States grapple with impacts of medical debt

“No one in our nation should have to go into debt just to get the quality health care that they need,” said Vice President Kamala Harris. And yet, she said, “1 in 3 adults—some 100 million Americans—struggle with unpaid medical bills.” 

Harris’ comments were made late last month at a press conference announcing the Biden administration’s plans to eliminate medical debt from consumers’ credit reports. The proposed rules come as a growing number of state and local governments in recent years have also sought to reduce the negative financial impacts of medical debt.

“Medical debt [can have] pretty intense financial repercussions for patients,” said Maanasa Kona, assistant research professor at Georgetown University’s Center on Health Insurance Reforms. 

The Biden administration’s proposed rules seek to target one of these consequences: the effect medical debt can have on an individual’s credit score. Kona says poor credit scores can impact a person's ability to rent an apartment or even get hired. 

Medical debt can also strain patients’ physical and mental health. A Gallup poll last year found that 38% of respondents said they or a family member postponed medical treatment because of the cost. Research shows financial worries are associated with psychological distress. Many hospitals and debt collectors can sue patients, put liens or foreclosures on their homes or garnish their wages. In 2022, for instance, 1 in 12 individuals reported they lost their home from eviction or foreclosure at least in part due to medical debt that they struggled to pay off, according to a nationwide survey conducted by KFF Health News.

In a bid to limit the impact of medical debt on its residents, Colorado became the first state in the nation earlier this year to enact legislation prohibiting consumer reporting agencies from including an individual’s medical debt on credit reports. That means if someone is applying for housing, for example, a landlord cannot see their medical debt status, said Julia Char Gilbert, a Connelly policy advocate at the Colorado Center on Law and Policy. 

Coloradans who notice medical debt-related information on their credit reports can file a dispute with the credit reporting firm to get that information removed, she said. Under the law, companies are legally required to review any dispute cases and resolve the issue.  

The law aims to protect individuals’ financial mobility, she said, as poor credit scores due to medical debt could make significant life milestones such as applying for a mortgage or starting a small business unattainable, she said. Plus, research shows medical debt may not be an accurate indicator of someone’s credit worthiness, or their ability to pay money back. 

New York lawmakers also passed similar legislation in June, which awaits Gov. Kathy Hochul’s signature.  

The Commonwealth Fund recently analyzed state medical debt policies and found several common strategies. Some states are addressing medical debt by requiring hospitals to offer financial assistance, such as payment plans, for patients at or below a certain percentage of the federal poverty level.

Others place limits on the amount of interest on medical debt. For instance, Colorado now caps interest rates on medical debt at 3%, which Char Gilbert called “an important consumer protection to help reduce … unmanageable medical bills snowballing into even more unmanageable levels.” 

Another strategy is to push for preventative care to avoid the creation of medical debt in the first place. Twenty states require nonprofit hospitals to invest in community benefits, such as vaccine clinics or housing and transportation vouchers. Improving a community’s health and financial conditions should help reduce medical debt. In some cases, nonprofit hospitals receive tax exemptions for providing these benefits, Kona said. 

However, better enforcement of medical debt protections, according to the Commonwealth Fund, could come from better data collection. More than 30 states have data reporting requirements, but “few are robust,” the analysis said. Data reporting helps states proactively monitor what hospitals are currently doing about medical debt, rather than relying on retroactive patient complaints, Kona said. In other words, “prevention is better than cure.”  

But only five states—Maryland, New Jersey, Illinois, Indiana and Colorado—require hospitals to report detailed data on their financial operations, financial assistance programs and patients’ demographics. Maryland, for instance, requires data collection on the bills hospitals categorize as bad debt and the number of lawsuits a hospital or debt collector has filed against a patient—and that data must be organized by race, gender and ethnicity. Breaking the data down by demographic categories is key, Kona said, as research shows medical debt tends to disproportionately affect vulnerable populations.

“Medical debt is an indication that you or someone in your family got sick or needed health care, and it was too expensive for you to be able to afford,” Char Gilbert said. “It is not an indication of whether you are someone who makes sound financial choices. Medical emergencies are not a choice that people take on voluntarily.”