Biden proposes eliminating medical debt from credit reports

The Biden administration on Tuesday proposed removing medical debt from the credit reports of more than 15 million Americans, making it easier for them to qualify for auto, home and small business loans.

The proposed rule, which will go through a public comment period, would not take effect immediately. It would ban health care providers from sharing medical debt with loan providers and prohibit those providers from considering medical information when it comes to making loans.

Vice President Kamala Harris said the move would improve “the financial health and well-being of millions of Americans.”

“One of the most significant consequences of carrying medical debt is the damage it does to a person's credit score,” Ms. Harris said. “Medical debt makes it harder for millions of Americans to get approved for a car loan, a home mortgage, or a small business loan, which in turn makes it harder to simply move forward, and even more. less moving forward. This is simply not right.”

Medical debt often looms large in the lives of Americans, with an estimated 20 million people owing more than $250 to healthcare providers. Black and Latino Americans are more likely to report outstanding bills, as are those who are low-income or uninsured. In surveys, Americans described taking out loans and working extra to cover those debts.

As the economy and inflation have soured voters during President Biden's first term, his administration's efforts to rein in costs have become the focus of his reelection campaign. His aides believe that measures such as cutting the prices of prescription products such as insulin or inhalers are already being felt by voters and will help improve perceptions of Biden's domestic agenda. The president has also relied on such economic results to convince voters of color – a base of his constituency – that he has delivered on his racial equity agenda, even as broader proposals have been blocked by the courts.

The policy most likely won't go into effect until early next year, according to administration officials who spoke on condition of anonymity to discuss details of the proposal. The public comment period lasts until August 12.

Harris said the proposal is part of a broader effort by the White House to address medical debt: The administration has forgiven $650 million so far. The new policy will not ease medical debt, nor will it stop all aggressive collection tactics. It will only affect information about unpaid debts that healthcare providers have sold to collection agencies.

But the Biden administration intends to sell the rule as a way to help Americans achieve greater financial freedom.

Rohit Chopra, director of the Consumer Financial Protection Bureau, said Tuesday that research conducted by the independent federal agency in 2022 found that medical debt collections appeared on 43 million credit reports.

“It doesn't eliminate the underlying medical debt that consumers have,” said Fredric Blavin, a principal research associate at the Urban Institute. “This policy attacks the symptom rather than the root cause.”

Blavin expected the policy would give a boost to consumers who need better credit scores to rent apartments or buy cars. But he also said there could be unintended consequences: Hospitals, for example, could be more likely to try to pursue the debt in other ways — such as suing patients, garnishing their wages or stopping treatment — because they no longer have the tactic of reporting. to credit agencies.

“It is unclear what these effects will be,” he said. “Hospitals could potentially be more aggressive up front in collecting data if they know they don't have this tool available to them.”

Tens of billions of that debt are sitting in collection agencies, where hospitals often send bills that patients haven't paid for months or years. Such debts could prove extremely damaging to patients' credit scores for decades.

That has changed significantly in recent years, as the three national credit reporting agencies – TransUnion, Equifax and Experian – have eliminated much of that debt from credit reports. Over the past two years, they stopped reporting debts under $500 and debts less than a year in collections.

According to a recent study by the Urban Institute, these changes have erased medical debt from the credit reports of millions of Americans. The percentage of Americans with unpaid healthcare bills on their credit reports dropped from 12% in August 2022 to 5% in August 2023.

Americans who erased medical debt from their credit reports during that period saw their credit scores increase by an average of 30 points, the Urban Institute study found, moving them out of the “subprime” range and closer to “prime” credit.

That still leaves about 15 million Americans with $49 billion in medical debt outstanding on their credit reports, according to research from the Consumer Financial Protection Bureau, the government agency that will implement the new rule.

These patients are the ones who will benefit the most from the Biden administration's policy.

“There's a good case to be made that credit reports should reflect bad behavior rather than bad luck,” said Neale Mahoney, a Stanford economist who studies medical debt. “Medical debt is often the consequence of 'my son broke his arm, I had bad luck and now I have a lot of bills.'”

Mahoney published a study this year examining the impact of not just stopping reporting medical debt to credit bureaus, but eliminating it altogether. The results were surprising and showed no improvements in credit scores or access to healthcare for the vast majority of patients.

There was, however, a small subset of patients who noticed improvements: those who only had medical debt on their credit report and no other types of loans or bills outstanding. For that group, Mahoney said, the Biden administration's policy is likely to matter most.

“Some people will benefit from this,” Mahoney said. “But for others, their financial situation was already a mess, so the impact on their access to credit will be more limited.”

Stacy Cowley contributed reporting from New York.

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