The Biden administration proposed on Tuesday to remove medical debt from the credit reports of more than 15 million Americans, making it easier for them to qualify for auto, home and small business loans.
The proposed rule, which will go through a public comment period, will not take effect immediately. It would prohibit health care providers from sharing medical debt with loan providers and prohibit those providers from factoring in medical information when it comes to making loans.
Vice President Kamala Harris said the move would improve “the economic health and well-being of millions of Americans.”
“One of the most significant consequences of incurring medical debt is the damage it does to a person’s credit score,” Ms. Harris said. “Medical debt makes it harder for millions of Americans to get approved for a car loan, home loan or small business loan, which in turn makes it harder to make ends meet, much less get ahead. That’s just not fair.”
Medical debt often looms large in the lives of Americans, with an estimated 20 million owing more than $250 to health care providers. Americans who are black and Latino are more likely to report outstanding bills, as are those who are low-income or uninsured. In surveys, Americans described taking out loans and working extra hours to pay off those debts.
As the economy and inflation have plagued voters during President Biden’s first term, his administration’s cost-cutting efforts have become a focus of his re-election campaign. His aides believe measures such as lowering prices for prescription products such as insulin or inhalers are already being felt by voters and will help improve perceptions of Mr. Biden’s domestic agenda. The president has also relied on such economic achievements to convince voters of color — a bedrock of his constituency — that he has delivered on his racial equality agenda, even as more expansive proposals have been blocked by the courts.
The policy likely won’t take effect until early next year, according to administration officials who spoke on condition of anonymity to discuss details of the proposal. The public comment period runs through August 12.
Ms. Harris said the proposal was part of a broader White House effort to tackle medical debt: The administration has so far forgiven $650 million of it. The new policy will not relieve medical debt, nor will it stop all aggressive collection tactics. It will only affect information about unpaid debts that healthcare providers have sold to collection agencies.
But the Biden administration plans to sell the rule as a way to help Americans achieve more financial freedom.
Rohit Chopra, director of the Consumer Financial Protection Bureau, said Tuesday that research by the independent federal agency in 2022 found that medical debt collections appeared on 43 million credit reports.
“It doesn’t eliminate the underlying medical debt that consumers have,” said Fredric Blavin, principal research fellow at the Urban Institute. “This policy attacks the symptom, not the root cause.”
Mr. Blavin expected the policy to give a boost to consumers who need better credit scores to rent apartments or buy cars. But he also said there could be unintended consequences: Hospitals, for example, may be more likely to try to claim the debt in other ways — such as suing patients, garnishing their wages or stopping care — because they no longer have the tactic of reporting to credit bureaus.
“It’s uncertain what those effects will be,” he said. “Hospitals may be more aggressive upfront about collecting themselves if they know they don’t have this tool available.”
That debt, worth tens of billions, sits in collection agencies, where hospitals often send bills that patients have left unpaid for months or years. These debts could prove extremely harmful to patients’ credit scores for decades.
That has changed significantly in recent years, as the three national credit reporting agencies — TransUnion, Equifax and Experian — have dropped much of that debt from credit reports. For the past two years, they have stopped reporting debts of less than $500 and those that have been in collections for less than a year.
These changes wiped medical debt off the credit reports of millions of Americans, according to a recent study by the Urban Institute. The share of Americans with unpaid health care bills on their credit reports fell from 12 percent in August 2022 to 5 percent in August 2023.
Americans who had medical debt removed from their credit reports during that time saw their credit scores rise an average of 30 points, the Urban Institute study found, moving them out of the “subprime” range and closer to in “prime” credit.
That still leaves about 15 million Americans with $49 billion in unpaid medical debt on their credit reports, according to research from the Consumer Financial Protection Bureau, the government agency that will implement the new rule.
These patients are the ones who benefit the most from the Biden administration’s policy.
“There’s a good case to be made that credit reports should reflect bad behavior rather than bad luck,” said Neale Mahoney, a Stanford economist who studies medical debt. “Medical debt is often a consequence of ‘my kid broke his arm, I was unlucky and now I have a lot of bills.’
Mr. Mahoney published a study this year that looked at the impact of not just ending medical debt reporting to credit bureaus, but eliminating it entirely. The results were surprising, showing no improvements in credit scores or access to health care for the vast majority of patients.
There was, however, a small subset of patients who saw improvements: those who only had medical debt on their credit report and no other types of loans or bills. For this group, Mr. Mahoney said, the policy of the Biden administration is likely to matter most.
“Some people will benefit,” Mr Mahoney said. “But for others, their financial situation was already a mess, so the impact on their access to credit will be more limited.”
Stacy Cowley contributed reporting from New York.
