Your Health Insurance Company Could Ruin Your Credit Score


By Mark Rukavina

If you have ever puzzled over a hospital or doctor bill and whether you are supposed to pay it, then join the ranks of millions of Americans equally confused by medical bills. One national study found that 40% of American adults do not understand these bills well enough to know why they owe the outstanding balance or if it is correct.

Other studies, including those by the American Medical Association, have revealed that one of every five claims is inaccurately processed by health insurers. To add to the confusion, many bills from hospitals and doctors arrive months after treatment, further clouding the reason for the bill and the amount due.

Many people are tempted to wait for clarity. They set the bills aside with the hope that their insurer will pay the claim. This is a big mistake, since delaying payment can result in the medical bill being turned over to a collection agency. Once there, it will likely lead to future headaches.

300 Billion Reasons to Pay Attention to Your Medical Bills

Total healthcare spending in America amounted to $2.6 trillion in 2010. Of this total, $300 billion was paid out of pocket, for example, through deductibles and co-payment fees. The growth in out of pocket spending accelerated between 2009 and 2010 as more people switched to higher deductible plans or increased co-payments in exchange for lower premium costs.

Paying more up front for healthcare is becoming commonplace for insured patients. But keep in mind; providers want to be paid for their services. When they do not receive prompt payments, they initiate action similar to other businesses and send the bills to collection.

Once in Collection, Doing the Right Thing is Not Enough

Contrary to what many believe, medical debt can hurt your credit score. Thirty million Americans are contacted annually by collection agencies for unpaid medical bills. Patients frequently claim confusion led them to allow bills to go past the due date or be sent to a collection agency. According to studies published in the Federal Reserve Bulletin, more than half of all collection accounts on credit reports are medical in nature.

Collection agencies routinely report medical bills to the credit bureaus. They view all collection accounts as “delinquent” with no regard for why the bills were sent to collection. Many people, upon hearing from a collection agency, promptly pay the medical bill in full. After doing so, they are often surprised to find that these accounts stay on their credit report.

Medical collection accounts can linger for up to seven years, even with a balance due of ZERO. Collection accounts are reported in the credit history section of a credit report which accounts for 35% of a credit score. Because of this, these fully paid “delinquent” medical bills can sting. One or two recent medical collections can lower a credit score by 50 to 100 points. Such a significant reduction in a score will dramatically increase the cost of a mortgage or the interest rate on a credit card.

Avoiding Medical Bill Problems

So, if you have an outstanding medical bill, what can be done? First, if you are confused by a medical bill, do not ignore it. Contact the provider immediately to discuss the bill. If you are not certain whether you or your insurer should pay the bill, inform your provider that you are working with your insurance company to get the bill paid. Assure them that you will pay your share. Ask that they refrain from sending the bill to a collection agency while you resolve the issue.

If the bill is large and you need to pay it off over time, again, discuss this with your provider. Doctors and hospitals often allow patients to pay their bills off over many months, even interest free. Some provide financial discounts to income eligible patients. If your hospital or doctor provides a discount or allows you to pay over time, ask them to put the agreement in writing. If they do, be sure to maintain timely payments so that the bills do not end up being sent to collection.

Addressing Medical Bills that were Sent to Collection

If you have a medical bill that has already been sent to collection, first make sure that you are obligated to pay it. Contact the provider and/or the insurer to make sure the insurance company has paid all claims and that the provider has applied all available discounts. Then make arrangements to pay your share and ask the agency to remove it from your report after it is fully paid.

If your medical bill had been inappropriately sent to collection due to confusion on whether you or the insurer was responsible for payment, this is not truly a credit issue. Work with the provider or their third party collection agency and ask that the account be deleted from your credit report once it is paid in full.

Systemic Change May Require an Act of Congress

Many healthcare providers recognize that bills can be sent to collection in error and may agree to delete them from a credit report. However, they are not necessarily required to so do.

The problem of medical bills ruining people’s credit has come to the attention of the U.S. House of Representatives. Congressmen Heath Shuler (D-NC) and Don Manzullo (R-IL) have put together a sensible bi-partisan proposal to address this problem. They feel that medical debt is unique and that it deserves to be treated differently than other types of debt. So they decided to take action by introducing HR 2086, the Medical Debt Responsibility Act. The legislation requires that medical bills (of less than $2,500) that are fully paid off or settled be removed from a consumer’s credit records within 45 days.

This straightforward proposal does not fix the medical billing system but it provides relief for those who’ve paid off their medical debts. It enjoys support across the political spectrum spanning from Rep. Ron Paul to Rep. Barney Frank and has dozens of co-sponsors. Congress should immediately enact this proposal and protect families from any further financial harm due to medical collections.

Be a Savvy Consumer

Illness or injury can result in hardship and medical bills. Ignoring these bills can create problems. Exercise your consumer protections. Keep tabs on the content of your credit report. Pay your bills. And do not allow confusion around your medical bills to ruin your credit and threaten your financial future.

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