In an effort to ease the financial strain on millions of Americans, the Biden administration has introduced a proposal to eliminate medical debt from credit reports. This new rule, which has been in the making since September, aims to improve access to home and car loans by preventing medical debt from negatively impacting credit scores.
The announcement was made by Vice President Kamala Harris and Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra. Highlighting the significance of the change, Chopra remarked, “This is going to be an enormous relief to so many people battling bills when it comes to hospital visits.”
Medical debt is widespread in the U.S., affecting two out of every five Americans, as reported by the health policy research organization KFF. A significant number of these individuals face thousands of dollars in debt, which, once sent to collections, can severely damage their credit scores. This, in turn, makes it harder to secure loans or only allows access to high-interest rates, creating a vicious cycle for those already struggling financially.
Linda Davis, a 61-year-old from Grand Rapids, Michigan, shared her experience of dealing with chronic obstructive pulmonary disease and a lower back injury, resulting in substantial medical bills. “People might be mistaken and think, oh, well, she’s got Medicare, she’s all set. That’s not the case at all, and it can screw your whole life up. It takes control of your whole life,” she explained.
CFPB’s research suggests that removing medical debt from credit reports could enable 22,000 more people to qualify for safe mortgages each year. Despite some credit reporting agencies like Equifax, TransUnion, and Experian already minimizing the impact of medical debt on scores, the rule aims to extend this practice across all credit reporting in the U.S.
Lexi Coburn, who accrued medical debt in her early twenties due to a lack of insurance, described the challenges she faced. “Immediately my medical debt was in the way of qualifying for a good loan that didn’t have an outrageous payment per month,” Coburn said, highlighting how medical debt impeded her ability to secure necessary transportation for her job.
Vice President Harris emphasized the broader implications of medical debt on Americans’ lives. “Medical debt makes it more difficult for millions of Americans to be approved for a car loan, a home loan or small business loan, all of which in turn makes it more difficult to just get by, much less get ahead. And that is simply not fair,” she stated during a call with reporters.
However, the proposal has faced criticism from some experts who fear it could lead to unintended consequences. Ge Bai, a health policy professor at Johns Hopkins University, warned that hospitals might implement more stringent payment measures, such as requiring upfront payments, which could adversely affect low-income patients. “I think in the short run, it will be great news for patients, and probably we’ll see patient advocacy groups pushing it. However, I think in the long run, when the long-term negative effects emerge, probably we’re going to see more pushback,” Bai noted.
Industry groups have also expressed concerns. Scott Purcell, CEO of the Association of Credit and Collection Professionals, argued that the proposal could increase medical care costs and reduce access to credit and healthcare. “The CFPB’s proposal will have a broad negative impact on businesses, health care providers, patients, and consumers because by suppressing information about a consumer’s debt, this will increase the cost of medical care and force more upfront payments,” Purcell stated.
Despite these concerns, Chopra dismissed the idea that the rule would lead to higher default rates on medical debt. “Those individuals will still be subject to collection actions, lawsuits, and more. There are plenty of ways that people get penalized for not paying their bills. I just don’t want to see the credit reporting system be weaponized against people who already paid them,” he affirmed.
Addressing the root causes of medical debt, experts like Matt Notowidigdo from the University of Chicago’s Booth School of Business suggest enhancing health care coverage to prevent the accumulation of unpaid medical bills. “We know empirically that the repayment rates are incredibly low for medical debt, and so it’s already the case that people aren’t really paying it down. So I don’t think this policy change is going to change the behavior that dramatically,” he commented.
The proposed rule, which could be enacted early next year, represents a significant shift in how medical debt is handled in the U.S., potentially providing much-needed financial relief for millions of Americans.