Medical Debt: Financial Side Effects

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Before reading, take a crack at the following question: Which type of debt accounts for over half of all outstanding debt that shows up on personal credit reports?

When we think about poor credit reports, it’s educational, utilities, retail or banking-related debt that often comes to mind. However, the reality is that medical debt accounts for about half, or 52%, of all outstanding credit report debt.
Those of us with healthcare insurance may feel pretty secure about our ability to cover medical expenses. Don’t be. Sometimes it takes only one accident or emergency surgery to wind up with an overwhelming amount of medical debt on your credit report. And it’s not just Americans who have charged too many vacations or are having trouble paying off student loans. Many consumers with medical debt on their credit report have “otherwise ‘clean’ credit” and “show no other evidence of financial distress,” reported the Consumer Protection Financial Bureau last December.

It’s a situation that millions of Americans are finding themselves in on a daily basis. To be more exact, 63% of Americans in 2014 received a medical bill that was more than they expected to pay. And this year, nearly a fifth of us will hear from medical-debt collectors, and they’ll gather $21 billion in total.

So where is all of this debt coming from? The main culprit is out-of-network charges unforeseen by patients prior to their procedure. The other two are medical billing errors and hospitals ability to charge different amounts for the same procedure. NerdWallet, who released a report in March 2014 stating that medical bankruptcy is the number-one cause of personal bankruptcy in the United States, also analyzed the varying costs of the same procedures in different hospitals across the country. The most staggering example was the highest cost for an inpatient stay due to severe intestinal bleeding in California ($291,000), compared to the lowest cost for treating the same condition in Nebraska ($5,400).

The cases you’ll hear about the most though, are the ones in which a patient has meticulously planned out a procedure to include in-network doctors, and awoke with staggering medical bills due to the last minute inclusion of an out-of-network doctor in the procedure. Often times, insurers will pay the full amount or large portions of these out-of-network fees, which provides incentives for doctors to continue the practice. Unfortunately for the people who are sent these bills, by the time insurers address an out-of-network billing issue the debt has already been sent to a collection agency, often without the patient’s knowledge. Hence the massive amount of medical debt in America.

However, there is some good news. For 15 million Americans out of the 43 million who have delinquent medical debt on their credit reports – medical debt is the only debt they have in collections in their credit report. And those people who paid off medical debt that had landed in collections were also more likely to repay the rest of their debt. FICO also announced their plan to distinguish between non-medical debt and medical debt in order to reduce the impact of healthcare debt on credit reports, so that’s a start.

While the FICO change is helpful, it doesn’t address the underlying issue – keeping people out of medical debt in the first place. Legislation such as the Medical Debt Relief Act, if passed (which it has struggled to do), would be a great advancement towards protecting Americans from medical debt and out-of-network bills. Resources also need to be made available to educate, empower, and arm Americans with their medical payment options. If we can teach Americans the proper ways to allocate funds towards healthcare, as well as provide instructions on how to handle blindsiding fees, we can greatly reduce the amount of people ending up in debt.

In the meantime, Jean Chatzky offers up a few suggestions such as purchasing the best health insurance policy possible and staying fit (no cigarettes and keep your weight in check). Should you be interested in reading about specific instances in which people undergoing surgery were slammed with unauthorized out-of-network charges, check out this New York Times article. Warning, it’s not pretty.

– Lucie Dufour, Associate

Photo Credit: Flickr

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