Why medical debts shouldn't count

By Liz Pulliam Weston

It's a good thing Greg Hilfman of Los Angeles has health insurance because an unpaid medical bill has sent his blood pressure soaring.

Hilfman's wife was in a hospital two years ago for pancreatitis, and Hilfman said she was treated by a "cadre" of doctors and specialists. All but one submitted bills to their insurer, Blue Cross of California, in time to get paid.

Six weeks ago, however, a woman from a neurologist's office contacted Hilfman, explaining that the office "didn't have the right address for Blue Cross" and thus hadn't submitted the bill within the one-year period required for reimbursement. She demanded that Hilfman cough up $540.

Hilfman was furious. He'd never heard of the doctor and insisted he'd seen no bill or any indication there was a problem with payment. Now he's worried he'll have to pay a bill that should have been covered by insurance or risk damage to the couple's credit reports.

"How is this fair?" he asked. "They can say anything they want (to the credit bureaus), and I have no recourse."

Tiny debts with huge impacts

Hilfman is right to be concerned. The Your Money message board is littered with complaints from folks whose otherwise pristine credit was sabotaged by a medical collection. Sometimes their records were besmirched over absurdly small amounts that nonetheless had big impacts on credit scores.

Poster "sunny_light," for example, recently discovered a medical-collection account for just $7.

"I pulled my credit report last week and found out," sunny_light wrote. "I promptly paid the collections people. But now my credit score is down by like 80 points."

Medical collections are surprisingly common, at least according to a 2003 Federal Reserve study of consumer-credit reports. Nearly one in three consumers (31%) with a credit report had at least one collection account reported, and more than half of those were medical collections.

The amounts owed weren't substantial: 36.5% of the medical collections were for $100 or less, and 86% were for $500 or less.

Medical collections make up half of all collection accounts:

Collection type	% of collection accounts	Median amount owed
Medical	52.2	$142
Utility	22.7	$199
Government	2.3	$199
Creditor*	5.8	$587
Other**	16.9	$116
All	100	$156
Source: Federal Reserve

*Includes large retailers, banks and finance companies

**Includes smaller retailers, law firms, individuals and educational institutions

Yet any collection account is considered a major negative to lenders and to the credit-scoring formulas they use. Though the impact of a collection on your scores fades over time, it will shave off points for as long as the negative mark remains on your report -- typically seven years.

Your chances of having your credit ruined by a medical bill are soaring for a variety of reasons:

More people are uninsured or underinsured. The U.S. Census Bureau counts nearly 45 million uninsured Americans. An additional 16 million or so are underinsured, with too little coverage to protect them from catastrophic medical expenses. Medical costs have been rising at a much higher rate than inflation, and those without insurance are often charged more than those with coverage (read "How to survive your hospital bills" for details). Thus a single accident, illness or emergency-room visit can easily result in an impossible-to-pay bill for many uninsured and underinsured families.

Medical-debt collection has become big business. An unpaid or disputed bill is more likely to wind up on your credit report because of a sea change in the way medical bills are treated.

"The reporting of medical debt (to credit bureaus) is becoming much more common," said Travis Plunkett, a spokesman for the Consumer Federation of America. "Medical-debt reporting has become more professionalized."

A decade ago, most hospitals did their own collections or assigned them to a collector who worked on contingency, collecting a portion of what was owed. Smaller providers typically handled collections in-house. Only the largest companies tended to report collections activity to the credit bureaus -- and then only after repeated collection attempts had failed.

Today, physicians groups and other small providers are more likely to outsource their collections to agencies that use negative credit-report entries as a tool to urge patients to pay.

Meanwhile, an increasing number of for-profit hospitals and even some nonprofits regularly sell their bad debts for 2 or 3 cents on the dollar rather than try to collect the money themselves. So-called debt purchasers buy huge portfolios of debt, and one of the first things they do is post the collections on the consumers' credit reports.

"Health-care-debt buying did not exist" 10 years ago, said Michael Klozotsky, an analyst for Kaulkin Ginsberg, which tracks debt-collection trends. In 2005, purchasers bought at least $3 billion of bad medical debts, and the market seems to be growing 11% to 15% a year.

Continued: Confusion abounds

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