The paradox of medical debt relief

Medical debt can be debilitating, weighing people down financially and mentally. Among adults with medical debt, 63% reported having to cut back spending on food, clothing, and other basics to pay down debt. People with medical debt are more likely than those without medical debt to report indicators of financial distress such as not having a rainy day fund, overdrawing their checking account, or using a payday loan. Adults with medical debt are also more likely to delay a doctor’s visit, test, treatment, or prescription due to cost (59%) compared to those without debt (17%).

Given the negative outcomes associated with medical debt, it seems obvious that getting rid of medical debt would lead to better financial security and health. On an anecdotal level, many patients have testified to the positive impact that removing their debt has had on their lives. That’s why Undue Medical Debt, a nonprofit organization that buys and forgives debt, recently bought $30 billion worth of medical debt from a debt collector and will be retiring the full amount, relieving about 20 million people of their debt.

But on a larger scale, research on the impacts of medical debt relief has not borne out those positive outcomes as expected. A study last year found that people who had their medical debt forgiven did not have improved mental health or the credit scores of debtors, on average. Now, a new study on the removal of medical debt from credit reports further puts this strategy into question.

Medical debt on credit reports

When people have their medical debt placed on their credit report, it can have a large impact on their financial health. Credit reports are used by lenders to give or deny access to mortgages, so a low credit score due to medical debt can force people to delay their plans of homeownership. Credit reports can also be used by employers or landlords to screen potential job or tenant applications, making it even more important that medical debt stay off these reports.

When the Consumer Financial Protection Bureau finalized their rule to disallow medical debt on credit reports, they anticipated that it would “lead to the approval of approximately 22,000 additional, affordable mortgages every year” and could increase the credit score of Americans with medical debt by 20 points. (The rule is at risk now that the administration is seeking to shutter the agency.)

However, a new study shows that the actual impact would likely be lower. A working paper from researchers at the Gies School of Business and the University of Illinois Urbana-Champaign measured the impact of removing medical debt from credit reports on certain financial health metrics. They used data before and after three major credit bureaus stopped reporting medical debt under $500 and a machine learning modeling technique to evaluate the effects of the policy change.

Underwhelming results

They found that overall, removing medical debt from credit reports does not change the rate of default, meaning that medical debt has little “predictive power” when it comes to understanding if a creditor will repay their debt or not. This supports the CFPB’s previous research showing that removing medical debt from credit reports would not have a negative impact on other lenders. In other words, medical debt shouldn’t be on credit reports at all.

However, if removing medical debt from credit reports is not predictive of default, it also may not have a positive impact on one’s credit to remove it. When the researchers looked at a set of people who had medical debt right above and below the $500 line, they found no significant difference in consumer credit scores, credit limits and utilization, repayment behavior, or payday borrowing before and after the sub-$500 debt was wiped from reports. Contrary to the CFPB’s analysis, they found only an average 0.7-point difference in credit scores (which was not a statistically significant difference) ranging from a reduction of 4 points at the low end to 6 point improvement at the highest end.

“Our findings suggest that [medical debt] information deletion [from credit reports] is an inadequate solution for those burdened by medical debt, underscoring the need for alternative policies that address its underlying causes.”

Duarte et al, NBER Working Paper

There will be more research needed on this topic, as this study only shows changes that happened up to one year after medical debts were removed from credit reports. It’s possible there could be longer-term benefits in later years that were not found in this study.

Advocates have also noted that removing the ability for medical debts to be put on credit reports can be a beneficial policy in and of itself. Often debt collectors will harass people who owe medical debt and threaten them with lower credit. Taking away this option would give people more breathing room and reduce stress when dealing with medical debt. Importantly, the study did not measure the impact on people’s mental health or stress levels as a result of the policy change.

The need for upstream and downstream actions

Medical debt forgiveness is just one part of a larger approach toward addressing medical debt, helping those who are currently impacted by debt as policymakers look to help fix the problem upstream. “We don’t think that the way we finance health care is sustainable,” said Undue Medical Debt chief executive Allison Sesso, in KFF Health News.

Among the upstream solutions that state and federal policymakers are considering include standardizing hospital financial assistance policies, implementing presumptive eligibility policies (screening patients for financial assistance rather than making them apply), improving transparency around hospital billing practices, expanding and sustaining Medicaid coverage, implementing cost-sharing limits for marketplace plans, regulating hospital mergers and prices, and more. These are all important for reducing medical debt in the long run.