Innovation

Decline in Medical Debt on Credit Reports

The share of people with medical debt in collections that shows up in their credit reports has fallen in the past decade, according to the Urban Institute. In 2013, 19.5% of Americans had medical debt in collections, while 10 years later, in 2023, that share fell to 5%, according to new research by the Urban Institute. This change is largely due to efforts by the major credit bureaus in 2022 and 2023 that removed paid medical debts from credit reports and delayed the reporting of unpaid debts.

Increase in Median Medical Debt

Yet, despite the drop in the percentage of people with medical debt in collections, the median medical debt in collections has increased over the same period. In 2013, the median medical debt in collections was $842, but by 2023, it had risen to $1,493, according to the Washington, D.C.-based think tank. This increase highlights that while fewer people may have medical debt impacting their credit scores, the amounts owed by those who do have such debt are higher.

Benefits of Improved Credit Scores

Breno Braga, principal research associate at the Urban Institute, stated that consumers who previously had medical debt in collections on their files have seen significant increases in their credit scores. This improvement can make it easier for debtors to access other types of credit, apply for jobs, or rent housing. The removal of medical debt from credit reports by the credit bureaus has had a positive impact on consumers' financial health and opportunities.

Regional Differences in Medical Debt Reduction

The Urban Institute found that the states where consumers saw the biggest reductions in medical debt in collections from 2021 to 2023 were concentrated in the South. For example, West Virginia saw its share of residents with medical debt in collections drop from 25.8% to 6.7%. South Carolina went from 24.4% to 9.1%, Oklahoma from 23.7% to 10.1%, Louisiana from 21.3% to 8.1%, and Mississippi from 18.5% to 6.1%. Colorado had no medical debt in collections in 2023 after it banned credit bureaus from including medical debt on credit reports. Other states with the lowest levels of medical debt in collections in 2023 included Minnesota (0.7%), Hawaii (1.2%), Vermont (1.2%), and Washington (1.4%).

Proposal to Ban Medical Bills from Credit Reports

The Consumer Financial Protection Bureau (CFPB) proposed in June to ban medical bills from credit reports. The independent government agency estimates that this rule would remove up to $49 billion in medical debts from credit reports. This proposal reflects an increasing recognition that while most people have health insurance, many still cannot afford health care. Matthew Rae, associate director of the Health Care Marketplace Program at KFF, a nonprofit organization that provides health policy research, emphasized the need to think about affordability differently. He pointed out that while efforts to erase medical debts from credit reports will help debtors, it doesn’t address the root issue of high health-care costs.

Financial Vulnerability of Those with Medical Debt

Recent KFF research found that people who carry medical debt are more likely to be financially vulnerable in other ways compared to adults who do not have unpaid balances. Of adults with medical debt, 72% reported carrying a credit card balance, 68% had no rainy-day fund, and 58% said they were just getting by financially. In comparison, just 37% of adults with no medical debt said they carry a credit card balance, while 37% had no rainy-day fund, and 28% said they were just getting by. Adults with medical debt were also more likely to overdraw their checking accounts, be contacted by a debt collection agency, use a pawn shop, or take out a short-term payday loan.

The Link Between Medical Debt and Bankruptcy

Matthew Rae noted that it is unclear where the problem starts—whether people with credit card debt are more likely to go into medical debt or vice versa. However, he stated that medical debt is “absolutely” a cause of bankruptcy, especially when high debts are combined with an inability to work. This underscores the severe financial strain that medical debt can place on individuals and families.

Efforts to Cancel Medical Debt

Certain states, cities, and counties are canceling about $7 billion in medical debt through the American Rescue Plan Act, federal legislation enacted in 2021. This move will cancel medical debt for up to 3 million Americans, according to White House estimates in June. Vice President Kamala Harris issued a call to states, cities, and hospitals to join in forgiving medical debt. The move is politically popular, with more than half of adults (51%) saying it is extremely or very important for medical debt to be forgiven, compared to just 39% who said the same for student loan debt, according to a recent study by the University of Chicago Harris School of Public Policy and The Associated Press-NORC Center for Public Affairs Research.

Steps to Alleviate Financial Burden

For debtors currently struggling with balances, there are some steps they can take to try to get financial relief. Matthew Rae advised negotiating with network providers and not taking the first number offered. However, there may be less room to reduce a bill if the debtor is on a high-deductible plan or has a high co-pay. Prescription costs are another area where patients tend to face burdensome expenses. Rae suggested shopping around to find the best price a pharmacy or mail order plan can provide.

Conclusion

While the share of people with medical debt on credit reports has decreased, the burden of medical debt remains significant. Efforts by the CFPB to ban medical bills from credit reports and state and local initiatives to cancel medical debt are steps in the right direction. However, the underlying issue of health-care affordability continues to impact millions of Americans. Addressing this problem requires a comprehensive approach that includes policy changes and financial education to help individuals manage their health-care costs more effectively.