For many, an unexpected healthcare crisis can quickly lead to a financial crisis. Surveys show that slightly more than half of all debt showing up on American’s credit reports are related to expenses from the medical industry. Sadly, this can quickly lead to a less-than-satisfactory credit report. However, changes in credit agency evaluation and reporting of medical debt are currently in process and are designed to reduce the pain from financial consequences associated with the rise of a healthcare issue.
The three major credit reporting agencies, Equifax, TransUnion, and Experian, will begin setting a 180-waiting period on medical debt before including it on a patient’s credit report starting on September 15th. The rationale behind this is to give a 6-month period of time to patients to give them the opportunity to resolve and delay in payment from insurers as well as resolving any disputes that might arise between patient and insurer.
Additionally, the three credit bureaus are set to begin removing medical debt from the credit reports of patients as soon as the debt has finally been resolved by a medical insurer; although some models do not currently penalize the consumer for medical debt.
The need for change was spurred on by states working to bring aid to consumers. The first was a settlement in 2015 that was negotiated by the Attorney General of New York, Eric Schneiderman. Schneiderman and the three credit reporting agencies came to an agreement and the changes agreed upon will be enacted nationwide. Currently, most hospitals, ASC’s, and medical providers choose to hire collection vendors to handle accounts once they have become 30-60 days past due.
A 2014 report from the Consumer Financial Protection Bureau (CFPB) showed that forty-three million Americans had medical debt in collections that was adversely affecting their credit reports. A noteworthy finding was that the average amount of medical debt in collections was a mere $579.00 as opposed to the typical $1000.00 dinging the credit reports of those with non-medical debt. Even more noteworthy is the fact that for 15 million of those with blemishes to their credit, medical debt was the only issue for them.
In the era of high deductible health plans (HDHP) which carry an extremely high financial responsibility for the policyholder; it might not be too difficult to understand how this situation has occurred. It’s clear that many who would previously have had good credit are now faced with a large self-pay portion for health services which can be daunting.
While credit reports are designed to demonstrate the likelihood of a consumer paying debt that he or she has accrued; some credit scoring companies such as VantageScore & FICO have adjusted their models to account for medical debt because they do not believe it is an accurate predictor of whether or not a consumer is a good credit risk. In fact, FICO has stated that consumers with medical accounts are typically less inclined to default on their accounts than those with non-medical accounts.
Both FICO and VantageScore are now updating their models to differentiate between debt that is medical and that which is non-medical. Those who have medical debt in collections will now receive a smaller penalty than those with non-medical collections; a change that can make a big difference in the lives of American consumers. So far, however, the one caveat is that many lenders and banks have not yet adapted to this new credit-scoring methodology. Because of this, even though medical debt should not be impacting consumer credit as much; for many nothing has changed yet.