How the Burden of Medical Debt Can Affect Your Credit

And What You Can Do About It!

Chances are, if you’re an American, you or someone you know has had trouble paying a medical bill.

According to the Kaiser Family Foundation’s recently released in-depth survey on medical debt, just over one-quarter of U.S. adults said they or a household member had problems paying medical bills in the previous 12 months.

You may be thinking, “Well, I have health insurance, so I won’t have a problem with medical debt.” But here’s the reality: In the survey, among those with medical bill problems, more than 60% were covered by health insurance.

Aside from harassing phone calls, unpaid medical debt can end up in collections and on your credit report. Although many new credit scoring models overlook medical debt, well-established models most lenders are currently using still count it as a negative mark on your credit report and it can affect you negatively for a long time.

By understanding how medical debt happens and what you can do if you incur medical debt, you can at least avoid medical debts that can destroy your credit.

How medical debt happens

Without health insurance, it’s obvious that medical debt happens whenever you incur medical bills you are unable to pay. But what if you do have medical insurance?

According to the Kaiser Family Foundation, health insurance provides financial protection when you need to use health services, but that protection is often incomplete and can result in medical debt.

Health insurance is an agreement between you and the insurer to split the costs of the medical bills in a specific way, according to your plan. You would be responsible for paying the monthly premium as well as your portion of provider charges which appear in terms such as deductibles, co-pays, coinsurance, maximum out-of-pocket expense and balance-billing. The insurer pays the balance of the allowed amount contracted with its in-network providers. When your income or savings falls short of your responsibility, you can incur medical debt.

Here are the most common ways medical debt can happen to you.

1. The deductible. Most health insurance plans have a deductible, or the amount you must pay before the health plan will pay for covered services. According to Kaiser’s statistics, the average combined deductible per person for 2016 is $5,765 for bronze plans and $3,064 for silver plans. So the deductible is the least amount you need to have in a medical emergency savings account to avoid medical debt. But that’s a lot of money to have saved and many don’t. The Kaiser survey found that in those with health insurance, higher deductibles caused problems with paying medical bills and now you can see why. More than half in the Kaiser survey had medical debt under $5,000. Even after the deductible is met, you are still responsible for your share of the provider bills.
2. An emergency room visit. Among those with medical debt problems, just over two-thirds said the bills resulted from one hospital stay or accident and that medical bills dragged on long past the initial incident or illness.
3. Many bills for the same incident: Nearly all (91%) of those who had problems paying medical bills had trouble with bills from at least two health providers (doctor, emergency room, prescriptions, lab fees, diagnostic tests, hospitalization, outpatient treatment, services) for the same incident. Over half had problems with bills from five or more sources.
4. Losing income. When people can’t work due to their own illness or to care for someone else in their family with any illness, medical debts are even more difficult. Nearly one-third in the Kaiser survey said someone in their household had to take a cut in pay or hours due to the illness that caused the medical bills.

What happens to your medical debt

Most hospitals and health care providers expect to be paid and will start calling after non-payment for 30 days. By 90 days of no payment, unpaid medical bills are referred to collections agencies and that’s when they get reported to your credit report that way.  Next, you will be contacted by the collections agencies with a demand for payment. According to Kaiser, most people who can’t pay initially end up with medical debt handled by a collections agency.

Others opt to put a portion of their medical debt on a credit card which can backfire into high levels of debt on credit cards and monthly payment problems, all of which also end up on your credit report.

Non-payment of debts, debt in collections and high credit card balances all lead to poor credit and low credit scores which can haunt you for a long time.

5 things you can do to manage medical debt

1. Make sure debts are accurate: Always keep copies of all medical bills and payments receipts. Check all invoices and demands for payment for errors you can dispute immediately with the provider or the collections agency and the credit bureau. Check that dates of service, account numbers, procedures and payments are accurate. If you have many medical debt to handle, a credit repair service may be able to help you more effectively.
2. Keep a medical emergency fund. Save the amount of your deductible in a cash savings account ready for use. This way, you will be able to afford the deductible in case of a medical emergency and not have to incur a medical bill, put a medical bill on a credit card or have a medical bill go into collections.
3. Search for a different health plan. If you have a very high deductible health plan and need to use health services often, it may benefit you to search for a plan with a smaller deductible and smaller maximum out of pocket expense even if the monthly premium is a little higher. Check with your employer or healthcare.gov to compare plans.
4. Always make payment arrangements. If you can’t pay even the co-pay or the entire bill due, make payment arrangements immediately with the healthcare provider. They will often agree to very small monthly amounts (such as $20 per month) to pay off the debt and this will keep it from going into collections.
5. Try to settle medical debts in collections. Are your medical debts currently listed on your credit report and within If they are and you have some money either from a raise, a bonus, a tax refund or some other windfall that is enough to pay a large portion of the medical debt, call up the provider and ask if they will settle the whole debt for a lesser amount than what is owed. Just be sure they report the debt as “satisfied” or “paid as agreed” to the credit bureaus as part of the settlement agreement.

Another interesting trend I noticed at my last hospital visit was that they offered me a discount if I paid the in-patient hospital co-pay right then while they were confirming the procedure appointment over the phone (which of course I took advantage of.)

The future of medical debt and credit scores

According to FICO, it’s now possible to distinguish between medical and non-medical collection agency accounts at all three major credit bureaus.

FICO has found that consumers with unpaid medical collections are less likely to default on future credit accounts in the future than those with unpaid non-medical collections.

As a result, both VantageScore 3.0 and the new FICO® Score 9 have deleted medical collections from their scoring models and FICO 9, but medical debt in collections still affects credit negatively on older scoring models.