Duke Of Moral Hazard: Biden Agency To Hide Medical Debt From Credit Reports
In a move that can only add risk to the financial system, the Biden administration is proposing a rule which will ban medical debt from credit reports.
The rule, announced on Tuesday by Vice President Kamala Harris and Consumer Financial Protection Bureau Director Rohit Chopra, will improve the ability for millions of Americans to take out more debt to purchase things like homes and cars.
According to Chopra, the rule - which has been in the works since September, could go into effect sometime next year.
"Our research shows that medical bills on your credit report aren't even predictive of whether you'll repay another type of loan. That means people's credit scores are being unjustly and inappropriately harmed by this practice," Chopra told ABC News.
CFPB’s research estimates that the new rule would allow 22,000 more people to get approved for safe mortgages each year — meaning lenders could also benefit from the positive impact on peoples’ credit scores, by being able to approve more borrowers.
Some major credit report companies have already stopped using medical debt to calculate peoples’ credit worthiness, including Equifax, TransUnion and Experian. FICO and VantageScore also recently started factoring medical debt less heavily into their scores. -ABC News
There are currently 15 million Americans with roughly $49 billion of medical debt, according to the CFPB, affecting roughly two in every five Americans according to KFF, a health policy research organization. The vast majority have debt in the thousands - which, when they go into collections, affect credit scores. This in turn hampers the ability to take out car and home loans - with those who can obtain them offered high interest rates.
The new rule also takes aim at incorrect, confusing or complicated medical bills which often lead to protracted disputes.
"Too often, we see that people are receiving bills that are inaccurate. Many patients are fighting over these bills for months, only to find that it then appears on their credit report," said Chopra.
Meanwhile, experts who support the new rule cite the already-low rate of collections on medical debt.
"We know empirically that the repayment rates are incredibly low for medical debt, and so it's already the case that people aren't really paying it down. So I don't think this policy change is going to change the behavior that dramatically," said University of Chicago’s Booth School of Business' Matt Notowidigdo.
To 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 on the front end, “rather than dealing with unpaid medical bills from lack of insurance or not generous enough insurance on the back end,” he said.
Of course, for now, those large bills and low repayment rates are already a challenge for hospitals and health care systems. -ABC News
That said, if the CFPB rule leads to fewer people paying their bills, hospitals will have to make up for those losses in other ways - such as requiring payment before patients receive medical care, a move which could leave low-income patients worse off.
"I think in the short run, it will be great news for patients, and probably we’ll see patient advocacy groups pushing it. However, I think in the long-run, when the long-term negative effects emerge, probably we're going to see more pushback," said Ge Bai, a professor who studies accounting health policy at Johns Hopkins University.
Industry group also oppose the move.
"There’s too much at stake for Americans’ access to quality health care by taking actions that only negatively affect the cash flow to the health care community without finding ways to replace those funds," said Association of Credit and Collection Professionals CEO Scott Purcell.
Chopra, however, rejects that notion - suggesting that medical debtors will still have to face other penalties.
"Those individuals will still be subject to collection actions, lawsuits and more. There are plenty of ways that people get penalized for not paying their bills. I just don't want to see the credit reporting system be weaponized against people who already paid them."