medical debt. Even if the federal government has more readily available policy levers for effecting change in the student debt market, which is dominated by loans issued by the Department of Education, tackling medical debt should be an urgent priority.

The burden of medical debt on American families, especially Black, Latinx, and low-income households, rivals that of student debt. In fact, a 2019 study found that 66.5 percent of people who filed for bankruptcy cited medical issues and bills as a reason for their bankruptcy. Only 25.4 percent cited student loan debt.¹⁷ Moreover, the coronavirus pandemic has taken a disproportionate toll on communities of color, and Black Americans in particular are less likely to be insured and more likely to have past-due medical bills than White Americans. To make matters worse, roughly 30 percent of consumers with medical debt have either suffered unemployment or reduced earnings due to the illness that caused their medical debt. Meanwhile, student loan debt is concentrated among those in the upper half of the income distribution who have attended at least some college.

Compounding these distributional concerns is the fact that the process of acquiring medical debt is more arbitrary than that of obtaining student loan debt. Patients do not agree to costs upfront, do not receive debt counseling, and face even tougher choices—a lower quality of life or, in some cases, death—in trying to avoid the potential debt than someone choosing whether or not to attend college. Patients simply do not strive for hospital admissions in the way that hopeful high school students aspire to college admissions, and they certainly do not receive the long-term economic payoff that a college degree can offer. If Congress aims to narrow the racial wealth gap, empower consumers, and stimulate the economy, medical debt relief is worthy of serious consideration as an alternative or supplement to student loan forgiveness.

Recommendations

The 117^th Congress has taken critical steps to address these injustices in our healthcare system, including several proposals to help coronavirus patients manage their medical debts.¹⁸ As Congress continues to respond to the rippling effects of the pandemic, it ought to reconsider our current framework for medical debt collection and adopt new rules that will help spare consumers from further economic devastation due to medical problems.

1: Permanently Ban Extraordinary Collection Tactics for Medical Debt

In 2021, Senator Chris Van Hollen (D-Md.) introduced a bill proposing to bar health care providers from engaging in certain “extraordinary debt collection tactics,” including placing liens on patients’ property and referring their debts to third-party debt collectors, through the end of the COVID-19 public health emergency.¹⁹ As discussed above, common debt collection measures, such as placing liens on property, seizing bank accounts, and harassing consumers with phone calls and litigation, are ineffective and unfair means of servicing medical debts.²⁰ Acknowledging this reality, the state legislature in Senator Van Hollen’s home state of Maryland unanimously passed a bill to permanently halt aggressive medical debt collection practices,²¹ which took effect in 2021.²² It prohibits debt collectors and medical providers from imposing liens on patients’ property and bars them from garnishing the wages of patients eligible for reduced-cost care. The bill also requires the state’s Health Services Cost Review Commission to develop guidelines for income-based payment plans, and it requires hospitals to document the measures they took to inform patients about payment plans and other assistance and to report annually on the volume of debt collection lawsuits filed against consumers.²³

Surveys of Maryland consumers conducted in support of the bill found that about 80% of people believed that “hospitals should not be able to garnish a person’s wages to collect a debt for medically necessary care,” and “88% of residents oppose the placement of a lien [on] a patient’s car or home by a hospital or debt collection agency.”²⁴ Additionally, over 90% of Maryland residents think that medical providers should not be able to drain a person’s bank account in order to recover a medical debt.²⁵ The motivation for Maryland’s bill stemmed from “growing recognition that consumers battling illness and financial hardship need new protection from debt-collection efforts” during the pandemic. However, medical debt is not a problem unique to the current pandemic. People were financially debilitated by unforeseen, unaffordable medical debts long before the onset of the pandemic,²⁶ and without drastic changes to our treatment of medical debt, they will continue to be financially devastated by illness and injury long after the pandemic has ended. Congress should extend the protections that Maryland consumers will receive to patients across the country by supporting Senator Van Hollen’s bill and making it a permanent rather than temporary measure.

2: Shift Toward an Income-Driven Repayment System

Nearly 70 percent of consumers who only have medical debt in collections have debt balances under $1,000. The predominance of small-dollar medical debts, considered in conjunction with the Federal Reserve’s finding that many Americans are unable to cover even a $400 emergency expense, begs a solution that will help consumers manage relatively small debt balances.

As such, Congress should require all healthcare providers to offer income-driven repayment plans at no cost to consumers. Medical debt payments under these plans should not exceed 7.5% of a consumer’s monthly household income.²⁷ Providers should be barred from reporting or referring these debts to collection agencies as long as consumers are making regular, timely payments. Additionally, consumers should be automatically considered for their provider’s charity care assistance program, if applicable, and exempted from making payments if they qualify.²⁸

Stakeholders in the healthcare industry will likely argue that income-driven plans will ultimately increase costs by requiring greater administrative efforts and delaying payments to providers. However, in terms of administration, deploying these plans can replace the ineffective tactics that providers and debt collectors currently use to solicit payments. Income-driven plans will also forestall the need to deploy more expensive debt collection tactics, such as litigation, and may enable more consumers to make payments than a system that uses rigid payment schedules that do not account for consumers’ respective abilities to pay.

Moreover, income-driven repayment (“IDR”) has been available to student borrowers for several years, and “research shows that borrowers who enroll in IDR have more success keeping up with their loan payments, pay down their non-student loan debts more quickly, and enjoy positive ripple effects across their financial lives such as improved access to other forms of credit.”²⁹ Furthermore, a Government Accountability Office study of student IDR plans found that borrowers on standard repayment plans were 28 times more likely to default on their debts than those on IDR.³⁰ Now that we know these plans are successful in preventing default and consumer harm, it is time for Congress to require healthcare providers to make income-driven repayment plans available to consumers with medical debt.

3: Prohibit Reporting of Medical Debt to Credit Rating Agencies

Acknowledging that “medical bills are a unique type of debt,” the three major credit reporting agencies have already begun treating medical debt differently by affording consumers a 180-day grace period before an unpaid medical bill can appear on their credit report. However, once that grace period expires, and a medical provider or debt collector reports the bill, a medical debt can remain on a consumer’s report for up to seven years. A debt in collection causes significant damage to a consumer’s credit score, which can increase their cost of obtaining credit or render them ineligible for certain forms of credit. A low credit score can also affect a consumer’s ability to obtain employment, rent an apartment, and qualify for utility services.³¹ In March 2022, the Consumer Financial Protection Bureau (“CFPB”), the federal agency that enforces the Fair Credit Reporting Act, announced that it will undertake new research to “assess whether consumer credit reports should include data on unpaid medical bills.”³² The changes adopted by credit reporting agencies and the CFPB’s commitment to this issue together suggest that it is time for policymakers to prohibit the inclusion of medical debt on credit reports once and for all.

Reporting medical debt to credit reporting agencies results in artificially suppressed and inaccurate credit scores. Previous CFPB research found that reporting “was causing an even-steeper uphill battle for consumers” for several reasons.³³ A single debt collection account on a credit report can cause a consumer’s credit score to drop by as much as 100 points, depending on the consumer’s original score.³⁴ At the same time, credit reporting agencies do not record the payment of medical debts. Yet, consumers with medical debt are better and more timely payers than consumers with other types of obligations, and they tend to perform in line with consumers whose scores are at least 10 points higher.³⁵

By placing unpaid medical debts on credit reports, healthcare providers are unnecessarily damaging consumers’ creditworthiness. Even credit reporting agencies themselves have implicitly acknowledged this; the latest iteration of the FICO score gives less weight to medical debt collections than nonmedical debt collections when calculating scores. Additionally, the imbalance in reporting practices actually disincentivizes consumers from paying their medical debts once they have been reported to credit reporting agencies. Once a consumer’s score has suffered due to a medical debt, they have little inducement to repay the debt, as payment will neither rehabilitate their score nor remove the debt collection mark from their report. All told, Congress could significantly improve the utility of credit scores and reduce consumer harm by amending the Fair Credit Reporting Act to exclude medical debt from credit reports.

Conclusion

In sum, significant changes to our treatment of medical debt are necessary to create greater parity between the process of amassing medical debt and that of resolving it. In contrast to student loan borrowers, patients may acquire their debts in life or death circumstances and are often lucky to emerge from their encounter with the healthcare system with their quality of life restored. Channeling some of the urgency that it has attached to student debt forgiveness, Congress should act now to bar the use of aggressive collection tactics for medical debt, provide more flexible payment options to consumers, and exclude medical debt from credit reports. Adopting this suite of reforms would help narrow the racial wealth gap, stimulate the economy, and afford more humane treatment to those whose health struggles are exacerbated by significant, unaffordable, and unforeseeable out-of-pocket medical costs.

Kaitlyn McMillan, J.D. Class of 2022, New York University School of Law

Suggested Citation: Kaitlyn McMillan, Credit Where Credit is Due: Why Congress Must Act Now to Prevent Americans from Being Financially Devastated by Medical Bills, N.Y.U. J. Legis. & Pub. Pol’y Quorum (2022).

1
Raymond Kluender, et al., Medical Debt in the US, 2009-2020, 326(3) J. Am. Med. Ass’n 250, 253 (July 20, 2021), https://jamanetwork.com/journals/jama/article-abstract/2782187 (finding that 17.8% of credit reports have a medical debt in collections). This figure only captures medical debt that was reported prior to the start of the coronavirus pandemic. Id. at 256. It is possible that this number has grown much larger since June 2020 (when Kluender’s analysis concluded). For instance, Credit Karma saw a 13% increase in the number of its members with medical debt collections on their reports from September 2020 to September 2021. Medical Debt Rises Throughout the Pandemic in the U.S., Is It Only Going to Get Worse?, Credit Karma (Sept. 27, 2021), https://www.creditkarma.com/about/commentary/medical-debt-rises-throughout-the-pandemic-in-the-u-s-is-it-only-going-to-get-worse (last visited Mar. 11, 2022).
2
This figure was derived by multiplying 220 million by 17.8%. See Frequently Asked Questions on Credit Reports, Experian (last visited Mar. 11, 2022) (stating that “[c]urrently, Experian helps more than 220 million consumers acquire, build, and improve credit by managing their credit histories”); see Kluender, supra note 1, at 253.
3
Signe-Mary McKernan, Steven Brown, & Genevieve M. Kenney, Past-Due Medical Debt a Problem, Especially for Black Americans, Urban Inst.: Urban Wire (Mar. 26, 2017), https://www.urban.org/urban-wire/past-due-medical-debt-problem-especially-black-americans; see generally Consumer Fin. Prot. Bureau, Medical Debt Burden in the United States 14–19 (2022) [hereinafter CFPB Medical Debt Burden], https://files.consumerfinance.gov/f/documents/cfpb_medical-debt-burden-in-the-united-states_report_2022-03.pdf (describing the impact of medical debt on low-income individuals and Black and Hispanic households).
4
Bd. of Governors of the Fed. Res. Sys., Report on the Economic Well-Being of U.S. Households in 2018 21 (2019), https://www.federalreserve.gov/publications/files/2018-report-economic-well-being-us-households-201905.pdf.
5
Kao-Ping Chua, et al., Assessment of Out-of-Pocket Spending for COVID-19 Hospitalizations in the US in 2020, 4(10) J. Am. Med. Ass’n Network Open, 1, 6 (2021), https://jamanetwork.com/journals/jamanetworkopen/fullarticle/2785079.
6
Ari Mwachofi and Assaf F. Al-Assaf, Healthcare Market Deviations from the Ideal Market, 11(3) Sultan Qaboos U. Med. J. 328, 330 (2011), https://www.ncbi.nlm.nih.gov/pmc/articles/PMC3210041/pdf/squmj-11-328.pdf.
7
Id. at 331.
8
Id.
9
Id.
10
Id. at 333.
11
See, e.g., CFPB Medical Debt Burden, supra note 3, at 10 (“Prices charged to patients can be confusing, often vary widely for the same service, and sometimes substantially exceed the cost of providing care. One 2021 study found that most Americans only “somewhat” understand their insurance charges, and only a third know that hospitals must disclose the price of services. Another 2021 study found that 57 of the top 100 largest U.S. hospitals were charging patients more than five times the amount that their care cost the hospital.”); Id. at 11 (“In emergency situations, there is no time to compare prices before seeking treatment.…Even in non-emergency situations, price opacity makes it difficult for patients to get accurate pre-treatment cost estimates.”).
12
See 2021 CFPB Fair Debt Collection Practices Act Ann. Rep. 14, https://files.consumerfinance.gov/f/documents/cfpb_fdcpa_annual-report-congress_03-2021.pdf (indicating that telecommunications debt, a type of utilities debt, is the second-largest category of debt collected by third-party debt collectors).
13
See, e.g., Kimberley Amadeo, Why Preventive Care Lowers Health Care Costs, The Balance (Jan. 28, 2021), https://www.thebalance.com/preventive-care-how-it-lowers-aca-costs-3306074 (describing how access to preventive care facilitates management of chronic health conditions and lowers healthcare costs).
14
Press Release, Elizabeth Warren, Senator, U.S. Senate, Warren, Schumer, Pressley, Colleagues: President Biden Can and Should Use Executive Action to Cancel up to $50,000 in Federal Student Loan Debt Immediately (Feb. 4, 2021), https://www.warren.senate.gov/newsroom/press-releases/warren-schumer-pressley-colleagues-president-biden-can-and-should-use-executive-action-to-cancel-up-to-50000-in-federal-student-loan-debt-immediately;see Russell Berman, The Bold Economic Move Joe Biden Refuses to Make, The Atlantic (Jan. 12, 2022), https://www.theatlantic.com/politics/archive/2022/01/biden-student-loan-debt-cancellation/621224/.
15
See Press Release, Elizabeth Warren, supra note 14.
16
Id.
17
It is worth noting that student loans may be cited less on bankruptcy applications because they are generally not dischargeable in bankruptcy. See Bankruptcy, Nat’l Consumer Law Ctr., https://www.studentloanborrowerassistance.org/bankruptcy/.
18
See, e.g., Medical Debt Relief Act of 2021, 117 S. 214 (2021) (proposing to ban paid medical debts and debts less than one year old from credit reports); COVID-19 Medical Debt Collection Relief Act of 2021, 117 S. 355 (2021) (proposing to bar “extraordinary” collection practices through the end of the pandemic emergency).
19
COVID-19 Medical Debt Collection Relief Act of 2021, supra note 18.
20
See supra Section I.
21
Bruce DePuyt, Consumer Groups Say Medical Debt Bill Is a First Step, But More Is Needed, Maryland Matters (Mar. 25, 2021), https://www.marylandmatters.org/2021/03/25/consumer-groups-say-medical-debt-bill-is-a-first-step-but-more-is-needed/.
22
The bill took effect without Governor Larry Hogan’s signature. Maryland Medical Debt Collection Requirements Bill Awaits Governor’s Signature, ACA International (Apr. 7, 2021), https://www.acainternational.org/news/maryland-medical-debt-collection-requirements-bill-awaits-governor-signature; see also Press Release, Nat’l Nurses United, Nurses Praise Maryland Bill to Protect Patients with Medical Debt (Jun. 4, 2021), https://www.nationalnursesunited.org/press/nurses-praise-maryland-bill-to-protect-patients-with-medical-debt.
23
An Act Concerning Health Facilities – Hospitals – Medical Debt Protection, 2021 Md. ALS 769, 2021 Md. Laws 769, 2021 Md. Chap. 769, 2021 Md. SB 514 (2021).
24
See DePuyt, supra note 21.
25
Id.
26
See generally Andrew Warren, Signe-Mary McKernan, & Breno Braga, Before COVID-19, 68 Million US Adults Had Debt in Collections. What Policies Could Help?, Urban Inst.: Urban Wire (Apr. 17, 2020), https://www.urban.org/urban-wire/covid-19-68-million-us-adults-had-debt-collections-what-policies-could-help.
27
This figure is derived from the Internal Revenue Service’s framework for the medical expense tax deduction, which allows deduction of medical expenses that exceed 7.5% of a taxpayer’s adjusted gross income. See Internal Revenue Serv., Topic No. 502 Medical and Dental Expenses (Mar. 12, 2021), https://www.irs.gov/taxtopics/tc502#:~:text=You%20may%20deduct%20only%20the,Schedule%20A%20(Form%201040).
28
“Charity care is free or discounted medically necessary health care that many hospitals offer to people who cannot afford to pay for treatment otherwise.” Karen Axelton, What Is Charity Care in Health Care?, Experian (Dec. 15, 2020), https://www.experian.com/blogs/ask-experian/what-is-charity-care-in-health-care/. Non-profit hospitals are required to offer charity care under the Affordable Care Act. CFPB Medical Debt Burden, supra note 3, at 11. Uptake on charity care assistance is low, and consumer complaints and industry analysis both identify hospital-imposed barriers to accessing charity care as a contributing factor. Many patients who would be eligible for charity care are not informed about assistance programs or cannot successfully apply due to procedural barriers. Id. at 16. These barriers appear to have disproportionate impacts on patients of color and undocumented patients, who are fearful of providing the information required to apply. Id. at 18.
29
Ben Kaufman, New Data Show Borrowers of Color and Low-Income Borrowers Are Missing Out on Key Protections, Raising Significant Fair Lending Concerns, Student Borrower Prot. Ctr.: Domino (Nov. 2, 2020), https://protectborrowers.org/new-data-show-borrowers-of-color-and-low-income-borrowers-are-missing-out-on-key-protections-raising-significant-fair-lending-concerns/.
30
Id.
31
Bd. of Governors of the Fed. Reserve Sys., Consumer’s Guide: Credit Reports and Credit Scores 1, https://www.federalreserve.gov/creditreports/pdf/credit_reports_scores_2.pdf.
32
Press Release, Consumer Fin. Prot. Bureau, CFPB Estimates $88 Billion in Medical Bills on Credit Reports (Mar. 1, 2022), https://www.consumerfinance.gov/about-us/newsroom/cfpb-estimates-88-billion-in-medical-bills-on-credit-reports/.
33
Sarah Schaut, What You Need to Know About FICO Score 9, Credit Karma: Advice (Nov. 25, 2020), https://www.creditkarma.com/advice/i/fico-score-9.
34
Consumer Fin. Prot. Bureau, Consumer Credit Reports: A Study of Medical and Non-Medical Collections 9 (2014) ], https://files.consumerfinance.gov/f/201412_cfpb_reports_consumer-credit-medical-and-non-medical-collections.pdf.
35
Id. at 5.