No matter which way you look at it, the current system for collecting small medical debts doesn’t work very well. From the consumer’s perspective, a late medical bill for as little as $15 can wind up costing thousands, even years after it’s paid, because it damages our credit scores, causing lenders to see us as bigger risks and charge higher interest rates accordingly.
From the perspective of doctors, hospitals and insurance companies, it’s a matter of throwing good money after bad. Even after paying collection companies’ fees, up to half of all unpaid medical bills under $1,000 are never recovered, according to a study by McKinsey & Company, a consulting firm.
And that’s for people with insurance. For the uninsured, the repayment rate drops to 10%, McKinsey found. Totaled up, that means hospitals and doctors lost $65 billion in uncollectible debts in 2010.
[Related article: Could A Medical Collection Account Keep You From Getting a Mortgage?]
For the last two years, Congress has considered a bill that could change the situation. The Medical Debt Responsibility Act of 2011, introduced by two Democratic and one Republican members of Congress, would require the three major credit bureaus to erase all records of medical debt under $2,500 from consumers’ credit reports within 45 days of payment.
“Small amounts of medical debt cause huge credit problems for millions of responsible, hard-working Americans who have suffered an illness or accident,” Rep. Heath Shuler (D-NC) said in a press release. “By keeping cleared medical debt off of credit reports, this bill will allow more Americans to have the credit score they deserve and need to buy homes and stimulate economic growth in their communities.”
Medical debt is different than other kinds of debt because in most cases people don’t apply for it, according to a study by the Commonwealth Fund. Instead, it often comes about because of an emergency, or a billing error. According to research by Stephen Parente, a health finance professor at the University of Minnesota, 30% to 40% of medical bills contain errors.
“If you receive a medical bill that’s wrong, good luck,” says Gerri Detweiler, Credit.com’s consumer credit expert. “There is no ‘Truth in Medical Billing Act’ to protect you.” To read more of Gerri’s coverage of this issue, click here and here.
Which is why it should not be included on credit reports, the bill’s Congressional supporters say, since late medical bills—especially paid ones—have little to do with a consumer’s willingness or ability to repay debts. In fact, many consumers go without just to pay their medical debts. About 28 million adults told the Commonwealth Fund that they used up all their savings to pay medical expenses, 21 million wracked up large credit card debt, and another 21 million went without basic necessities.
“Medical debt is not a reliable indicator of credit risk, yet nearly a quarter of Americans have seen their credit scores plummet because of small, routine medical bills,” Rep. Nydia Velazquez (D-NY), one of the bill’s cosponsors, said in a press release. “This bill provides a commonsense, simple solution.”
The Medical Debt Responsibility Act was first introduced by Rep. Mary Jo Kilroy (D-OH) in 2010. It passed the House, but died in the Senate. The bill was reintroduced this year by Reps. Velasquez, Ralph Hall (R-TX) and Heath Shuler (D-NC), and is awaiting a hearing by the House Financial Services Committee.
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Image: Adrian Clark, via Flickr.com