Michelle Singletary: Federal watchdog questions whether credit reports should include medical debt

When my daughter’s right lung collapsed two years ago, she needed emergency surgery. Even as she was struggling to breathe, she was concerned about how much of her care would be covered by her health insurance provider.

That’s the state of health care in the United States – making sick folks worry themselves sicker about the cost of their care.

Purely by chance, my daughter ended up at an in-network hospital. Thankfully, the majority of her medical expenses – minus some co-payments – were covered.

But a reader made a prophetic observation after I wrote about the ordeal, asking me to write a follow-up on “how she coped with the medical bills … and perhaps inadequate insurance.”

Sure enough, the dizzying flood of billing statements caused my now-26-year-old daughter a lot of stress. She had received services from out-of-network medical professionals at the in-network hospital. Eventually, some of the charges were removed, yet she’s still in financial limbo, waiting to see whether her insurance will cover thousands of dollars in charges for services she received during her nine-day hospitalization.

Such situations are typical, according to the Consumer Financial Protection Bureau, which recently issued a report critical of the byzantine medical billing system in the United States.

The CFPB questioned whether this debt should even be reported to the credit bureaus and thus factored into credit scores, which are used to determine people’s creditworthiness for loans, apartments or insurance.

As of the second quarter of 2021, 58% of bills that were in collections and on people’s credit records were medical bills, according to the CFPB.

“When most of us think about credit reports, we think about obligations where we signed up for a specific loan or a credit card,” CFPB Director Rohit Chopra said in an interview. “You go to a provider or a hospital, you have no idea sometimes what services are being performed on you. All you know is you’re in-network.”

But when consumers can’t pay, the accounts end up with a debt collector.

Delinquent medical debt reported by a collection agency or debt purchaser should not show up on a consumer’s credit report until 180 days from the date of first delinquency. This is supposed to allow time for insurance companies to process payments, according to the CFPB.

When bills finally come, people often end up in a “bureaucratic nightmare,” Chopra said. And sometimes they don’t even owe the debt.

“And then what happens is you feel coerced or extorted when they say that they’re going to put it on your credit report,” he said.

The CFPB’s research shows $88 billion in medical debt on consumer credit records as of June 2021.

While young people more frequently see medical debt go to collections, older adults and veterans are also heavily impacted by medical debt. Black and Hispanic people, and low-income individuals of all races and ethnicities, are also more likely to have medical debt, the CFPB report said.

A report released this week by the National Consumer Law Center looked at how medical debt disproportionately affects Black households.

“Due to racial inequities in health and wealth, the medical debt crisis has impacted Black families more acutely than white families,” wrote Berneta Haynes, staff attorney at NCLC and author of the report. “In recognition of the explicit role racism plays in medical debt and health disparities, advocates and leaders should take action to protect Black patients from unaffordable medical bills that trap families in a cycle of financial insecurity.”

Although people with insurance have been largely shielded from high medical costs associated with COVID, many still received bills for hospitalization care. Then there’s this: As of August 2021, 72% of large insurers had stopped waiving cost-sharing for COVID hospitalizations, the CFPB said.

And, of course, the uninsured face significant COVID-related medical debt.

So, should medical debt be excluded from credit reports?

Not necessarily, according to the Consumer Data Industry Association, or CDIA, the trade group that represents, among others, the three major credit bureaus – Equifax, Experian, and TransUnion.

Significant medical debt could signal to a mortgage lender that a potential borrower may not be able to handle a home loan, said Francis Creighton, president and chief executive of CDIA.

“In the mortgage context, they’re looking at your debt-to-income ratio,” Creighton said. “And that’s where the medical debt can come in handy in trying to determine what your total debt situation is. We don’t do people any favors when we give them loans that they can’t afford to pay back.”

Chopra pointed out that medical billing data isn’t a good predictor of people’s ability to repay other debt obligations. In fact, newer credit scoring models don’t weigh medical collections as heavily as other forms of credit. And when such data is removed, people’s scores can jump significantly, as much as 25 points.

Yet, older scoring models still in use by lenders factor in the delinquent debt.

One good thing that’s happened is, starting this year under the No Surprises Act, insurance companies, plan providers and health-care facilities are banned from sending surprise bills for emergency services or even nonemergency care from out-of-network hospitals, doctors or other providers.

An estimated 1 in 5 emergency claims and 1 in 6 in-network hospitalizations included at least one out-of-network bill, according to the Kaiser Family Foundation.

So much is unknown about how long people will suffer from COVID-related conditions requiring long-term medical care, making this the right time to look at eliminating medical debt from people’s credit reports.

“I was incredibly overwhelmed and outraged by the billing process,” my daughter said. “It’s insane that I was supposed to know which was the right hospital to go to during a major health crisis. Even though I ended up at the right one, it still didn’t protect me. After a major health scare, your only job should be to rest and recover, not panic about how you are going to afford the medical bills.”