Proposed rule to halt credit-reporting of medical debt would have big ramifications for hospitals and other providers

A proposed rule from the Consumer Financial Protection Bureau (CFPB) would curtail the inclusion of medical debt in credit evaluations, potentially shaking up healthcare billing and collections processes.

The CFPB framed part of its rationale for the rule in the context of privacy, noting Congress previously limited the sharing of a patient’s medical information in the U.S. financial system. An exception drafted by federal regulators allowed creditors to obtain and use medical financial information under certain conditions.

The new rule largely would close that loophole and restrict the ability of reporting agencies to furnish medical debt information to creditors for determining a consumer’s credit eligibility.

“As a result of these changes, consumers’ sensitive medical information would be protected, and consumers would no longer be unfairly penalized in the credit market for having medical debt,” the CFPB wrote. “Consumers with and without medical debt would have equal access to credit at comparable terms and debt collectors would have less leverage over consumers to pressure consumers into paying medical debts that they may not owe.”

As word gets out, an obvious question is whether some patients will be less motivated to pay their bills.

“We definitely think there’s going to be — once people hear about this rule, even without it taking effect — some immediate consumer reactions of not paying debt as much as they are now,” said Leah Dempsey, JD, co-chair of the financial services practice at the law firm of Brownstein Hyatt Farber Schreck.

Constraints on providers

The proposed rule is “well-intentioned” as a patient-focused measure, said Shawn Stack, a director of healthcare finance policy with HFMA.

However, he added, it “excessively restricts providers’ ability to collect cost-sharing payments and potentially limits providers’ ability to assess patients for financial assistance and charity care through patient-friendly tools like presumptive eligibility.”

The CFPB said available data is inadequate to project whether on-time payments would drop because of the rule.

“Even if some consumers were less likely to make on-time payments, it is not necessarily the case that the proposed rule would significantly reduce healthcare providers’ revenues, and thus lead healthcare providers to take [collection-related] actions,” the agency wrote. “Consumers would remain liable for their unpaid medical debts under the proposed rule.”

Tim Haag, president and CEO of State Collection Service, foresees the regulations increasing the practice of requiring upfront payment. The process at hospitals soon could be “no different than the dentist,” he said.

Citing data from a 2018 HFMA article that was authored by a vendor, the CFPB said “there is already a substantial economic incentive to require upfront payment or deny service to patients with overdue accounts given that recovery rates on billed expenses to patients are already low.”

During a preliminary comment period before the issuance of the proposed rule, providers warned they might end up denying nonemergency care to patients who cannot pay in advance or have an outstanding balance they cannot resolve. While foreshadowing a “minimal” impact on healthcare access from the proposed rule, the CFPB requested additional feedback, including “quantitative estimates of the expected size of these impacts and any disparate regional impact.”

A more litigious era?

The CFPB said collection practices would not have to change as a result of the regulations, with providers and collectors continuing to rely on calls, letters and text messages. Notably, the rule also references litigation as an ongoing option.

But litigation carries obvious drawbacks in the current environment, especially at not-for-profit (NFP) hospitals, which have been subject to media and congressional scrutiny for going that route in recent years.

It was “a big surprise [that CFPB is] actually suggesting that as a means of collecting medical debt,” Haag said.

Ultimately, he thinks more providers could come around to inferring that they don’t have another option.

“Providers don’t like to [be in] the headlines,” Haag said. “I think it’s going to take time and it’s going to take data to show them that this is the only way they’re going to be able to increase some of these collections.”

To avoid having to make that choice, providers can look to shore up their patient financial communications. Such steps can help limit bad debt and reduce the need for extraordinary collections actions (ECAs).

Regardless of rules around debt reporting, Stack said, HFMA continues to advocate for deemphasizing ECAs and has seen noteworthy advancements implemented by its member-hospitals. In 2014 and again in 2020, HFMA published Best Practices for Resolution of Medical Accounts (Haag and his colleague Steve Beard were on the task force that developed the 2020 update).

Among the best practices described in the reports are actions that should precede ECAs, including ensuring the patient has been apprised of opportunities for financial assistance and payment plans.

A financial bind

Especially for hospitals that eschew litigation, the proposed regulations would add to mounting reimbursement challenges.

“Payer shifting has been going on for the last 15 years, [with] more patient responsibility,” said Beard, the chief business development officer at State Collection Service. “So now, the unintended consequences — everybody knows [medical debt is] not going to be credit-reported. Most people know they’re not going to be sued. So, what’s the hospital to do?”

Brownstein (the firm where Dempsey works) commissioned an analysis of the rule by Andrew Nigrinis, PhD, an economist who previously worked at the CFPB. In a preliminary summary shared with HFMA, Nigrinis predicts that the liquidation rates of medical accounts referred to debt collectors would decrease by 10.1%. The impact would be 7.3% for providers that choose to litigate collections.

“Even providers who do not credit-report today are expected to experience a 6% decrease in recoveries,” the analysis states. “This is attributed to increased patient awareness that medical debt cannot be reported and thus may be viewed as a voluntary payment.”

As with other policies that affect hospital finances, the most vulnerable organizations will be those that tend to squeak by under the best of circumstances.

“I have concerns about the potential impact of these regulations on the solvency of community providers operating on razor-thin margins — and [that the rules] may have implications on payment planning to help patients fulfill their obligations,” HFMA’s Stack said.

It’s even conceivable that hospitals will find themselves in breach of contract if the rule becomes finalized.

“Providers could be rendered powerless to fulfill their contractual obligations set by payers to collect patient cost-sharing amounts that payers and plans dictate to their patients and providers,” Stack said.

A continuum of changes

Even before the proposed rule, Haag, Beard and Dempsey were preparing to present at HFMA’s Annual Conference next week in Las Vegas on the topic of recent credit-reporting changes and their impact on medical debt resolution. (The June 25 afternoon session also features Jack Brown of Gulf Coast Collection Bureau.)

For example, Haag said, many collections companies in recent years have stopped reporting medical debt to the credit-reporting agencies unless a client contractually requires them to do so.

And in 2022 and 2023, the agencies voluntarily instituted steps that included removing medical debt from reports if it was for less than $500 or had been paid. They also imposed a one-year waiting period from the date of service before any balance higher than $500 could be reported.

Trends from those changes already are evident, healthcare stakeholders say, especially because the large majority of medical debts are for under $500. Bad-debt placements are up year-over-year on a same-client basis, Beard noted.

“We’re seeing less people paying at the hospital, it goes to bad debt, and our recoveries as a percentage are down,” he said. “So that’s a double-whammy — placements up, recoveries down.”

Even with the voluntary policies, the CFPB says 15 million Americans still had $49 billion in medical bills on their credit reports as of June 2023. The new rule essentially would wipe all that debt off those reports.

The call to action

If the November election leads to a change in administration, the future of the new rule and of the CFPB more broadly would be uncertain. Regardless, healthcare stakeholders can use the 60-day comment period ending Aug. 12 to state their concerns about the regulations.

Dempsey noted there’s a disconnect in the proposals because the CFPB is focused on consumer issues and may lack expertise in the nuances of the healthcare revenue cycle.

“You’ve got to get out to your representatives and tell them how this is going to hurt you,” Haag said. “We [as collections companies] have a voice, but [hospitals’] voice in this situation can be much louder.”