Q&A of the Day – Impact of The CFPB’s Decision to Remove Medical Debt from Credit Reports
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Today’s Entry: Brian, The CFPB could be considered the worst agency created. This agency has no congressional oversight and no budget. The director works at the will of the President. IMO, they act as bullies with fear of Audits and Fines if they do not take recommendations and voluntarily make them internal policy. As a matter of fact, in May of this year, the 3 CBR’s (Equifax, Experian and Transunion) voluntarily removed all reported Medical Debt under $500 as a recommendation from the CFPB. And Creditors are being asked to remove all medical reported debt from risk scoring.
Now, the CFPB is requesting that NO medical debt be placed under its Rule Making. While the Federal Govt created the “AFFORDABLE HEALTHCARE ACT”, they also created the policies which determine the high deductibles, co-pays etc. So while the insurance companies get their premiums, our medical professionals will have no recourse for non-payment of services as Co-Pays and deductibles will have ZERO consequence for non-payment. This is just legalized theft.
Bottom Line: Today’s note is on the back of the action taken earlier this year by the Consumer Financial Protection Bureau to remove medical debt under $500 from credit reports and their just announced intent to remove medical bills from credit reports altogether. On the surface, and often to the extent this gains coverage, it’s framed favorably as a populist position. After all, medical bills and medical debt are things most Americans already associate as being negatives. The impact of this move could have far wider reaching consequences however. Those consequences could lead to honest and honorable people who pay their bills being left holding the bag for all of those who could choose to abuse the new system through eventual higher prices for services...in addition to the enormous immediate implications for medical service providers.
As the CFPB noted when they first pushed to have medical debt under $500 removed from credit reports, approximately a fifth of households have delinquent medical debt across a total of 43 million Americans. From a point of practicality, even if due to dire/emergency circumstances that are no fault of their own, one might wonder why these individuals would be better credit risks with other forms of debt, if they’re not able or unwilling to pay their medical debt? From that perspective it’s possible that as the major credit rating agencies were mandated to make this initial change in April, lenders may be extending more credit to these individuals than is a reasonable risk. By doing so there’s the potential for rising default levels and debt bubbles to be created in various financial products. And with that in mind, that latest announcement by the CFPB called for a rule which if finalized would (quoting the agency):
- Remove medical bills from consumers’ credit reports: Consumer reporting companies would be prohibited from including medical debts and collection information on consumer reports that creditors use in making underwriting decisions.
- Stop creditors from relying on medical bills for underwriting decision
- Stop coercive collection practices: As unpaid medical bills would no longer appear on consumers’ credit reports used by creditors in making underwriting decisions, debt collectors would no longer be able to use the credit reporting system as leverage to pressure consumers into paying questionable debts.
While the benefit to those holding the medical debt is evident if this rule goes through, so too are the implications for all others. As the Wall Street Journal noted this week: A new CFPB rule would make it easier to refuse to pay medical bills. Well, if that happens who pays for those who choose to abusive the system? Quoting the WSJ’s story:
Last week the CFPB announced a rule-making to remove medical debt from credit reports. The agency invokes sympathetic stories of sick patients with large medical bills, but the rule isn’t necessary to help them and its perverse incentives will hurt others.
The CFPB claims that medical debt is a less accurate predictor of credit worthiness than other unpaid bills. It also says that consumers can sometimes be charged unexpectedly for care, and it can take time to sort out claims with insurance companies.
All true, but this is why credit bureaus recently eliminated from credit reports any medical debt collections that are less than $500, as well as arrears that consumers later pay. The companies also gave consumers a one-year grace period to resolve medical debt before a collection account appears on a credit history.
The Journal details numerous consequences of this rule taking place – illustrating a series of incentives for bad and potentially abusive consumer behavior. Among them is this interesting observation as well... The new rule would also eliminate the incentive to carry health insurance, which could raise costs for those who do. Why would a young, healthy person pay hundreds of dollars every month for insurance if he needn’t pay for the cost of an emergency or unexpected illness if he doesn’t carry insurance?
The fact of the matter is that if one were attempting to collapse the existing medical system in this country, perhaps in lieu of a nationalized medical establishment, they wouldn’t do anything any differently than what’s being proposed here. This isn’t on the radar of many, however, should this rule go through, the consequences overtime will be paid for out of the paychecks of many...along with the elevated risk of another debt crisis. That’s independent of many medical service providers that would likely collapse financially and many more doctors in private practice that’d either opt for prepayment options only, or out of the profession altogether. Saul Alinsky couldn’t have written this proposed rule any better.