In a sea change, the Biden administration will ban medical debt from credit reports

In a sweeping shift that could improve the ability of millions of Americans to own a home or buy a car, the Biden administration on Tuesday will propose a rule to ban medical debt from credit reports.

The rule, which will be announced by Vice President Kamala Harris and Consumer Financial Protection Bureau Director Rohit Chopra, comes as President Joe Biden steps up his efforts to convince Americans that his government is cutting costs, a key concern for voters in the next elections.

The rule, which is in it works since September, could take effect next year, Chopra told ABC News in an exclusive interview before the policy was announced.

Rohit Chopra, director of the Consumer Financial Protection Bureau, speaks during a hearing in Washington, DC, USA, on Thursday, May 9, 2024. (PHOTO: Tierney L. Cross/Bloomberg via Getty Images)Bloomberg via Getty Images

“Our research shows that medical bills on your credit report don’t even predict whether you’ll pay off another type of loan. This means that people’s credit scores are being unfairly and inappropriately harmed by this practice,” Chopra said.

The CFPB investigation estimates that the new rule would allow 22,000 more people to be approved for secure mortgages every year – meaning lenders could also benefit from the positive impact on people’s credit scores by being able to approve more borrowers.

Some major credit reporting companies have already stopped using medical debt to calculate people’s creditworthiness, including Equifax, TransUnion and Experian. FICO and VantageScore have also recently started factoring less medical debt into their scores.

But 15 million Americans still have $49 billion in medical debt that is hurting their scores, the CFPB says. found. This rule would extend the practice to all credit reports in the U.S.

Medical debt is extensive in the US. Affects two in five Americans, according to the health policy research organization KFFand the vast majority have debts in the thousands.

When these debts go into collections, credit scores take a hit, meaning car and home loans are harder to get or are only offered at high interest rates – leading to a slippery slope for people who are already struggling with their bills.

Lexi Coburn, 33, first faced this problem almost a decade ago. She incurred medical debt in 2013 when she was 23 and uninsured.

Her feet were too swollen to walk, so she went to the emergency room, not knowing where else she could go to get medical care without insurance. They told her she had early-onset arthritis.

The $425 bill from that visit wasn’t in Coburn’s budget, so she didn’t pay it. Growing up, her family often didn’t have the income to cover medical expenses, she said, and she felt ill-equipped to navigate the medical system differently as a young adult.

Although she was later able to enroll in health insurance through the Affordable Care Act, Coburn’s medical debt still grew to more than $2,300 — including another $1,532 for dental care and a separate emergency room visit, both in 2019.

The consequences became clear when she tried to get a car.

“Immediately, my medical debt prevented me from qualifying for a good loan that didn’t have an exorbitant monthly payment,” Coburn said.

“The most frustrating aspect for me was when I was in my early 20s, when I wasn’t making much money and needed transportation to get to work,” Coburn said.

Medical bill macro includes test/x-ray/laboratory/surgery (PHOTO: Getty Images)Lbodvar/Getty Images

She saw a dangerous financial cycle building up. Coburn’s bills and subsequent low credit score prevented “being able to prosper enough to pay off the debt,” she said. “So it felt like a domino effect.”

The CFPB’s new rule also seeks to address the issue of incorrect, confusing and complicated medical bills, which often lead to long, drawn-out disputes between patients and billing departments – a complaint that the CFPB, as the agency charged with empowering the consumer, receives en masse, Chopra said.

“We often see that people receive inaccurate bills. Many patients are fighting over these bills for months, only to find them showing up on their credit reports,” he said.

Experts supporting the CFPB’s proposed rule also point to the already low success rate in collecting medical bills.

“We know empirically that repayment rates are incredibly low for medical debt, and so it’s already true that people aren’t actually paying it off. So I don’t think this policy change is going to change behavior that dramatically,” said Matt Notowidigdo, a professor at the University of Chicago Booth School of Business who studies health economics.

Linda Davis, a 61-year-old resident of Grand Rapids, Michigan, has chronic obstructive pulmonary disease, a type of lung disease, and uses a power wheelchair due to a lower back injury. She said she doesn’t think she will ever pay her medical bills, which she estimates to be between $45,000 and $50,000.

“People might be mistaken and think, oh, well, she has Medicare, she’s all set. This is not the case and it can ruin your entire life. It takes control of your entire life,” Davis said.

She said her monthly income covers rent, electricity, cell phone bills and groceries, but she has no room in her budget for medical expenses.

“You discover [after the procedure], you have all these medical bills and what should you do with them all? You know, there’s no way on God’s green earth I can pay all those medical bills. Even if I paid a small amount every month, I wouldn’t live long enough to pay them all off,” Davis said.

For Notowidigdo and many other health economists, addressing the root cause of America’s medical debt issue would mean enrolling more people in adequate health care coverage from the start, “rather than dealing with unpaid medical bills due to lack of insurance or for insufficiently generous insurance on the back end,” he said.

Of course, for now, these high bills and low reimbursement rates are already a challenge for hospitals and health systems.

Vice President Kamala Harris speaks at the Prime Osborn Convention Center on May 1, 2024, in Jacksonville, Florida. (Photo by Joe Raedle/Getty Images)Joe Raedle/Getty Images

If the CFPB rule leads to fewer people paying their bills, it could be patients who suffer, some experts warned.

Ge Bai, a professor who studies healthcare accounting policies at Johns Hopkins University, predicted that hospitals will have to make up for this loss in other ways. Stricter payment efforts, such as requiring payment before patients receive medical care, could leave low-income patients worse off.

“I think in the short term it will be great news for patients and we will probably see patient advocacy groups promoting this. However, I think in the long term, when the long-term negative effects emerge, we will probably see more resistance,” Bai said.

Industry groups such as the Association of Credit and Collection Professionals have voiced Bai’s concerns.

“There is too much at stake for Americans’ access to quality health care by taking actions that only negatively affect cash flow for the health care community without finding ways to replace those funds,” said ACA CEO, Scott Purcell. he said when the CFPB first announced it was reviewing the policy change.

Chopra rejected the notion that more people will default on their healthcare debts as a result of the rule, saying they will still face other penalties that come with the debt.

“These people will still be subject to collection actions, lawsuits and more. There are many ways people are penalized for not paying their bills. I just don’t want to see the credit reporting system used as a weapon against people who have already paid them off,” Chopra said.

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