The Biden administration on Tuesday proposed removing medical debt from the credit reports of more than 15 million Americans, making it easier for them to qualify for auto, home and small business loans.
The proposed rule, which will go through a public comment period, would not take effect immediately. It would prohibit health care providers from sharing medical debt with loan providers and prohibit those providers from considering medical information when it comes to 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 having medical debt is the damage it does to a person’s credit score,” Ms. Harris said. “Medical debt makes it harder for millions of Americans to get approved for a car loan, a home loan, or a small business loan, all of which in turn makes it harder to survive—and a lot harder.” less get ahead. “That’s just not fair.”
Medical debt often looms large in the lives of Americans: an estimated 20 million people owe more than $250 to healthcare providers. Black and Latino Americans are more likely to report outstanding bills, as are those who are low-income or uninsured. In surveys, Americans have 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 limit costs have become the focus of his re-election campaign. His advisers believe that voters are already feeling measures such as reducing the prices of prescription products such as insulin or inhalers and will help improve the perception of Biden’s domestic agenda. The president has also relied on those economic achievements to convince voters of color (a base of his electorate) that he has delivered on his racial equity agenda, even as courts have blocked broader proposals.
The policy most likely will not take effect until early next year, according to administration officials who spoke on condition of anonymity to discuss details of the proposal. The public comment period runs through August 12.
Harris said the proposal was part of a broader White House effort to address medical debt — the administration has forgiven $650 million so far. The new policy will not alleviate medical debt or stop all aggressive collection tactics. It 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 an investigation by the independent federal agency in 2022 found that medical debt collections appeared on 43 million credit reports.
“It doesn’t eliminate the underlying medical debt that consumers have,” said Fredric Blavin, senior research associate at the Urban Institute. “This policy attacks the symptom rather than the root cause.”
Blavin hoped the policy would give 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, are more likely to try to collect their debts in other ways (such as suing patients, garnishing their wages or discontinuing 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 can potentially be more aggressive early on in collecting data themselves if they know they don’t have this tool at their disposal.”
Tens of billions of that debt are in the hands of collection agencies, where hospitals often send bills that patients have left unpaid for months or years. Those debts could prove extremely damaging to patients’ credit scores for decades.
That has changed significantly in recent years, as the three national credit reporting agencies (TransUnion, Equifax and Experian) have removed much of that debt from credit reports. In the last two years they have stopped reporting debts of less than $500 and those that have been in collections for less than a year.
Those changes removed medical debt from the credit reports of millions of Americans, according to a recent Urban Institute study. The share of Americans with unpaid health care bills on their credit reports decreased from 12 percent in August 2022 to 5 percent in August 2023.
Americans who had medical debt removed from their credit reports during that time saw their credit scores rise by an average of 30 points, the Urban Institute study found, moving them out of the range of “subprime” credit and closer to “prime” credit. “.
That still leaves about 15 million Americans with $49 billion in outstanding medical debt on their credit reports, according to research by the Consumer Financial Protection Bureau, the government agency that will implement the new rule.
Those patients are the ones who will benefit the most from the Biden administration’s policy.
“There’s a good fairness argument 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 consequence of ‘my son broke his arm, I was unlucky, and now I have a lot of bills.’”
Mahoney published a study this year that looked at the impact of not only ending reporting of medical debt to the credit bureaus, but also eliminating it altogether. The results were surprising, showing no improvement in credit scores or access to health care for the vast majority of patients.
However, there was a small subset of patients who did see improvements: those who only had medical debt on their credit report and no other types of loans or outstanding bills. For that group, Mahoney said, the Biden administration’s policy is probably the most important.
“Some people will benefit,” Mahoney said. “But for others, their financial situation was already a disaster, so the impact on their access to credit will be more limited.”
Stacy Cowley contributed reporting from New York.