How banning medical debt from credit reports could help millions of Americans

By banning medical debt from being included in credit reports, this proposed rule from the Biden administration aims to address increasing discontent over the economic burden that can go hand-in-hand with serious health problems. Photo by Getty Images

When confronted with a grim diagnosis or a catastrophic accident, Americans often wonder not only how they will recover their health and well-being but also if their finances can withstand medical debt and its rippling effects.

But a proposed rule from the Biden administration could translate to more financial relief for the 15 million Americans with $49 billion in unpaid medical bills in collections, experts say.

By banning medical debt from being included in credit reports, this proposal aims to address increasing discontent over the economic burden that can go hand-in-hand with serious health problems. An estimated 100 million people in the United States have medical or dental bills they are paying off or that are overdue, according to the Urban Institute.

“More than any other form of financial distress or debt, medical debt is the result of bad luck, not bad behavior,” said Neale Mahoney, an economist at Stanford University who has studied the effects of medical debt throughout his career. “Nobody chooses to get sick, but we end up with a mess of medical bills.”

People with medical debt would still have to pay their bills, but the proposed rule would change how that debt is used against them. In addition to banning credit companies from including medical debt in people’s credit histories, the rule would prevent lenders from factoring medical debt into decisions about whether a person is eligible for credit. It would also prohibit lenders from using medical devices as collateral for loans, which could lead to the repossession of wheelchairs and prosthetic limbs if the debt goes unpaid.

In 2023, three major credit bureaus – Equifax, Experian and TransUnion – voluntarily removed paid bills and bills under $500 from people’s credit reports, affecting millions of Americans. Credit-scoring companies, such as FICO and VantageScore, reduced how much medical debt could weigh down a person’s credit score. If the ban goes into place, those voluntary actions would become permanent.

Berneta Haynes with the National Consumer Law Center said this ban would especially help people of color, who often face a disproportionate burden of medical debt through higher rates of chronic illness and persistent wealth gaps compared to white people. In states that have not expanded Medicaid, Haynes said, these inequities are more prevalent because people are more likely to be uninsured. As a result, they are more exposed to risk of financial harm if they get sick or endure a medical emergency. That risk often makes people less likely to seek medical care, even if they need it.

If a family with little wealth got a $1,000 medical bill, Haynes said, “that could send them into a tailspin. Even if they eventually pay it, it’s likely to show up on their credit report before they’re able to do it.”

That negative mark on their credit report could haunt them for years, if not decades, when they try to purchase a car or home or even get a new job. If finalized, the overall impact of this rule could mean an increase of up to 20 points on some credit scores, Mahoney said.

“No one should be denied access to economic opportunity simply because they experienced a medical emergency,” said Vice President Kamala Harris during a call with reporters Tuesday that served as a joint announcement with the Consumer Financial Protection Bureau.

It’s also not uncommon for people to gamble with their health, avoiding medical debt and the catastrophic financial consequences it can mean.

In 2009, when DonnaMarie Woodson and her husband moved from Minneapolis to Charlotte to launch a consulting firm, they planned to buy health insurance once they had “some money flowing,” Woodson said. For a year, she went without coverage, and Woodson delayed care “not wanting to get into medical debt.”

When the Affordable Care Act was passed, Woodson once again scheduled her screenings to find out that she had late-stage colon cancer and breast cancer.

“It just proved that you don’t know what you don’t know,” said Woodson, 69, a patient who has been in remission from both cancers for nine years in Charlotte, N.C. “You might be feeling perfectly fine but drop dead the next day.”

While this rule could restore some financial stability for millions of Americans, Mahoney said it is not going to cure all that ails the nation’s health care system. The U.S. offers “a unique problem among rich nations,” he said, one riddled with many holes “that people can fall through.”

Numerous factors, such as lack of health insurance, inadequate coverage and health systems that are inaccessible (due to barriers like affordability or geography), “can discourage people from seeking care,” Mahoney said.

But the new rule, if it becomes reality, “does address one of the most unfair and burdensome features of our health care system,” he said.

The public comment period for the proposed changes lasts until Aug. 12.