Biden Administration Proposes Rule to Remove Medical Debt from Credit Reports

In a significant move that could help millions of Americans buy homes or cars, the Biden administration proposed a rule on Tuesday to remove medical debt from credit reports.

Announced by Vice President Kamala Harris and Consumer Financial Protection Bureau (CFPB) Director Rohit Chopra, the rule is part of President Joe Biden’s efforts to show that his administration is lowering costs, a key concern for voters in the upcoming election. “This will be an enormous relief to many people struggling with hospital bills,” Chopra told ABC News before the policy announcement.

The rule, in development since September, could take effect early next year. “Our research indicates that medical bills on credit reports aren’t predictive of whether a person will repay another type of loan. This means people’s credit scores are being unfairly and inappropriately affected,” Chopra said.

According to CFPB’s research, the new rule could enable 22,000 more people to qualify for safe mortgages annually, benefiting lenders by improving borrowers’ credit scores and increasing the number of approved loans.

Some major credit reporting companies, including Equifax, TransUnion, and Experian, have already started to stop using certain medical debts to assess creditworthiness. FICO has also begun to weigh medical debt less heavily in its scores, and Vantage Score has excluded it from its newer models.

However, the CFPB found that 15 million Americans still have $49 billion in medical debt impacting their scores. This rule aims to extend the new practice to all U.S. credit reporting.

The Impact of Rising Medical Debts

Medical debt is widespread in the U.S., affecting two out of five Americans, according to health policy research organization KFF, with most debts amounting to thousands of dollars.

Once these debts go to collections, credit scores drop, making it harder to get car and home loans or resulting in high-interest rates, creating a challenging financial cycle for those already struggling with bills.

“Medical debt makes it more difficult for millions of Americans to secure a car loan, home loan, or small business loan, complicating their ability to just get by, let alone get ahead. And that is simply not fair,” Harris said in a call with reporters on Tuesday.

Lexi Coburn, 33, first encountered this issue nearly ten years ago. She accumulated medical debt in 2013 when she was 23 and uninsured. After visiting the emergency room due to swollen feet, she was diagnosed with early-onset arthritis. Unable to pay the $425 bill from that visit, her debt grew to over $2,300, including $1,532 from dental work and another ER visit in 2019.

When trying to get a car, Coburn found that her medical debt hindered her ability to qualify for a loan with reasonable payments. She described the financial cycle as a “domino effect,” with her low credit score making it difficult to thrive and pay off the debt.

The new CFPB rule also aims to tackle issues of inaccurate, confusing, and complicated medical bills, which often lead to prolonged disputes between patients and billing departments, a common complaint received by the CFPB.

“Too often, we see people receiving inaccurate bills and fighting over them for months, only to have them appear on their credit report,” Chopra said.

Experts supporting the CFPB’s proposed rule point to the low success rate of collecting medical bills. “Repayment rates for medical debt are incredibly low, so this policy change won’t dramatically alter behavior,” said Matt Notowidigdo, a health economics professor at the University of Chicago’s Booth School of Business.

Linda Davis, a 61-year-old from Grand Rapids, Michigan, with chronic obstructive pulmonary disease and a lower back injury, doubts she will ever pay off her medical bills, estimated between $45,000 and $50,000. Despite having Medicare, she struggles to cover medical expenses.

Experts like Notowidigdo argue that addressing America’s medical debt issue requires enrolling more people in adequate health care coverage to prevent unpaid medical bills from accumulating.

Some warn that if the CFPB rule leads to fewer people paying their medical bills, it could ultimately harm patients. Ge Bai, a health policy professor at Johns Hopkins University, predicts that hospitals might require upfront payments before providing care, negatively impacting low-income patients.

“I think initially, this will be good news for patients, and advocacy groups will support it. However, in the long run, as negative effects emerge, there will likely be more pushback,” Bai said.

The Association of Credit and Collection Professionals has expressed similar concerns, warning that the rule could increase the cost of medical care and force more upfront payments, altering the credit-based economy.

Chopra dismissed the idea that more people will default on their health care debts due to the rule, stating that other penalties for unpaid debt would still apply. “People will still face collection actions and lawsuits. We just don’t want the credit reporting system weaponized against those who have already paid their bills,” he said.