Medical debt, biggest source of collections, to be kicked from credit reports in July

TAMPA, Fla. (WFLA) — On Friday, the three main national credit reporting agencies said they’d remove the bulk of medical debt collections from U.S. credit reports. According to their announcement, it would take out almost 70% of medical debt from the reports.

The companies also said they’d extend the time it takes for unpaid medical debt to appear on reports to a year. The changes take effect on July 1. Starting in 2023, all three credit companies, Equifax, Experian and TransUnion, will stop including medical debt collection on credit reports when the debt is under $500.

A recent study by HealthCare.com showed the amount of medical debt adult Americans carry.

According to a 2021 HealthCare.com study, 35% of Americans 18 years or older have medical debt. Of the Americans with medical debt, six of 10 adults received healthcare knowing they would be put in debt by doing so, according to the study. More than half had debts over $1,000. Some had debts of $10,000 or more. The study found that these debts occurred even when patients had health insurance. The survey results found that 44% of the services which caused Americans to go into debt were not covered by their insurance, while 30% had deductibles that were “too high.”

The three nationwide credit reporting agencies’ release on medical debt collection cited Kaiser Family Foundation data which found two thirds of medical debts are due to one-time or short-term medical expenses “arising from an acute medical need.” The release said that after two years of the COVID-19 pandemic, the NCRAs were going to make the changes to debt collection reporting to help Americans “focus on their personal wellbeing and recovery.”

According to federal Consumer Finance Protection Bureau, medical debt in the U.S. was an $81 to $140 billion industry. The CFPB noted in their report on medical debt that the exact amount in collections was not definitively established, and the potentially $140 billion debt was an estimate.

The CFPB found that across the U.S., the percentage of people with medical debt was more concentrated in the Southeast. In Florida, 15.33% of residents have medical debt in collections. A 2019 analysis by CFPB found “66 percent of all debt collection tradelines reported by third-party debt collectors were medical debts.” The Kaiser Family Foundation reports “People living in rural areas, in the South, and in Medicaid non-expansion states are more likely to have significant medical debt.”

Unlike CFPB, Kaiser reported that in the U.S., at least $195 billion in medical debt is owed, and “the bulk of that debt is owed by people with over $10,000 in debt.” CFPB said that they estimate about $88 billion is shown on American credit reports.

A July Commonwealth Fund report on health care affordability found that 10% of adults 19 to 64-years-old were uninsured in the first half of 2021, and that 6% of working-age adults had lost their insurance due to pandemic-related job losses.

The CWF study found that of their survey respondents, “35 percent used up all or most of their savings, 35 percent took on credit card debt, 27 percent had been unable to pay for basic necessities like food or rent, and 23 percent delayed education or career plans” due to medical debt.

The pandemic became a time when more Americans enrolled in public insurance, such as what was provided through the Affordable Care Act’s marketplace, due to changes caused by COVID-19, and policy directives made by the federal government to address them.

The CWF study found that even among those insured through private insurance, provided by employers, or public insurance such as ACA, or Medicaid, medical bills and costs contributed to debt problems in 2020 and 2021.

For the uninsured or underinsured, debts were higher. The CFPB found that young adults, on average, have higher-balance medical debts in collections, and are less likely to be insured. The lack of health insurance, which typically helps reduce some out of pocket medical expenses, can contribute to higher levels of medical debt.

“Large shares of young adults are uninsured, and higher health insurance coverage among older adults corresponds with a clear decrease in the size of medical debts,” CFPB said. “Even among insured young adults, underinsurance may result in medical debt. Many young people with health insurance cannot afford the cost sharing required by their plans.”

CFPB found young adults also “tend to have relatively low incomes,” and “far fewer assets and more debts, such as student loans, than previous generations at similar ages.” The bureau study also reported that medical debt can adversely impact financial, physical and mental health, and contribute to impacts such as avoidance of medical care. Such impacts are unique to medical debt, according to CFPB.

The issue of medical cost is another factor to consider when weighing medical debt and wages. According to Kaiser, “out-of-pocket spending has risen about twice as fast as workers’ wages in the last decade.” The higher cost of deductibles has reportedly affected 40% of Americans with employer coverage.

A study by Stanford University professor Dr. Neale Mahoney found that “medical debt has become the largest source of debt in collections,” over the past 10 years.

On March 4, the CFPB announced it was weighing a ban on medical debts being included on consumer credit reports. The CFPB said that they would be “closely scrutinizing the Big Three credit reporting agencies” about their billing practices, related to how they “coerce and extort” patients for what they owe on medical bills.

The three national credit agencies announced the coming changes to how they factor medical debt into their credit reports two weeks later.