Will Upcoming Changes from Credit Reporting Agencies on Medical Debt Actually Make Things Worse?

Equifax, Experian, and TransUnion, the three major consumer credit reporting agencies, recently announced that as of July 1, 2022, they will make changes to the way medical collection debt is reported. These changes may provide some initial benefits to consumers. But it’s unclear whether they will address the real underlying problems stemming from medical debt.

The Massive Problem of Medical Debt

Early in my career I worked at a collection firm that was known as a medical collection debt specialist. I’ll never forget the creditor’s examination where I asked a judgment debtor why she had not paid her bill since I had last examined her the year before. “Because I’m dying,” she responded. That was one of the shortest and most memorable interactions I’ve experienced on behalf of a creditor.

Collecting medical debt is an ugly business—and that’s from the creditor’s side. It can be devastating for the patient/obligor.

Medical debt has long been touted as a primary reason for many consumer bankruptcies, but just how much medical debt Americans carry is not clear. A panel of PhDs from Harvard, Stanford, UCLA, and the National Bureau of Economic Research published a study in the Journal of the American Medical Association in July 2021 analyzing medical debt in the United States between 2009 and 2020. They concluded that 17.8% of Americans had medical debt in June 2020, with an average debt of $429. I’m inclined to believe this JAMA study, but contrast those numbers with LendingTree’s analysis that 37% of Americans owed medical debt in 2020, and Credit Karma’s declaration that such debt averaged $5,953.

Either way, medical debt is a drain on family finances and the economy as a whole. And it’s not just a financial problem. Many people, particularly those who are uninsured or underinsured, go without needed medical care due to the high cost of health care. This problem is likely to get worse given inflation, as dollars that may have been allocated to health care now go to basic necessities like food and gas.

And when someone falls behind on medical debt payments and collection activity ensues, that can impact their credit score and access to lending markets. It can create a vicious cycle. This cycle affects the consumers and also employers and financial institutions.

Will Steps Being Taken by Credit Reporting Agencies Actually Help?

Equifax, Experian, and TransUnion are making changes to the way medical collection debt is reported, effective July 1, 2022. Here is a summary of the changes:

• If it has been paid, presumably in full or through an agreement between the parties, the debt will not appear at all on someone’s credit report.
• If it is unpaid, it will take a full year before appearing on the consumer’s credit report, instead of the current six months.
• Medical collection debt under $500 will no longer be included on credit reports beginning sometime in the first half of 2023.

But will credit bureau reporting changes really make things better?

If certain medical debt is excluded, consumers should, at least in theory, be able to borrow more. That could mean loan consolidation, including getting rid of the unreported medical bills. It also could mean increased spending, which would be a boost to the economy.  But it just as likely could mean an even greater debt burden that they can’t pay back.

So does limiting the credit reporting really help, or is it going to hurt consumers’ finances and push more into bankruptcy? Perhaps the better long-term solution is to eliminate the debt, not the reporting of it. And, perhaps, our discussion should be on debt forgiveness, as well as how to lower medical costs.

The lawyers of Dalton & Tomich provide general counsel to small businesses.  We also have experience with creditors’ rights, debt collection, and bankruptcy.  Contact us if this issue is affecting your employees or receivables or if you have any other related questions.