CFPB Rule Would Help Medical Debtholders: Who Are They?

The Consumer Financial Protection Bureau proposed a rule in June that, if adopted, would bar credit reporting agencies from sharing information on medical debt with lenders.

In a press release announcing the move, the agency asserted that the 15 million Americans with a collective $49 billion in medical debt on their reports would, on average, see a 20-point rise in their credit scores.

Medical debt can be particularly pernicious because of the knock-on effects it can have, said Elizabeth Renter, senior economist at NerdWallet. It can impact your score when you’re unable to keep up with payments and accounts go delinquent, but even when the payments are manageable, it can increase your debt to income ratio, a key metric considered by creditors.

“When medical debt impacts your ability to obtain credit, the effects of ongoing healthcare bills on your household finances can be compounded,” said Renter. “That's because traditional credit can act as a buffer against household economic shocks. When your ability to handle such shocks is diminished, it can spill over into other financial obligations such as your ability to make a car payment or pay your rent.”

So who are the Americans most likely to benefit from the CFPB’s proposed rule?

Some answers come courtesy of the Census Bureau’s just-released Survey of Income and Program Participation. The SIPP, an annual survey measuring many indicators of economic well-being and participation in government programs, includes questions about Americans’ medical debt.

In 2022, the most recent year for which this data is available, the typical American household with medical debt held about $2,000 of such debt.

But some types of households tended to have more debt than others.

Households with ongoing medical costs, insurance gaps

Medical debt rises with ongoing care needs and gaps in insurance.

Households with higher annual medical expenses in 2022 generally tended to have more medical debt. Those households with $2,500 or more in medical expenses had about $3,000 in medical debt as compared with $2,000 for those with no medical expenses.

One factor that seems to mitigate the impact of high medical bills: whether all members of the household had health insurance for the entire year.

Such households had about $1,740 in debt versus $2,500 for households where not all members were covered by insurance.

“The more you access the healthcare system, the more likely it is you're going to have greater medical bills and therefore medical debt. Health insurance doesn't dampen this relationship entirely, because most health insurance policies have deductibles and other out-of-pocket responsibilities for consumers,” said Renter. “In fact, high-deductible health plans are fairly common now, which means patients are bearing a higher share of their healthcare costs before their insurance kicks in.”

Each day of inpatient care cost the average hospital more than $3,000 in 2022, according to the Kaiser Family Foundation — costs that are typically passed along to the patient, whether directly or through insurance. So it’s perhaps unsurprising that households in which a member spent at least one night in a hospital also tended to have more medical debt — $3,000 versus $1,500 for households where no members stayed overnight at a hospital.

Households experiencing financial hardship

More broadly, households experiencing financial hardship tended to have higher medical debt than others.

Households who reported they were unable to pay their rent or mortgage had around $3,000 of debt as compared with $2,000 for households who were able to pay.

Households with a negative or zero net worth had by far the highest typical amount of medical debt: $3,000. That compares with $1,500 of medical debt for the typical household with a networth of $500,000 or more.

A clear pattern also emerged with the age of the householder. Among both married-couple households and single-headed households, medical debt tended to drop in households headed by people 65 and older. Most Americans gain access to Medicare at the age of 65.

Renter’s advice for dealing with large or unexpected medical expenses: be proactive in handling them.