By Lauren Johnson
About 15 million Americans have more than $49 billion in outstanding medical debt, and a large number of those people live in the south and in low-income communities, according to data from the Consumer Financial Protection Bureau (CFPB). The CFPB released this report a year after the three largest credit agencies stopped reporting balances under $500 in order to reduce the number of medical bills on credit reports.
While Jason Steadham, vice president of DiRecManagement, a collection agency based in Mobile, believes this was done in good faith to help people who have fallen into bad health, he’s seen negative effects since it was implemented. The patients who are struggling with greater debt didn’t experience any relief. Likewise, providers with smaller practices took a financial hit as fewer people paid their outstanding medical bills.
“While it may have been a good idea, the application of it has fallen victim to the law of unintended consequences,” Steadham said. “Some people don’t care about these small balances because they know there are no repercussions for not paying them, which hurts medical practices.
“The credit agencies also established a longer grace period, waiting one year before reporting medical debt. When the debt was on their credit, people were more likely to contact the provider or the collection agency. That started the conversation to get the insurance issues corrected before the timely filing limits fall out.”
Under today’s rules, a patient who received medical services won’t see the debt on their credit until one year later. If the patient was unaware of their bill until a year has passed, it’s typically too late for their insurance provider to pay for the medical service.
Additionally, within the past two years, the cost of living has increased which has caused a rise in bankruptcies, and this affects medical debt collections. Steadham, who’s been in the industry since 2002, has seen the correlation between the price of gas and collections.
“In the medical debt space, you’re dealing with unsecured debt. Medical collections live and die with discretionary income,” Steadham said. “As the price of gas goes up, collections go down, and vice versa.”
When the cost of living eats up more income, people have a difficult time paying off their medical bills. Studies show that roughly 66 percent of bankruptcies are caused by medical expenses, making medical debt the leading factor for bankruptcy in the U.S. In 2024 so far, the U.S. Bankruptcy Court reported a 16 percent increase in bankruptcy, which is on top of a 16 percent increase in 2023.
“Bankruptcies are on the rise in the two years since the credit agencies stopped reporting medical debt under $500 so I would argue that this policy change hasn’t had a positive effect on people’s finances.”
Lawmakers have also proposed a new regulation that would remove all medical debt from credit reports, and Steadham is worried about the aftermath of this legislation.
“Debt collection is critical in keeping overall costs down,” Steadham said. “The higher the number of uncollectible accounts that are written off will directly affect the rates for people who have paid their bills.”
When providers are only paid for a portion of their service and still have to cover 100 percent of their expenses, they will be forced to raise their prices across the board so they can continue to practice,” Steadham said. “Healthcare costs are reduced because of the ability of the collection industry to bring in money. When the recovery rates are negatively affected, some hospitals and medical providers will start closing.
“If the consumer knows that the medical debt is not going to affect their credit score, they will likely pay another bill that will affect their credit score. We all want to see what’s best for our neighbor, but we have to remember that the provider is also our neighbor.”