WORD ON THE STREET: I have been fortunate to sustain my business during the ups and downs of these economic times. I have witnessed many changes in my industry and the market over the years, but there has been nothing more disturbing to me than creditworthy consumers trying to gain access to necessary credit in this economy and being denied.
Several years ago, the nine-year-old son of one of my clients was involved in an accident on his bicycle. He was taken to the hospital by ambulance where he received medical treatment, and thankfully had no life threatening injuries. My client was told by the insurance company that the $200 trip in the ambulance was going to be covered by his insurance policy. Several months and phone calls later, when the bill remained unpaid, my client finally decided it was easier to pay the $200 himself, but, by then, it was too late. The bill had been turned over to a collection agency.
The debt had been reported to the credit agencies, but it was only when my client and his wife went to refinance the $240,000 mortgage on their home in Lewisville, Texas, nearly six years after the accident, that he learned the bill had shaved about 100 points from his credit score. Even with no other debts, a healthy income and otherwise pristine credit, the couple had to pay an extra $4,000 to secure a market interest rate. He did not ignore the debt, but was simply unaware of it.
This story was covered recently in the New York Times, and is certainly not unique. There are plenty of stories just like it.
Even people with good insurance coverage know how hard it can be to figure out how much they owe after a visit to the doctor or, even worse, the emergency room, which can generate multiple bills from multiple providers. As patients become responsible for a growing share of costs – not just co-payments, but also deductibles and coinsurance – bill paying is becoming ever more complex.Â
On top of that, more medical providers are using collection agencies and turning to them more quickly than they have in the past. For these reasons, I have been advocating for the passage of the Medical Debt Responsibility Act, which was introduced in this Congress by Reps. Donald A. Manzullo, Heath Shuler and Ralph Hall. The Medical Debt Responsibility Act would require consumer credit reporting agencies to permanently remove paid or settled medical debt – not to exceed $2500 – from a consumer's credit report within 45 days of being paid or settled by the consumer. I believe strongly in this common sense, bipartisan legislation which goes a long way in helping the economy and consumers.
Similar legislation passed in the House of Representatives last Congress with overwhelming support from both Republicans and Democrats by a margin of 336-82, including the support of 13 committee chairs. Legislation has also been introduced in the Senate this Congress.
Too many errors
This year, a New York City hospital made international news for improperly billing a patient nearly $45 million for an outpatient service that amounted to only $300. The error was the fault of the billing company, which incorrectly listed the invoice number in the ‘amount due’ field.
While this incident is extraordinary, errors in medical billing are not uncommon, and the consequences are cause for serious concern. Over 20% of all medical claims every year are processed inaccurately. When those inaccuracies are sent to collection and reported to the credit bureaus, these mistakes become huge problems for the individual consumer.
The problem is compounded by the way in which credit agencies treat medical debt. Because health care providers rarely report medical bills paid on time, most consumers are penalized when medical bills, either appropriately or due to inaccuracies, are assigned to collections, which can lead to plummeting credit scores.
Even though medical debt is not a reliable indicator of credit risk, small medical bills are often the difference between being creditworthy and not creditworthy for millions of Americans. Unpaid medical debt sent to collections – whether for $100 or $10,000 – can shave up to 100 points from an average credit score, even if the collection is made in error.
In other circumstances, the billing may be correct, but the insurance claim submissions and the supporting documentation are incomplete – and, therefore, denied. Resubmitting claims takes time and runs the clock on bills that may ultimately be sent to collections. Unlike mortgage or credit card payments, medical payment history is incomplete and error prone since timely payments are not reported, but accounts that have been sent to collections are.
The Medical Debt Responsibility Act would ensure that minor medical bills no longer play a major role in credit score calculations. Consumers with a zero balance would have the collection removed from their credit report in a timely basis instead of suffering the consequences of a bureaucratic mistake for seven years. If this straightforward legislation became law, millions of Americans would have the good credit standing necessary to qualify for mortgages, credit cards and other types of loans.
The Medical Debt Responsibility Act also has the support of a diverse group including housing, consumer and mortgage lending groups as illustrated by a letter they sent to Congress in support of passage of the bill, which is included as part of this statement. Addressing this issue could markedly increase the ability of many consumers to refinance or purchase a home in this historically low-rate interest environment.
There is strong anecdotal evidence to show hidden medical debt has cost homeowners. For instance, in December 2010, the Wall Street Journal cited a consumer who received two erroneous $11 doctor bills, dropping their credit score by 77 points, making the cost of refinancing prohibitive.
The theory of perfect competition and the assumption of perfect information is a longstanding central component of microeconomic theory. Market efficiency and competitive equilibrium are dependent on the assumption of perfect information.
However, markets do not work well and are inefficient when the information is incorrect, unknown, or is otherwise compromised (i.e., housing bust, mortgage defaults, subprime mortgage-backed securities). Indeed, when information is inaccurate, markets make decisions on less than perfect information.
Furthermore, medical debt is unique in that it is not typically reported to the credit bureaus by health care providers. According to Experian, health care providers account for only 7/100th of 1% of their data. Most of the time, medical bills are reported to the credit bureaus only after they have been assigned to collections. This means the credit bureau is receiving incomplete and biased information because it does not receive data reflecting positive payment history – only the negative.
This is very different from a mortgage or a credit card, where payment history is reported to the bureaus on a monthly basis – positive and negative. Since this is not the case with medical debt, a consumer checking his/her monthly credit report cannot even see if a medical debt is outstanding, unless – and until – it goes to collections.
The unfortunate fact is that the consumer is the only party who pays for the errors, mistakes and confusion of the process. Those making the errors or causing the confusion – whether health insurers, collection agencies or providers – bear no responsibility.
In 2010, 30 million American adults under the age of 65 were contacted by collection agencies for unpaid medical bills. More than one-half (52%) of collection accounts reported to the credit bureaus are associated with medical bills, according to a study published in the Federal Reserve Bulletin.
Given the breadth of consumers impacted by this issue and the current system that punishes consumers regardless of the underlying facts (e.g., mistakes, errors or otherwise), Congress could dramatically increase economic activity and growth by amending the Fair Credit Reporting Act to require the removal of medical collection accounts that are paid in full or settled. I strongly believe that passage of the Medical Debt Responsibility Act will accelerate growth in the economy.
Rodney Anderson is executive director of Supreme Lending, based in Plano, Texas. This article is adapted and edited from recent testimony delivered before the House Subcommittee on Financial Institutions. The original text is available online.