mug blittIn May 2014, the Consumer Finance Protection Bureau (CFPB) released a study finding medical debt that goes into collections inordinately penalizes consumer credit scores because current credit scoring models may underestimate the creditworthiness of consumers who owe medical debt. The CFPB also questioned the way credit scoring models handled the repayment of that debt.

The CFPB’s analysis found that information about unpaid medical bills is reported to the nationwide credit reporting agencies in two different ways: directly reported by the medical service provider or, more frequently, by a third-party debt collection agency that has purchased the debt or been contracted to collect it. From a statistical standpoint, the CFPB estimated 99.4% of unpaid medical accounts are reported by credit agencies. This dovetailed with a Federal Reserve Board study that showed over half of all collections on credit reports are associated with medical bills.

In the study, the CFPB examined whether having an account in medical and non-medical collections equally predicted whether the consumer would pay on debts incurred later. The CFPB found that consumers with more medical than nonmedical collections had comparable delinquency rates with consumers whose credit scores were ten points higher. Likewise, when they compared consumers with more unpaid than paid medical bills, the CFPB model consumers with more unpaid medical bills were delinquent as often as consumers with credit scores twenty points higher. In criticizing the current scoring algorithms, the CFPB noted that for consumers on the brink of what is considered sub-prime, the score difference could end up costing a consumer tens of thousands of dollars on large loans like home mortgages.

It is unclear from the study what the CFPB intends to do in response to its findings. Credit scoring agencies are taking a proactive approach. The creator of the widely used and influential FICO credit score has announced adjustments to its algorithms to address these concerns. Similarly, another major credit-scorer is anticipated to announce weighing unpaid medical collections differently from other debt.

So what does this mean for the collections industry?

1. While I am not an expert on algorithms for large-scale data analysis (I limit that sort of work to my fantasy football stats), the choice to only examine the first three months of new accounts fails to evaluate long-term performance on a mix of accounts. Rather than a panoramic view of one’s credit history, we are presented with a snapshot. It is also unclear whether the report differentiated between insured and uninsured consumers.

2. If your client uses a scoring model based on credit reporting to determine suit worthiness, a new FICO system could skew results, leading to lawsuits where a consumer is least able to pay. Third, clients who consider credit history in authorizing settlements may reject legitimate offers where the medical debt burden calls for a reduced settlement.

3. This ignores a 2013 study, reported by CNBC, which found three in five bankruptcies are due to medical bills. If medical bills are not indicia of financial hardship, then it is hard to explain why 60% of bankruptcies are based on medical debt.

There are legitimate reasons for reconsidering certain negatives from medical debts on credit reports. In many instances, what is reported as unpaid medical debt is a result of insurance delays, resubmission of old bills for consideration by the insurer and/or the common back-and-forth between provider and the insurer as to how much will be paid. In the meantime, the debt is not yet paid and could be reported. In my opinion, this area would be one where the credit scoring and reporting companies could arrive at a better plan for handling these accounts as it relates to the determination of a credit score. A good approach might be to flag those debts that may be unpaid but are still under consideration with the insurance company.

The enormous bills associated with major medical procedures are something we all fear. Outside of a mortgage, these expenses can be the largest bills we ever face. Yet in the challenge of helping the consumer through the process, the unintended consequences of this change may lead to the consumer being hurt rather than helped.

Fred N. Blitt, Esq., is a partner with Blitt and Gaines, PC in Illinois and Couch, Conville and Blitt in Louisiana. He is past president of NARCA. Contact: This email address is being protected from spambots. You need JavaScript enabled to view it..