October 26, 2014
4 Misconceptions About Medical Debt
How much do you know about America’s most common type of debt?
No one likes to talk about medical debt. People often feel shame about it, even though nobody goes about accumulating medical bills on purpose. When a medical emergency occurs, there’s no time to think about the cost — all you want is the best care possible. Nonetheless, the bills come and can turn into a financial emergency right when you’re trying to recover.
Medical debt is more common than you may think: It’s the leading cause of personal bankruptcies in the United States and accounts for nearly 40 percent of debt collection accounts — that’s more than any other type of debt, even student loans.
Despite being so widespread, medical debt is still poorly understood. Here are four commonly misstated facts about the type of bills that cripple Americans' finances more than any other.
Misconception No. 1. You should pay medical bills as soon as you get them
While you should pay medical bills promptly, you should never do so without scrutinizing them for errors first. This can be a long, tricky process, but you should never skip it. Healthcare providers or insurance companies make errors, and their mistakes almost always cost you.
The medical billing system is complicated: Everything from over-the-counter pain relievers to MRIs to doctor consults count as separate charges, and the charges are tallied to obtain your final bill — if you only get one bill, that is. You may receive additional bills from separate hospital departments, or from the ambulance company if you were transported by ambulance. Each charge on each bill presents an opportunity for error.
Before you even see the bill, it’s sent to your insurance provider, where a claims processor will decide what the company will pay. An error can enter the system here, too. Only after insurance covers some of the charges and pays the hospital does the average consumer see the real bill. If you are unsure of how to start examining your bill for possible errors, here’s a helpful guide.
Misconception No. 2. You must be notified before any medical bill is sent to collections
If only this were true. Medical billing is vastly different from any other type of billing process that may end up in collections. Unlike a credit card company or an auto lender that will send multiple notices, a healthcare provider may send you a bill once, with no warning that it could later be sent to collections.
Because there’s no rule or law stating you must be notified about a bill before it becomes a collections account, pay attention to the due date. If the statement you receive says that you have 90 days to pay and you don’t pay in full before then, the health provider or hospital may send it straight to collections. This applies even if you send partial payments, so your best bet is to communicate with billing staff frequently and work out a payment agreement.
Misconception No. 3. Medical debt doesn’t affect the rest of your finances
Once an account of any type is sent to collections, your credit has been damaged, and medical bills are no exception. That means your credit score will go down and your interest rates on any new accounts will be higher than they would be otherwise. So even if you’ve paid your bills on time faithfully your entire adult life, medical bills in collections can make you appear to be a credit risk.
Misconception No. 4. The new FICO scoring model will erase medical debt from your credit report
At this point, if you’re thinking this whole thing is unfair, you’re not wrong. A medical bill you can’t afford (or didn’t know about) doesn’t make you less reliable when it comes to paying regularly anticipated bills. The Consumer Finance Protection Bureau released a report in May 2014 stating just that: People with otherwise good credit are continually penalized for medical bills.
Then, in August 2014, credit-scoring company FICO announced that its newest version, to be released this fall, will reduce the effect of medical debt on its scores. In short, medical bills in collections will count against your FICO score less, and once they are paid, they will be removed from the report. Unpaid bills in collections will still harm your score.
FICO isn’t the only credit scorer out there, however. They are by far the most widely used scores, and credit card issuers and auto lenders are expected to use the new model. Unfortunately, mortgage lenders are historically slow in adopting FICO changes and must adhere to strict standards. The housing industry still uses a 10-year-old scoring model, so don’t expect the FICO changes to affect your mortgage lending options positively if you have had a problem with medical debt.