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Scratching Medical Debt from Credit Reports: The Cons

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Earlier this month the Medical Debt Responsibility Act of 2011 was introduced by U. S. Representative Heath Shuler.  In summary, the bill would require credit reporting agencies (Equifax, Experian, TransUnion, etc.) to remove paid or settled medical collection items up to $2,500 per collection from credit reports.

[Related Article: Scratching Medical Debt from Credit Reports-The Pros]

Unpaid medical expenses may take the form of a medical collection item when the unpaid medical bill is turned over to a collection agency and may be reported to the credit reporting agencies. The collection item can remain on the credit report for up to seven years and can negatively impact a consumer’s credit score. The exact impact on the credit score will vary depending on the medical collection information reported as well as on the overall composition of the consumer’s overall credit profile.

Do I support this proposed action?

While I can appreciate the difficult decisions some consumers have to make regarding paying for healthcare-related expenses, I do not think it in the best interest of all US consumers and of the credit granting industry in general to subjectively modify credit data and credit scores through policy decisions.

The decision to block or remove any data item from a credit report should be considered carefully and should include a thorough analysis on how that data element is predictive of future risk. The industry research I have seen consistently shows that consumers who have a medical collection on their credit report pose a greater risk of not paying as agreed in the future compared to consumers with no collections on their credit report. That is why the presence of medical collection items on credit reports are often considered to be “high risk” by lenders and within credit scoring systems.

If this information is suppressed, these borrowers may appear less risky than they really are and, as a result, may take on additional credit they can’t safely handle and thus prolong the cycle of missing payments and increasing their cost of credit. This can also result in an increase in the cost of credit for all consumers as lenders will inevitably spread the cost of these losses via higher interest rates and fees for all new borrowers.

If the medical collection information is inaccurately reported, then the consumer should have every right to dispute that data and the parties (consumer, credit bureau, collection agency, medical service provider) should engage in the established dispute resolution process to correct any reporting error. If that process is not working, then the focus should be on addressing how it can be improved rather than enacting a decision to remove the data element from credit reports.

Lastly, the industry has already proactively addressed this issue to some degree. Both the FICO score and VantageScores incorporate logic where small dollar “nuisance” collection items are either not considered in the score calculation or factor into the score is a less severe way, and thus have less negative effect on the score.

In my opinion, this is the type of question or issue that the newly formed Consumer Finance Protection Bureau (CFPB) should research so that any go forward decisions can be made based on empirical findings in addition to public policy drivers.

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  • Victoria Mar

    I feel that your opinion does not take into the account the nuisance it causes the consumer who has to fight inaccuracies from medical bills/medical collections or disputes with health insurance companies. I think there should also be some sort of government policy to improve this system as well.

    As someone who has had a medical dispute with my health insurance provider lead to an unpaid medical bill, (that should have been paid by a health insurance provider) that was then sent to a collections agency which severally impacted my credit score for a measly $70 and what would remain on my credit report for 7 years. There is no regard to my prior superb credit history of paying all my bills and paying them on time. The presence of the medical collection on my credit report does in no way indicate that I will not pay my student loans off, my mortgage, my credit cards or any other debts owed for that matter. However, the system is severely flawed and even though I pay a bill that has been sent to collections it remains on as a derogatory mark on my credit report.

    I do think it in the best interest of all US consumers to subjectively modify credit data and credit scores through policy decisions. There are millions of US consumers just like me and I fully support this measure.

  • Donna Phillips

    I agree with Victoria Marr (above comment) I pay my bills on time. It is not my fault that the medical insurance companies fight not to pay medical bills they owe! I have 5 medical bills on my credit that are listed all under $16 each! This is because I had 2 insurance policies that continued to fight each other on who would have to pay. So I am being punished for being over insured.

  • LT

    I wonder if the statistical analysis Mr. Quinn is referencing (the one which showed a positive correlation between unpaid medical bills and the same consumers’ general payment history) actually ISOLATED the factor of the incidents of medical collection and other delinquencies. It stands to logic to wonder if someone who is going though financial hardship and falls behind on ALL of their obligations may be viewed as a higher risk than someone who generally pays all of their bills and only falls behind on the medical expenses, does it not?

  • Seth R

    I am currently helping someone clear up their credit (via a Power of Attorney). I can see some of the issues folks get involved with when dealing with medical debt. That now makes me a proponent of medical debt removal.

    Several things happen here when insured.
    1. The hospital bills the insurance company and gets paid at some point. Of course, the insurance company pays part and the hospital bills the rest. This COULD take months. Then the hospital places you in arrears.

    2. The smart people go back and look at was was billed, paid and disallowed (happens a lot). I found that insurers may disallow something that “was included in another procedure.” Double billing. But, the hospital tries to collect. This argument can take months to clear up also.

    3. The hospital bills what THEY say is the “co-pay” and/or “deductible.” However, with Medicare and supplimentals, there is an “amount you may be billed.” This takes out the disallowed items. That is another argument.

    4. The most recent bill I started to clear up that is in collections led me to pull the complete admission file. Guess what? She never signed ANYTHING!! The hospital never collected insurance information from her. The excuse is, “It was a motor vehicle accident. We don’t get insurance information. We send it to Med 1 and they collect all of that for us later.” What? She had insurance (through her husband) AND it happened while working–her employer’s insurance was liable also. Why would she respond to Med 1? Never heard of them!!

    5. A 5-1/2 yr old debt in collections. The hospital states, “We don’t have that debt any more. We wrote it off.” Why? “because of the statute of limitations,” the hospital said. Another one they never sent to insurance. Their answer is, “You can try to send it to them, but it is old and they won’t do it.” What? The hospital was negligent and the patient has to now pay it all? Not in my book.

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