Ramifications of a proposed rule to halt credit reporting of medical debt

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 June 11 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 some conditions.

The new rule largely would close that loophole while also limiting the ability of reporting agencies to furnish medical debt information to creditors.

“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.

If Donald Trump regains the White House in November’s election, the new rule’s future would be uncertain. For the time being, providers are concerned about how consumers will react if they realize they can avoid a credit-score impact from an unpaid medical bill.

A significant reduction in collections is a foreseeable outcome, provider advocates have argued during the proposed rule’s comment period, which ends Aug. 12.

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.”

A 69-page analysis by Andrew R. Nigrinis, PhD, an economist who previously worked for the CFPB, projects that providers will experience a cash-flow reduction of $24 billion in the first year after the rule is implemented. The analysis was commissioned by the law firm of Brownstein Hyatt Farber Schreck LLP, which advocates on behalf of ACA International, the leading association for accounts receivable management companies.

Tim Haag, president and CEO of State Collection Service, foresees the rule increasing the practice of requiring upfront payment. The process for nonemergency hospital care 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 the impact likely would be limited because “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 proposed rule was issued, providers warned they might end up denying more 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, 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, especially given that not-for-profit hospitals have been subject to media and congressional scrutiny for going that route in recent years.

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

Ultimately, he suspects more providers will come around to inferring that they don’t have another option if the proposed rule is finalized.

“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. In 2014 and again in 2020, HFMA published best practices for resolving medical accounts.

Among the 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

For providers, the proposed regulations likely would add to mounting reimbursement challenges.

Using survey data from ACA International members, Nigrinis’s analysis finds that the liquidation rates of debts referred to collection agencies would decrease by 8%.

After applying that figure to the value of medical debt already on the books, Nigrinis concludes: “The proposed rule’s cost due to the inventory of medical debt lost is expected to be $17.6 billion. The loss will be $6.44 billion when the rule comes into force. However, the annual loss will continue indefinitely.”

Many providers already refrain from reporting medical debts to agencies such as Equifax. But even those providers may need to prepare for a fall-off in collected revenue. An earlier analysis by Nigrinis put the drop at 6%, stemming from “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 rule] 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 final.

“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.

Such concerns illustrate why providers were urged to offer feedback to the CFPB during the two-month comment period that precedes publication of the final rule, which is expected by year’s end.

“We [as collections companies] have a voice,” Haag said. “But [hospitals’] voice in this situation can be much louder.”

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The CFPB’s newly proposed rule is part of a continuum of changes

Even before the proposed rule issued in June by the Consumer Financial Protection Bureau (CFPB), changes to credit-reporting policies and practices stood to affect medical debt resolution.

For example, many collections companies have stopped sending medical debt to the credit-reporting agencies unless a client contractually requires them to do so, said Tim Haag, president and CEO of State Collection Service.

“The reason for [that] is it’s the number-one source for us to get sued by a consumer,” he said.

In 2022 and 2023, the credit-reporting agencies voluntarily implemented 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 $500+ balance 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. Per the Consumer Data Association, more than 70% of medical debt was removed as a result of the new policies.

An analysis by economist Andrew R. Nigrinis, PhD, examines the changes and finds that even as gross collections remained stable, collection rates fell by 5.6% nationally.

“This could be an anticipatory effect of the belief that debts would not have to be paid,” Nigrinis hypothesizes.

(The data does not constitute an ideal national sample, the analysis notes, because it’s based on a survey of members of the trade group ACA International, with more than 46% of the responses coming from California.)

Even with the voluntary policies implemented since 2022, the CFPB says 15 million Americans still had $49 billion in medical bills on their credit reports as of June 2023. The new rule is meant to essentially render all that debt invisible.

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How is the CFPB’s proposed rule projected to affect consumers?

A proposal to eliminate medical debt as a factor in credit scores would be a major boost for consumers, says a representative of one of the healthcare industry’s leading financial-assistance navigators.

“All this is going to do is relieve a lot of anxiety and fear from the patients who know about [the change],” said Eli Rushbanks, JD, general counsel and director for policy advocacy at Dollar For.

“Their credit score is very present in their mind,” he added.

Rushbanks thinks hospital collection rates won’t be adversely affected, given that they already are low. He cited a CFPB estimate that only 2.5% of medical debt furnished to the reporting agencies is ever paid.

“If this money existed and people had it, the collection company would be able to get it,” Rushbanks said.

Potential for unintended consequences

The proposed rule could bring negative implications for consumers’ ability to access credit, according to an analysis by economist Andrew R. Nigrinis, PhD. Lenders would be more wary because they would have less insight into an individual’s ability to repay a loan.

In July 11 testimony before a Senate committee, Benedic Ippolito, PhD, senior fellow with the American Enterprise Institute, said data shows medical-debt forgiveness does not lead to substantial improvements in other financial outcomes.

“In part that likely reflects the fact that most medical debts ultimately do not get repaid,” Ippolito told the committee.

Rushbanks sees positive outcomes from the proposed rule, including a reduction in the number of people who take out credit cards to pay off  medical bills when, in fact, they were eligible for financial assistance.

Dollar For’s data suggests only 29% of eligible patients receive charity care. Rushbanks says it can be deduced that a majority of medical debt should be slotted as charity care.

Most patients who fall through the cracks don’t realize they can access financial assistance, he noted.

Going the extra mile

Rushbanks knows hospitals already work hard to make patients aware of their options, but he says there is room to do more using tools such as income estimators and processes such as presumptive eligibility.

Assuming patients will take the initiative to apply for charity care may be expecting too much.

“Financial assistance and charity care [are] a concept that is just foreign to folks,” he said. “It doesn’t exist in other consumer interactions. People don’t get discounts based on their income when they buy a car.”