Biden Proposes Dropping Medical Debt From Credit Reports

The Biden administration on Tuesday proposed removing medical debt from the credit reports of more than 15 million Americans, making it easier for them to qualify for car, home and small-business loans.

The proposed rule, which will go through a public comment period, would not take effect immediately. It would forbid health care providers to share medical debt with loan providers and prohibit those providers from factoring in medical information when it came to granting loans.

Vice President Kamala Harris said the move would improve “the financial health and well-being of millions of Americans.”

“One of the most significant consequences of carrying medical debt is the harm it does to a person’s credit score,” Ms. Harris said. “Medical debt makes it more difficult for millions of Americans to be approved for a car loan, a home loan or a small-business loan, all of which in turn makes it more difficult to just get by, much less get ahead. That is simply not fair.”

Medical debt often looms large in the lives of Americans, with an estimated 20 million owing more than $250 to health care providers. Americans who are Black and Latino are more likely to report outstanding bills, as are those who are low income or uninsured. In surveys, Americans have described taking out loans and working extra hours to cover those debts.

As the economy and inflation have soured voters during President Biden’s first term, his administration’s efforts to limit costs have become a focus of his re-election campaign. His aides believe measures such as cutting prices for prescription products like insulin or inhalers are already being felt by voters and will help improve the perception of Mr. Biden’s domestic agenda. The president has also relied on such economic achievements to convince voters of color — a base of his constituency — that he has delivered on his racial equity agenda, even as more sprawling proposals have been blocked by the courts.

The policy will most likely not take effect until early next year, according to administration officials speaking on the condition of anonymity to discuss details of the proposal. The public comment period runs until Aug. 12.

Ms. Harris said the proposal was part of a broader effort by the White House to address medical debt: The administration has forgiven $650 million of it so far. The new policy will not relieve medical debt, nor will it halt all aggressive collection tactics. It will only affect information about unpaid debts that health care providers have sold to collection agencies.

But the Biden administration plans on selling the rule as a way to help Americans achieve more financial freedom.

Rohit Chopra, the director of the Consumer Financial Protection Bureau, said on Tuesday that research from the independent federal agency in 2022 found that medical debt collections appeared on 43 million credit reports.

“It doesn’t eliminate the underlying medical debt that consumers have,” said Fredric Blavin, a principal research associate at the Urban Institute. “This policy is attacking the symptom rather than the root cause.”

Mr. Blavin expected that the policy would give a boost to consumers who need better credit scores to rent apartments or buy cars. But he also said there could be unintended consequences: hospitals, for example, might be more likely to try to pursue debt in other ways — such as suing patients, garnishing their wages or cutting off care — because they no longer have the tactic of reporting to credit bureaus.

“It’s uncertain what those effects will be,” he said. “Hospitals may potentially be more aggressive upfront in collecting themselves if they know they don’t have this tool at their disposal.”

Tens of billions worth of that debt sits with collection agencies, where hospitals often send bills that patients have left unpaid for months or years. Those debts could prove extremely harmful to patients’ credit scores for decades.

That has changed significantly in recent years, as the three national credit reporting agencies — TransUnion, Equifax and Experian — have dropped much of that debt from credit reports. Over the last two years, they have stopped reporting debts smaller than $500 and those that have been in collections less than a year.

Those changes wiped medical debt away from millions of Americans’ credit reports, according to a recent Urban Institute study. The share of Americans with unpaid health care bills on their credit reports decreased from 12 percent in August 2022 to 5 percent in August 2023.

Americans who had medical debt dropped from their credit reports during that time saw their credit scores increase by an average of 30 points, the Urban Institute study found, moving them from out of the “subprime” range and closer to “prime” credit.

That still leaves about 15 million Americans with $49 billion in outstanding medical debt on their credit reports, according to research from the Consumer Financial Protection Bureau, the government agency that will carry out the new rule.

Those patients are the ones who stand to benefit the most from the Biden administration policy.

“There is a good fairness case to make that credit reports should reflect bad behavior rather than bad luck,” said Neale Mahoney, a Stanford economist who studies medical debt. “Medical debt is often the consequence of ‘my kid broke his arm, I got unlucky and now I have a lot of bills.’”

Mr. Mahoney published a study this year that looked at the impact of not just ending the reporting of medical debt to credit agencies, but of wiping it out entirely. The results were surprising, showing no improvements in credit scores or access to health care for the vast majority of patients.

There was, however, a small subset of patients who did see improvements: those who had only medical debt on their credit report, and no other types of outstanding loans or bills. For that group, Mr. Mahoney said, the Biden administration policy is likely to matter the most.

“Some people will benefit,” Mr. Mahoney said. “But for others, their financial situation was already a mess, so the impact on their access to credit will be more limited.”

Stacy Cowley contributed reporting from New York.