Surprise Billing Ban Opens Door for CFPB to Curb Medical Debt

Mar 14, 2022

A new federal ban on surprise medical bills gives the Consumer Financial Protection Bureau a path to limit how much medical debt is posted to consumer credit reports.

The CFPB recently announced that it was looking into whether uncollected medical bills should be included on credit reports at all. Such debts are often inaccurate and not always representative of a person’s creditworthiness, the consumer watchdog said.

Forcing consumer credit reporting bureaus—including the big three, Equifax, Experian, and TransUnion—to abandon medical debt may prove difficult for the CFPB, despite its broad rulemaking powers under the Dodd-Frank Act. Taking that step would be drastic and would likely lead to litigation from credit reporting bureaus and debt collectors.

“That’s an envelope pusher, if you ask me,” said Joann Needleman, the head of Clark Hill PLC’s financial services regulatory practice.

The federal No Surprises Act, a ban on most surprise medical bills that took effect in January, could be a more viable path for the agency to get large amounts of medical debt off of consumers’ credit profiles. The CFPB can supervise credit bureaus for compliance with the law and bring enforcement actions for reporting errors.

“The CFPB could certainly do things that are short of banning medical debt in credit reports by making it harder to report medical debt,” said Chi Chi Wu, an attorney with the National Consumer Law Center who focuses on credit reporting issues.

‘Doom Loop’

The amount of uncollected medical debt appearing on Americans’ credit reports stood at around $88 billion in June, or around 58% of all outstanding debt, according to a March 1 CFPB report.

Collecting medical debt is often more complicated than collecting other types of debt, like outstanding credit card bills. Billing processes can be confusing, insurance payouts can be slow, and collectors may not have the appropriate documentation to substantiate the debt, the CFPB found.

“When it comes to medical bills, Americans are often caught in a doom loop between their medical provider and insurance company,” CFPB Director Rohit Chopra said in a March 1 statement.

Medical bills that make their way onto credit reports can lower credit scores and increase borrowing costs for consumers looking to buy a home or car or apply for credit cards, the CFPB said.

The agency is considering several options for limiting the amount of medical debt that hits credit reports, including studies to determine whether it’s predictive of a consumer’s ability to repay other debts. Many medical bills are one-time events that occur in emergencies, and consumers can’t shop on price for most procedures, the CFPB noted.

Other Means

The CFPB doesn’t necessarily need a new rule to ban or limit medical debt from credit reports.

Through supervision and enforcement of both the debt collection and credit reporting industries, the agency could make sure that debt collectors are only reporting valid debts to credit bureaus and punish those that don’t.

“They can put their finger on the scale to ramp up the pressure to make sure that folks are only reporting accurately and raise the level of compliance necessary to accomplish that goal to some extent,” said Jonathan Joshua, a special counsel at Manatt Phelps & Phillips LLP.

Yet enforcement of debt collectors’ compliance with the No Surprises Act and similar laws in states like Georgia could provide a window for the CFPB to cut out a potentially large amount of medical debt from credit reports.

Under the No Surprises Act, hospitals and doctors have to charge in-network prices for emergency care or procedures carried out by out-of-network providers, like anesthesiologists, if the facility where the procedure takes place is in a patient’s insurance network. Thirty-three states had similar protections of varying strength as of February 2021, according to the Commonwealth Fund, a private foundation that conducts health-care research.

The new federal law requires credit bureaus to determine that the information they get from hospitals, medical offices, debt collectors, and other data furnishers is accurate, and that the debts are legitimate. If those data providers report debts that are barred by the No Surprises Act, credit bureaus are supposed to cut off the data furnishers.

The CFPB would be able to go after debt collectors and other data providers by making them unable to report outstanding debts that are barred by surprise billing laws, Needleman said. The credit bureaus face their own scrutiny for potentially not doing enough to check the data, she added.

“Medical debt, for them, checks off so many boxes in one area,” Needleman said.

Limited Measures

Using the No Surprises Act to reduce medical debt on credit reports has its limits because the law only applies to Americans with health insurance.

Around 31 million Americans lacked health insurance as of November, according to the Centers for Disease Control, and still more don’t have sufficient insurance coverage. Those people are likely to face higher costs or skip out on medical procedures, the CFPB found.

A more widespread ban on medical debt in credit reports would likely face opposition from debt collectors and the credit reporting industry, Needleman said.

Credit bureaus call medical debt a “unique and important issue” affecting both consumers and the credit reporting industry. The industry has added protections in this area, including a 180-day waiting period before medical debt appears on a consumer’s credit history.

“Our industry remains focused on providing accurate consumer reports and leveraging data to support access to credit,” said Justin Hakes, a spokesman for the Consumer Data Industry Association, which includes the big three credit bureaus as members.

But waiting periods and other measures so far haven’t stopped debt collectors from threatening to report missed payments to credit bureaus, the CFPB said.

Another option would be for lenders to adopt new credit scoring models—developed by the Fair Isaac Corp. and others—that place less emphasis on outstanding medical debt in calculating consumer credit scores. But most lenders have been slow to adopt the new FICO and VantageScore models, the agency said.

Removing all medical debt from credit reports may have a negative impact on the credit system. Lenders still need a full picture of a potential borrower’s credit history, said Jacob Corlyon, the CEO of collections firm CCMR3 and the president of the New York State Collectors Association.

“It is helpful to understand what the other outstanding debts may be,” he said.

By Evan Weinberger