Rerun: Should medical debt count against your credit rating?

The Health Business Blog is taking a break this week and is rerunning some favorite posts. If you want to comment, please do so on the original post.

As far as I’m concerned, a lot of medical debt isn’t real debt. Real debt is borrowing money from a bank to buy a car or using a credit card to finance a vacation or taking out a student loan to pay for college. Borrowers know ahead of time that they are incurring a financial obligation for a known amount of money for specific goods or services. They have the opportunity to choose what to buy and from whom or not to buy at all. Prices can be compared across different sellers.

Some medical debt is like the real debt described above, but a lot is not. Hospitalized patients receive bills that are often indecipherable, incorrect, and owed by an insurance company. Even when technically correct the amounts can be non-sensical and vary widely from provider to provider. Patients don’t voluntarily incur these expenses –sometimes they aren’t even conscious when the decisions are made. Unlike in typical industries, providers charge patients vastly different amounts for the same services. They often charge the most to those who lack insurance and have lower ability to pay. They also expect a significant percentage of patients not to pay at all. In fact, hospitals may even boast about how much “uncompensated care” they provide.

That’s why Medical bills can wreck credit, even when paid off struck a nerve. [Note: article is no longer available.] The article describes the plight of consumers who paid off medical bills after they were referred for collection, and yet found their credit ratings dinged. There are a variety of anecdotes:

  • A couple paid off a $200 bill sent to collections, then found they couldn’t get a mortgage because their credit score had fallen dramatically. Turns out the $200 bill was in error to begin with
  • A breast cancer survivor was placed in handcuffs at the end of a chain of events prompted by the failure of a hospital to place her in the charity care program
  • An Iraq vet had trouble refinancing his home because a bill that was still in dispute was referred to a collection agency

It’s a bit shocking that even medical bills that are paid off –sometimes just to end the nuisance– can have a long-term, negative effect on one’s credit rating.

Congress is debating the Medical Debt Responsibility Act that would force credit rating agencies to delete paid off medical debt from credit reports within 45 days. That seems quite reasonable to me, especially since we’re talking about debt that’s actually been paid.

I don’t begrudge providers the right to send debt to collection. The reality is they have to collect at least some of what’s owed, and there are plenty of people who seek to avoid payment if they can. But a credit report should differentiate between medical debt and real debt.