Why medical debts shouldn't count

Medical billing is a mess. Even when a consumer is covered by insurance, confusion abounds. Doctors and hospitals often insist the consumer is ultimately responsible for the bills, saying medical providers bill insurers only as a courtesy. Yet frequently the providers have agreements with insurers and government agencies to accept discounted reimbursement as payment in full; the providers aren't supposed to pursue patients for payment.

Meanwhile, insurers are constantly changing what's covered and by how much, and providers move in and out of covered networks. Providers also claim some insurers deliberately drag their heels on reimbursements, adding to the chaos and uncertainty.

"Insurance companies are often contributing to the false reporting of medical debt," the Consumer Federation's Plunkett said, as tussles over payment increasingly get turned over to collection agencies.

Medical debt is no predictor of risk

Even when medical debts are legitimately owed and left unpaid, though, some experts question whether they belong on credit reports.

There's no question that medical bills pose huge risks for the finances of many families. Medical problems were cited as a factor in nearly half of the bankruptcies studied by Harvard University professor Elizabeth Warren (.pdf file).

Still, many mortgage lenders who specialize in serving low-income communities have discovered that discarding medical debts often gives them a better picture of a borrower's true creditworthiness, said Michael Stegman, the director of policy for the MacArthur Foundation's program on human and community development.

"If all their other credit accounts are in good shape, or they haven't established credit but they've had no delinquencies on their rent," Stegman said, "the fact you have a bad medical debt or an outstanding judgment over a medical bill is not a good predictor of default."

One such lender, Self Help of Durham, N.C., has a 1% default rate on its mortgages, which public-policy director David Beck said is comparable to mainstream lenders that use credit-scoring formulas that take medical debt into account.

"Our experience has been that medical debt isn't generally reflective of a borrower's ability or willingness to repay," Beck said.

It's not clear that these lenders' experiences with low-income borrowers can be extended to the population in general, but it's time to find out. Credit-scoring companies such as Fair Isaac, the creator of the leading FICO scoring formula, should research whether medical debt really is predictive or not.

In a bind? 4 tips

Personally, I think we could solve much of the problem of unfair medical-debt reporting by excluding all collections under $100 from credit reports. I also think medical debts should be treated differently, with shorter statutes of limitation on collection and reporting (say, four years instead of the current seven), to reflect the fact that medical bills are a fundamentally different kind of debt from credit cards and auto loans.

Unless that happens, here's how to reduce the chances of your credit getting run over by medical debt:

• Bird-dog your medical bills. Don't assume your health-care provider and your insurance company will eventually work it out. Follow up on every bill or claim with an unpaid balance. If a debt remains after more than a month or two, ask your provider and your insurer what the problem is and what you can do to help.

• Negotiate if you're uninsured. As I discussed in "How to survive your hospital bills," you may be able to qualify for charitable assistance that could reduce or eliminate your bills. Even if you don't qualify, you should try to get the amount you're charged reduced to what an insurer or government agency would pay.

• Get payment agreements in writing. If you don't have insurance and want to make payments, make sure your agreement is in writing. One Your Money message boardcontributor agreed to pay her health-care provider $50 a month to pay off a $1,600 bill. No agreement was signed, however, and the provider recently started demanding $150 a month.

• Try to talk your way out. If despite your best efforts a medical bill lands on your credit report, you have a couple of options. One is to dispute the bill with the credit bureaus as "not mine"; sometimes collection agencies won't bother to verify the disputed account, and it will fall off your reports. Option two is to negotiate with the collection agency to remove the account from your credit reports in exchange for payment.

Ideally, you'd get that promise in writing before you pay anything, but sunny_light managed to sweet-talk a collection agency rep into clearing a credit report after sending the $7.

"I called that collection agency woman again and talked and talked and talked to her with lots of 'please' . . . and then it was quiet for a while so I thought she hung up . . . but then she said she was looking at my file . . . and finally she said 'normally we don't do this' and then she told me to check my report in about 30-45 days," sunny_light wrote.

Two weeks later, sunny_light checked, "and the $7 medical bill (paid) has been removed from all three credit reports . . . and my credit scores went back up!!"

Columns by Liz Pulliam Weston, the Web's most-read personal-finance writer and winner of the 2007 Clarion Award for online journalism, appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Published Nov. 19, 2007

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