Medical debt and its relevance when assessing creditworthiness.

• Author: Rukavina, Mark
• Position: Symposium: Credit Reporting and Credit Scoring

1. INTRODUCTION

   Millions of Americans who experience illness or injury, even those with health insurance, are at risk of incurring medical bills associated with their medical treatment. Many pay for their healthcare at or near the time of treatment. Some pay outstanding medical bills over time after negotiating short-term payment plans with their healthcare providers. Still others struggle for extended periods before ultimately paying their medical bills. Millions of American families incur billions of dollars in medical bills each year. (1) While some may choose to ignore these bills, millions of Americans experience privations paying them. The stress of dealing with illness is exacerbated when medical bills find their way onto a credit report, resulting in further financial distress for families.

   Healthcare spending in the United States totaled $2.7 trillion in 2011, representing 17.9% of our nation's gross domestic product (GDP). (2) Spending on healthcare has increased significantly over the past decade; in 2000 it amounted to $1.377 trillion, or 13.8% of GDP. (3) For the past ten years, the cost of healthcare has consistently outstripped the consumer price index and wage gains for American workers. (4)

   Not surprisingly, the amount patients have spent out of pocket for healthcare has also increased substantially--from $201.7 billion in 2000 to $307.7 billion in 2011. (5) These costs are in addition to the money patients and their families pay for health-insurance premiums. For some families this has meant fewer dollars to devote to other basic needs and savings. Unfortunately, millions of Americans do not have financial cushions that would enable them to absorb the increasing cost of healthcare. Instead, they incur medical debt.

   The Patient Protection and Affordable Care Act (Affordable Care Act or ACA) will expand coverage through both Medicaid and private insurance sold through health insurance exchanges by 2014. (6) It is expected that the ACA will result in an increase in overall spending for insurance coverage and that this will extend insurance to millions of Americans who currently go without. (7) The expansion of insurance coverage is likely to provide relief in terms of costs paid out of pocket. Despite this expectation, growth in overall out-of-pocket spending is projected at an average rate of 5% from 2015 through 2020. (8) Current projections predict that total health expenditures will exceed $4.638 trillion in 2020, while out-of-pocket costs will be more than $443 billion that same year. (9) Even with healthcare reform, healthcare costs will continue to consume a significant share of the American family's budget. Research has found that healthcare expenses and the fear of incurring medical bills make people reluctant to seek needed medical care. (10) However, there has been far less research on the effect that medical debt has on peoples' ability to access credit. (11) In this Article, I intend to describe how the reporting of medical debt to consumer reporting agencies (CRAs) can influence consumers' credit histories and access to affordable credit.

2. MEDICAL-BILLING PROBLEMS

   The combination of unaffordable healthcare costs and inefficient insurance-claims payment systems damages credit for millions of Americans. The problem of unaffordable medical bills is quite common and has increased in recent years. The percentage of working-age American adults experiencing problems with medical bills or medical debt increased from 34% in 2005 to 40% in 2010. (12) Seventy-three million Americans experienced problems such as being unable to pay medical bills, having to makes changes to their way of life in order to pay medical bills, being contacted by collection agencies for unpaid medical bills, or having to pay off medical debt over time. (13)

   The melange of health-insurance products on the market also contributes to medical-billing problems. The lack of a standard health-insurance benefit package results in confusion for both patients and providers. Many people are confused about who has responsibility for paying a medical bill. They are often uncertain about the explanation-of-benefits form, unclear about the exact service for which they are being billed, and unsure whether they should pay the healthcare provider or their insurer. one study found that nearly one-third of respondents let a medical bill go to a collection agency because they did not understand the bill or explanation-of-benefits statement. (14)

   Other medical-bill problems result from errors. Research estimates that one-in-five claims for insured patients are processed inaccurately, resulting in delayed payments to providers. (15) The problem with billing errors is amplified by the various reasons insurance companies use to deny payment.

   According to a United States Government Accountability Office study:

   Claims may be denied for billing reasons, such as the provider failing to include a piece of required information on the claim, such as documentation that the provider received preauthorization for a service, or submitting a duplicate claim.... [C]laim denials can occur when a determination is made that the service provided was not appropriate, specifically that the service was not medically necessary.... Depending on the reason for a claim denial, either the provider or the consumer may bear the financial responsibility for the denied coverage amount. Claims that are denied because of such billing errors as the provider not providing a required piece of information can be resubmitted and ultimately paid. (16) As a result, an industry of "denial-management" consultants has emerged to help healthcare providers negotiate with insurance companies and appeal both unpaid and denied claims. Even with denial-management consultants, millions of Americans are at risk of having their credit damaged as a result of medical-billing errors.

   1. Medical Collections

      Many patients are asked to pay for bills while waiting for their claims to be fully adjudicated. others delay paying providers while they wrangle with insurers over rejected claims. In the end, the patients are ultimately responsible for paying the bill. It is a routine practice for patients to sign treatment consent forms that include language stating that the patient will assume responsibility for payment in the event that his or her insurance company does not cover 100% of the amount of the medical claim.

      Healthcare providers routinely contract with collection agencies to try to recover unpaid patient accounts. Between 2005 and 2010, the number of working-age American adults that collection agencies contacted for medical bills jumped from 22 million to 30 million. (17) Medical collections are the most frequently reported type of collection account on credit reports. (18) More than half of all collection accounts on reports are medical in nature. (19)

      Medical collection companies are increasingly the subjects of scrutiny. Public policymakers and the media are examining healthcare providers'--and their collection agents'--billing and collection practices. (20) Minnesota Attorney General Lori Swanson investigated collection practices being used by Accretive Health, one of the nation's largest collectors of medical debt. (21) Aggressive collection activities were alleged in the emergency room and throughout hospitals where Accretive was brought in to help with bill collection:

      Employees were told to stall patients entering the emergency room until they had agreed to pay a previous balance, according to the documents. Employees in the emergency room, for example, were told to ask incoming patients first for a credit card payment. If that failed, employees were told to say, "If you have your checkbook in your car I will be happy to wait for you," internal documents show. (22) Carol Wall, a 53-year-old Minnesota resident, said "a woman with a computer cart" told her she owed $300 as she was "vaginally hemorrhaging large amounts of blood" at an Accretive-affiliated emergency room in January, according to court records. Another patient, Terry Mackel, 50, said he was asked to pay $363.55 at another Accretive-affiliated emergency room in Minnesota as he waited "alone, groggy and hooked up to an IV" waiting to see an emergency room doctor, according to court documents. Fearing that it was the only way to see a doctor, both patients paid. (23) The Affordable Care Act will likely address certain medical-billing problems. The ACA added new requirements that hospitals and health systems must meet in order to maintain their federal tax exemption. (24) These provisions require hospitals to have written financial-assistance policies. (25) The policies must include clear eligibility criteria and information on how to apply for assistance--regardless of whether the assistance is provided at discounted rates or for free. (26) Further, the criteria must be widely publicized. (27) The ACA also requires that hospitals provide emergency services regardless of a patient's ability to pay, have written billing and collection policies, and limit the fees charged to patients eligible for financial assistance. (28) Possibly the most significant provision is one prohibiting "extraordinary collection" practices prior to making reasonable efforts to determine whether a patient is eligible for financial assistance. (29)

      In June 2012, the Internal Revenue Service issued a notice of proposed rulemaking on financial assistance as well as billing and collection policies. (30) These proposed regulations define "extraordinary collection actions" as: "actions taken by a hospital facility against an individual related to obtaining payment of a bill for care covered under...