Lowering Mortgages Payments Inflated Due to Medical Bills

Below is guest post written by a friend of the Asset Building Program, Mark Rukavina. Mark runs The Access Project and is one of the country's leding experts on medical debt and its debilitating impacts. 

If you think it is implausible that co-payments for doctor or hospital visits could increase your mortgage interest rate, think again.  Medical bills, even those that have been paid in full, can and do ruin credit and increase the cost of loans.   

The reasons for this vary.   Healthcare costs, for some, are simply unaffordable and bills go unpaid.  Others are confused by their bills and allow them to go past the due date or be sent to a collection agency.  Studies have found that American patients often do not understand claims well enough to know why they owe the bill or if it is correct.  An American Medical Association study found that one of every five claims is inaccurately processed by health insurers. 

In 2010, thirty million Americans were contacted by collection agencies for unpaid medical bills.  Research published in the Federal Reserve Bulletin found that more than half of all collection accounts on credit reports are medical in nature. 

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.   Between 2009 and 2010, the growth in out-of-pocket spending accelerated as more people switched to higher deductible plans or increased co-payments in exchange for lower premium costs.  

As out-of-pocket healthcare costs increase, people are left wondering whether they or their insurer is supposed to pay the bill.   Understandably, providers want payment in exchange for their services.  When they do not receive prompt payments, they initiate action similar to other businesses and send the bills to collection.

It is a common misconception that medical debt cannot hurt your credit score.  Collection agencies typically report medical bills to the credit bureaus and view all collection accounts as delinquent.  They do so without regard for why the bills were sent to collection. With medical collections, many people pay off the balance promptly upon hearing from a collection agency.  They are frequently surprised to find that these accounts stay on their credit report and lower their score.

So back to home mortgages.  Medical collection accounts can linger for up to seven years on a credit report, even with a balance due of ZERO.  Being factored into the most heavily weighted section of the report, the credit history section, even fully paid “delinquent” medical bills can sting.   One or two recent medical collections can lower a credit score by 50 to 100 points.  This can add tens of thousands of dollars to a thirty year mortgage. 

Problems related to medical bills ruining people’s credit and interfering with mortgage financing has come to the attention of the US House of Representatives.  Working across the aisle, Congressmen Heath Shuler (D-NC) and Don Manzullo (R-IL) have put together a legislative proposal to address this problem.  HR 2086, the Medical Debt Responsibility Act, 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. The sponsors feel that medical debt is unique and deserves to be treated differently than other debt. 

This proposal is straightforward, has dozens of co-sponsors, and enjoys support across the political spectrum from Rep Ron Paul to Rep Barney Frank. It is precisely the type of proposal referenced by President Obama in his recent State of the Union address when he challenged Congress to work together to achieve objectives that help Americans and get our economy moving again. 

HR 2086 will stop the practice of allowing imperfect information, errors and billing confusion to smear people’s credit.  It will also provide an opportunity for Congress to demonstrate to the American electorate that it’s capable of working in a bi-partisan fashion for the good of millions of Americans. 

During this highly charged election cycle, practical legislative proposals like HR 2086 are unique.  There is general agreement that homeowners should be helped to refinance their mortgages to take advantage of historically low interest rates.  This legislative proposal will help millions of Americans do just that.  It corrects a problem with the current credit reporting system, puts an end to discriminating against people who have paid bills, and allows Americans to finance home mortgages at affordable rates.   Best of all, it does so without spending any federal dollars.



Reid Cramer is director of the Millennials Initiative at New America. Previously, he served as the Asset Building program's research director and as a co-director of New America's Next Social Contract Initiative.