U.S. agency proposes rule to eliminate medical debt from most credit reports, saying it's an unreliable predictor of payment

Third Way graphic

Kentucky Health News

The federal Consumer Finance Protection Bureau is proposing to eliminate medical debt from most credit reports, stop companies from sharing debt information and bar lenders from making decisions based on medical data.

About 12 percent of Kentucky adults, more than 400,000 people, are estimated to have medical debt.

The proposed rule brought "immediate cheers from consumer advocacy groups that have long pushed for change," Amy Lotven reports for Inside Health Policy. "CFPB believes the rule . . .would remove as much as $49 billion in debt from 15 million Americans and increase credit scores by an average 20 points."

The agency's research has found that medical debt "is not a good predictor of loan repayments," so it thinks the regulation would "improve underwriting, stop denials of loans to consumers who would repay, and lead to about 22,000 additional safe mortgages a year," Lotven writes.

CFPB Director Rohit Chopra said the credit-reporting system is often inaccurate, yet is used "to coerce patients into paying medical bills that they do not owe."

In 2003, Congress restricted lenders from using medical information about debts, but "agencies created a regulatory loophole that let creditors use such information in their decisions," Lotven reports. The proposed rule "would close the regulatory loophole from 2003 by establishing guardrails for credit-reporting companies and banning lenders from taking medical devices as collateral for a loan as well as from repossessing a device if the loan is not repaid."

Vice President Kamala Harris and Lisa Lacasse, president of the American Cancer Society Cancer Action Network, said states should take similar action. David Kendall, senior fellow for health policy at Third Way, a centrist group that has produced several reports on debt, said the proposed regulation is the latest in a series of federal and state actions “to fight the scourge of medical debt. They have been preventing medical debt by expanding coverage, funding medical debt abolishment, and ending junk insurance that can lead to medical debt.”

UPDATE, June 12: "Tuesday's announcement builds on a 2022 effort by the big credit bureaus TransUnion, Equifax and Experian to keep debt off consumers' reports until it's at least a year old," Axios reports. "The two major credit scoring companies, FICO and VantageScore, have also reduced how much medical debts can factor into consumers' scores at that time."

Judge says UK should repay money to patients whose debts it 'improperly' referred to state Revenue Department for collection

A judge has ruled that the University of Kentucky "improperly used the Kentucky Department of Revenue and state tax statutes to collect unpaid bills from patients," reports Monica Kast of the Lexington Herald-Leader: "Douglas Richards, attorney for the plaintiffs, said the final amount that will have to be repaid is not yet known, but he estimated it could be upwards of $90 million."

The Revenue Department stopped collecting debts for UK HealthCare this year because the legislature passed a law that keeps it from collecting “any consumer debt owed for health care goods and services.”

Judge Thomas Wingate

Franklin Circuit Judge Thomas Wingate ruled in a class-action lawsuit filed in 2018 on behalf of more than 5,000 debtors whom UK had referred for collection. "The department added interest . . . and a 25% collection fee, taking payment from patients’ wages and tax returns to cover the bills." Kast notes.

Wingate's ruling is not the end of the controversy, which has gone on for years. In 2018, a Fayette circuit judge ruled that UK couldn't use the Revenue Department as a collection agency, on grounds that it is not part of the state executive branch. The state Supreme Court said it was.

In defending the class-action suit, UK cited state laws that executive agencies use to recover funds that were improperly paid, but those laws "only relate to collections for payments that were improperly made because of error, fraud or abuse, Wingate wrote in Monday’s ruling," Kast reports.

UK spokesman Jay Blanton said Wingate's ruling did not address a law that allows the university to refer debts to the Revenue Department, under an agreement between the two agencies.

Kast writes, "Because it is a class-action lawsuit, people who were impacted by this policy will have the option to opt in or out of the payout. The process of gathering information from people affected and returning payments to patients could take several years," according to plaintiffs' attorney Douglas Richards.

Richards told Kast, “This is just completely bad public policy and morally indefensible, because these are two of the biggest institutions in the state — UK and the Department of Revenue — and they’re punching down on people who generally make $10 to $12 an hour,” That's why they lacked the money to pay and fell behind, he said.

The debt crisis sick Kentuckians can’t avoid: health-care bills. State's rate of medical debtors is 11th, but average debt is low.

Kaiser Health News chart, adapted by Kentucky Health News

By Elisabeth Rosenthal

Kaiser Health News

President Joe Biden’s campaign promise to cancel student debt for the first $10,000 owed on federal college loans has raised debate about the fairness of such lending programs. While just over half of Americans surveyed in a June poll supported forgiving that much debt incurred for higher education, 82% said that making college more affordable was their preferred approach.

But little public attention has been focused on what is — statistically, at least — a bigger, broader debt crisis in our country: An estimated 100 million people in the U.S., or 41% of all adults, have health-care debt, compared with 42 million who have student debt.

Kentucky ranks high in percentage of residents having medical debt in the collection process, at 18.1%, which is 11th among the states, but the average debt is one of the lower, $520.

The millions under the weight of medical debt deserve help, both because medical debt is a uniquely unfair form of predatory lending and because of its devastating ripple effects on American families.

Unlike college tuition or other kinds of debt, outlays for medical treatments are generally not something we can consider in advance and decide — yes or no — to take on. They are thrust upon us by illness, accident, and bad luck. Medical treatment generally has no predictable upfront price and there is no cap on what we might owe. And, given our health system’s prices, the amount can be more than the value of the family home if incurred for a hospital stay.

When it was time for my kids to choose a college, I knew in advance almost exactly what it would cost. We could decide which of the different tuitions was “worth it.” We made a plan to pay the amount using bank accounts, money saved in college savings plans, some financial aid, a student job, and some money loaned by a grandparent. (Yes, we had enough resources to make a financially considered choice.)

Think about how different educational debts are from those incurred in health care. In one case, profiled by KHN, the parents of twins, who were born at 30 weeks, faced out-of-pocket bills of about $80,000 stemming from charges in neonatal intensive care and other care that insurance didn’t cover. In another case, a couple ended up owing $250,000 when one spouse went to the emergency room with an intestinal obstruction that required multiple surgeries. They had to declare bankruptcy and lost their home. Even smaller bills lead to trashed credit ratings, cashing in retirement accounts, and taking on second jobs; in surveys, half of adults in the U.S. say they don’t have the cash to pay an unexpected $500 medical bill.

In “taking on” medical debt, patients sign only the sort of vague financial agreement that has become ubiquitous in American health care: “I agree to pay for charges my insurance doesn’t cover,” presented on the stack of forms to sign on arrival at an emergency room or a doctor’s office. But no one can fully consider options or say “no” to care while in pain or medical distress or even properly agree to pay an unknown amount.

Student debt causes hardships because it hits people who’ve just started careers, with salaries at the bottom of the pay scale, forcing them to delay life choices, like purchasing a home or starting a family. But medical debt often comes with all that plus medical woes: In a KFF poll, 1 in 7 people with health care debt said they’d been denied care by a provider because of unpaid bills. Sometimes a bill for as little as a few hundred dollars can turn into a collections nightmare.

Already, the federal government is stepping in to assist student loan borrowers. It has paused student debt payments during the pandemic, and the Biden administration has announced that it would forgive student debt for tens of thousands of public sector workers. Late last year, the Department of Education announced that it would no longer contract with outside debt collectors but would instead deal with loan defaults and potential defaults itself to better “support borrowers.”

Medical debt collection has typically been outsourced to aggressive private agents and the for-profit medical debt collection industry; there are few guardrails. Recently, consumer credit reporting agencies have said they will no longer put small medical debts on credit reports and remove medical debts that have been paid. For many people, that will take years. Some 18% of Americans with health care debt said they never expect to be able to pay off their debt.

The irony here is that medical debt is sometimes discharged in bulk by charities, like RIP Medical Debt and church groups, which will pay pennies on the dollar to make patients’ outstanding medical debt disappear. The absurdity of this fix was shown when the comedian John Oliver, in a late-night stunt, cleared $15 million of Americans’ debt after buying it for $60,000.

But medical debt isn’t a joke and now harms a broad swath of Americans. The government could act in the short term to relieve this uniquely American form of suffering by buying the debts for a modest price. And then, it needs to tackle the underlying cause: a health care system that denies millions of people adequate care while still being the most expensive in the world.

Kaiser Health News is a national newsroom that produces in-depth journalism about health issues. Along with Polling and Policy Analysis, KHN is one of the three major operating programs at the Kaiser Family Foundation, an endowed nonprofit organization providing information on health issues.