Medical bills can wreck credit
Their credit report contained a shocker: A $200 medical bill had been sent to a collection agency. Although since paid, it still lowered their credit scores by about 100 points, and it means they'll have to pay a discount point to get the best interest rate. Cost to them: $2,500.
A growing number of Americans could encounter similar landmines when they refinance or take out a loan. The Commonwealth Fund, a private foundation that sponsors health care research, estimates that 22 million Americans were contacted by collection agencies for unpaid medical bills in 2005. That increased to 30 million Americans in 2010.
Surprisingly, even after the bills have been paid off, the record of the collection action can stay on a credit report for up to seven years, dragging down credit scores and driving up the cost of financing a home. An estimated 3.4 million Americans have paid-off medical debt lingering on their credit reports, according to the Access Project, a research group funded by health care foundations and advocates of tougher laws on medical debt collectors.
Among them are Nathen and Melissa Cobb of Riverton, Ill., who tried to refinance their home last year. They didn't qualify for the loan because of $740 in medical bills that had been sent to a collection agency. The Cobbs were surprised because the bills — nearly a dozen small copayments ranging from $6 to $280 — had been paid before they tried to refinance. The collection action took their credit score from good to mediocre and is likely to mar their credit report for years.
"I'm not one of those people trying to ditch out on my bills," 34-year-old Melissa Cobb said. "I'm really frustrated."
Medical bills make up the majority of collection actions on credit reports, and most are for less than $250, according to Federal Reserve Board research.
The Parks had no idea a billing error they'd sorted out a year earlier — they never actually owed the $200 — could affect their credit. They didn't know the bill for a copayment on a PET scan Mike needed had been sent to a collection agency.
"We've prided ourselves in having impeccable credit. We worked hard to establish that," said Laura Park, a 51-year-old office manager married to a 53-year-old firefighter. They are going ahead with the home purchase while trying to fix their credit report.
"I'm very upset," Park said. "It's going to be a nightmare and who knows how long this is going to take to resolve."
Matt Ernst, a vice president at Mortgage Lenders of America in Overland Park, Kan., said medical collections frequently turn up on credit reports.
"We see a ton of them," Ernst said. They have an impact on financing, he said, but even he didn't realize how much until he learned that someone with a FICO score of 680 — which is considered good, but not excellent — will see their score drop up to 65 points because of a medical collection.
"I didn't know a medical collection would hammer it that hard," Ernst said. "Our investors require a 620 to even get a loan."
It's a problem for insured and uninsured alike. Outright billing mistakes, confusion over whether a claim will be paid by insurance and disputes between insurance companies and doctors — all can lead to medical bills being sent to collection agencies.
Congress is considering legislation — the Medical Debt Responsibility Act — that would require credit agencies to delete paid-off medical debt from credit reports within 45 days.
"We're not talking about somebody buying a big screen television and not having the ability to pay. This is debt incurred because of a health condition. That makes medical debt unique," said bill co-sponsor U.S. Rep. Don Manzullo, an Illinois Republican.
The bill has bipartisan support in the House, said co-sponsor U.S. Rep. Heath Shuler, a North Carolina Democrat. Shuler said the health care industry sends delinquent bills to debt collectors quicker than any other industry.
"If it wasn't an industry that sent it straight to collections, we wouldn't be having this conversation," Shuler said. A Senate version was introduced last week.
For Illinois breast cancer survivor Lisa Lindsay, a $280 medical bill led to state troopers showing up at her home and taking her to jail in handcuffs.
Like the Parks in Texas, she, too, said it started as a billing mistake. Her hospital told her the radiology bill would be covered because she qualified for a charity care program. But the radiology doctors' office sent the bill to a collection agency and, despite Lindsay's protests and the paperwork she kept sending, the matter ended up in court.
Lindsay believed that eventually the documentation would catch up with the bill and be settled. She went to court and told a judge her story. Later, she missed a court date — she said she was never informed of it — and that's when the state troopers showed up. Lindsay, a 46-year-old teaching assistant from Herrin, Ill., ended up paying more than $600 because legal fees had been added to the original amount.
"I paid it in full so they couldn't do it to me again," Lindsay said. She recently testified at a hearing on aggressive debt collection practices in Illinois.
Refinancing a home loan can be affected too by unpaid medical bills — or the appearance of unpaid medical bills.
Iraq veteran Steve Barnes and his wife, Tara, were refinancing their home through a VA program when they found out from their mortgage banker that nearly $600 in unpaid medical bills had brought down their credit scores. It means they'll have to pay an extra $1,700 in additional fees to the lender to get the lowest interest rate.
Bills for treatment last fall related to his wife's cancer had been turned over to a collection agency while Barnes was still talking with his insurance company about what would be covered, he said.
"We pay our bills," said Barnes, 33, the postmaster in Nocona, Texas. "As soon as they were brought to our attention, we paid them." But the collection could stay on their credit reports for seven years, even though it's now paid.
Debt collectors support the legislation in the House, according to ACA International, a trade association. A key foe of an earlier bill was another group representing the nation's credit bureaus. The Consumer Data Industry Association, which hasn't taken a position on the revised bill, said that lenders need to see a consumer's patterns of behavior over time and even paid-off medical debt is relevant to whether the consumer is a good risk.
Most hospitals and physician groups use collection agencies to go after late bills after 60 or 90 days, rather than hiring more staff. It makes financial sense to share the amounts collected with an agency. "If you don't collect anything, it's worth zero," said Richard Gundling of the Healthcare Financial Management Association.
Hospitals started relying on debt collectors in the 1980s, said Chicago-based health care consultant Jim Unland.
"When the numbers of uninsured started to grow significantly, hospital financial staffs had the perception they were getting overloaded" with delinquent bills, Unland said. "It became easier to turn these bills over to collection agencies."
The Affordable Care Act, President Barack Obama's health care law, bars tax-exempt hospitals from using "extraordinary collection actions" until it has made "reasonable efforts" to determine whether a patient qualifies for financial assistance. But it's still unclear how that will be interpreted and whether reporting late bills to a collection agency would be considered extraordinary, Unland said.
Barnes, the Texas veteran, said he and his wife have learned something: how quickly medical bills are sent to debt collectors. "It will really happen in a blink of an eye and you won't even know it."
How to check your credit for medical debt snags
When a debt collector goes after you for a late medical bill, your credit can suffer — even if you quickly pay up.
Paid or unpaid, large or small amounts — all can affect a credit score, said Anthony Sprauve, a spokesman for FICO, developer of the most widely used measure of credit risk. Banks and credit card companies use FICO and other credit scores to decide if they'll lend to you and how much you'll have to pay to borrow money.
The effect on a credit score can vary, but for any medical collection — paid or unpaid — "a person with a FICO score of 680 will see their score drop between 45 and 65 points. Someone with a FICO score of 780 will see their score drop between 105-125 points," Sprauve said.
Your credit score is determined by information in your credit report, which you can check for accuracy. Federal law says everyone is entitled to one free credit report per year from each of the three major credit reporting companies — TransUnion, Equifax and Experian.
The government-approved site www.annualcreditreport.com tells how to request a free copy of your credit report.
If you find a mistake in your credit report, you can dispute the error with the credit reporting company. The Federal Trade Commission has steps for disputing errors, including a sample dispute letter, on its website.
But if the bill wasn't a mistake, there's not much you can do once it goes to a collection agency and it's reported to a credit bureau, experts say. In some cases, its impact on your score will decrease over time and, after seven years, the record of the collection will be taken off your credit report and your score should rise accordingly.
Consumers can dispute whether they were properly notified of a bill, but that's tough to prove, said Mark Rukavina, director of the Access Project, a nonprofit that gets some funding by supporters of tougher laws on medical debt collections.
It's theoretically possible to get a collection agent to delete an account from a credit report once the bill is paid, but it's very difficult, Rukavina said.
And take care. Disputing something on your credit report can delay the process of getting a home loan. That could potentially cost you when low interest rates are available for a limited time or if there's a closing deadline on a property.