The Biden administration on Tuesday proposed removing medical debt from the credit reports of more than 15 million Americans, which would allow them easier access to auto, home and small business loans.
The proposed rule, which will be subject to a public comment period, would not take effect immediately. It would prohibit health care providers from sharing medical debt with lenders and prohibit those providers from considering medical information when making loans.
Vice President Kamala Harris said the move would improve “the financial health and well-being of millions of Americans.”
“One of the most significant consequences of medical debt is the harm it causes to a person’s credit score,” Ms. Harris said. “Medical debt makes it harder for millions of Americans to get a car loan, home loan or small business loan, which in turn makes it harder to get by. and even less to move forward. It’s just not fair.
Medical debt often looms large in Americans’ lives, with an estimated 20 million people owing health care providers more than $250. Black and Latino Americans are more likely to report unpaid bills, as are those who have low incomes or are uninsured. In surveys, Americans described taking out loans and working overtime to cover those debts.
As the economy and inflation have soured voters during President Biden’s first term, his administration’s efforts to contain costs have become the focus of his re-election campaign. His aides believe that measures such as reducing the prices of prescription products like insulin or inhalers are already felt by voters and will help improve the perception of Mr. Biden’s domestic agenda. The president has also relied on such economic achievements to convince voters of color – a base in his constituency – that he has implemented his racial equity agenda, even as more far-reaching proposals have been blocked by courts.
The policy likely won’t take effect until early next year, according to administration officials speaking on condition of anonymity to discuss details of the proposal. The public comment period runs until August 12.
Ms. Harris said the proposal was part of a broader White House effort to combat medical debt: The administration has canceled $650 million of it so far. The new policy will not relieve medical debt, nor will it end all aggressive collections tactics. This will only affect information about unpaid debts that health care providers have sold to collection agencies.
But the Biden administration plans to sell the rule as a way to help Americans achieve greater financial freedom.
Rohit Chopra, director of the Consumer Financial Protection Bureau, said Tuesday that research conducted by the independent federal agency in 2022 found that medical debt collections appeared on 43 million credit reports.
“It doesn’t eliminate consumers’ underlying medical debt,” said Fredric Blavin, senior research associate at the Urban Institute. “This policy addresses the symptoms rather than the root cause. »
Mr. Blavin expects the policy to provide a boost to consumers who need better credit scores to rent apartments or buy cars. But he also said there could be unintended consequences: Hospitals, for example, might be more likely to try to collect debts through other means — like suing patients, garnishing their wages or stopping care – because they no longer have the tactic of reporting to the credit bureaus.
“It’s not clear what those effects will be,” he said. “Hospitals could be more aggressive from the start in their own collection if they know they don’t have this tool. »
Tens of billions of dollars of that debt belongs to collection agencies, where hospitals often send bills that patients haven’t paid in months or years. These debts could prove extremely damaging to patients’ credit scores for decades.
The situation has changed significantly in recent years, as the three national credit reporting agencies – TransUnion, Equifax and Experian – have removed much of this debt from credit reports. Over the past two years, they stopped reporting debts under $500 and those that had been in collections for less than a year.
These changes have erased medical debt from the credit reports of millions of Americans, according to a recent study by the Urban Institute. The share of Americans with unpaid healthcare bills on their credit reports decreased from 12% in August 2022 to 5% in August 2023.
Americans who had medical debt removed from their credit reports during this period saw their credit scores increase by an average of 30 points, according to the Urban Institute study, pushing them out of the ” subprimes” and approaching “prime” credit.
That still leaves about 15 million Americans with $49 billion in unpaid medical debt on their credit reports, according to a study by the Consumer Financial Protection Bureau, the government agency that will enforce the new rule.
These patients are the ones who will benefit the most from the Biden administration’s policies.
“There are good fairness reasons that credit reports should reflect bad behavior rather than bad luck,” said Neale Mahoney, a Stanford economist who studies medical debt. “Medical debt is often the result of ‘my kid broke his arm, I was unlucky and now I have a lot of bills.’
Mr. Mahoney published a study this year that examined the impact of not just stopping reporting medical debt to credit agencies, but eliminating it altogether. The results were surprising, showing no improvement in credit scores or access to health care for the vast majority of patients.
There was, however, a small subset of patients who saw improvements: those who only had medical debt on their credit report, and no other types of loans or outstanding bills. For this group, Mr. Mahoney said, it is likely the Biden administration’s policies that will matter most.
“Some people will benefit from this,” Mr Mahoney said. “But for others, their financial situation was already dire, so the impact on their access to credit will be more limited. »
Stacy Cowley contributed reporting from New York.