Why medical debt is the most damaging part of our $17 trillion problem

It’s far too easy in the United States to fall into a debt trap. Debtors’ prisons may be a thing of the past — they were outlawed in 1833 — but new lending services, from buy-now-pay-later companies like Affirm to mobile-friendly credit lines like PayPal Credit and Venmo’s cash-back credit card, are becoming standard payment options for everything, capturing our money like well-stocked snares. Simultaneously, billing and debt-collection practices across industries have grown increasingly complicated as we hit a new peak of consumer debt. Household balances collectively exceed $17 trillion, and nearly one in every 10 credit-card accounts are currently in delinquency. But of all the debt types, medical debt is arguably the most damaging. 

Even doctors fall victim to misleading medical-bill traps, like the new care-provider classification known as hospital outpatient departments (HOPD), which charge a premium for urgent-care services labeled with a hospital billing code. In the past, insurance companies were primarily responsible for navigating these nuances, but because our third-party-payer system has been pushing up healthcare costs for nearly 100 years, the level of complexity has surpassed what anyone is prepared to navigate. As a result, the administrative burden of medical debt has shifted to patients, said Jacob Corlyon, cofounder and CEO of the New York-based collections agency CCMR3.

“Now the patient is becoming the responsible party in this whole quagmire of information and fees moving around,” Corlyon said, who sits on the board of the New York State Collectors Association. “But they're not experts in this. And it's very complicated.”

A recent study by the Kaiser Family Foundation found that about half (48%) of people with insurance still worry about poor coverage and out-of-pocket costs. To add insult to often literal injury, the CFPB has recently flagged medical offices that offer credit cards to patients who can’t pay for treatments and don’t always disclose full details regarding promotional and deferred interest rates.

It’s no surprise that medical debt remains the leading driver of bankruptcy. Brad Stroh, co-CEO and cofounder of debt-resolution company Achieve, said 45% of consumers who enroll in Achieve’s debt-resolution program report medical hardship as the main reason. Most annoyingly, debt from a one-time medical emergency is usually an outlier, Howard Dvorkin, certified public accountant and chairman of Debt.com, said. 

“Most medical debt results from a single serious illness or condition,” Dvorkin said. For someone who normally pays bills on time and has disposable income, medical debt on their record could be “distorting their actual creditworthiness.”   

It’s not like there haven’t been attempts to fix these problems. In 2022, the federal No Surprises Act passed to protect consumers from having to pay bills from providers they weren’t informed were out of network. (Note, however, that the Act doesn’t apply to HOPDs.) The same year, the three major credit-reporting bureaus (Experian, TransUnion, and Equifax) began removing all paid medical debts from consumer credit reports, as well as those less than a year old. They then started wiping away all medical collections under $500 in 2023.

“It was estimated that with these changes, about half of people with medical debt on their reports would have it removed from their credit history, and nearly 70% of collection accounts would be removed from consumer credit files,” New York debt-relief lawyer Leslie Tayne explained. 

In June, the CFPB announced another proposal to remove medical debt from credit reports entirely, plus use American Rescue Plan funds to forgive $7 billion in medical debt for some 3 million consumers by the end of 2026. The bureau predicts the plan will raise credit scores for 15 million people by an average of 20 points and result in the approval of about 22,000 more mortgages per year. Tayne said this is good news, given that people with a history of medical debt often have a harder time borrowing money for a car, home, or other needs. The implications even extend beyond gaining access to more credit, she said, affecting a person’s ability to secure housing and basic necessities.

“Landlords often check credit reports when you apply to rent an apartment, and you may be denied housing due to bad credit,” Tayne said. “Utility companies and service providers also may require larger deposits or even deny service if they see past-due debt on your credit report.”

Finally, the latest CFPB proposal also takes aim at nonprofit hospitals, which according to one report allocate only 2.3% of revenue to charity despite receiving an estimated $60 billion in tax breaks. Insidiously, hospitals also seem to have grown comfortable suing patients for unpaid medical bills through the anonymous go-between service of third-party collections agencies. The practice has become so commonplace that Colorado Attorney General Phil Weiser just introduced a bill forcing hospitals to use their own company names in public lawsuits. 

Punitive versus proactive measures to neutralize debt

Unsurprisingly, professionals in the third-party collections industry argue that we shouldn’t just go around wiping medical debt off of people’s reports, no matter how perplexing the system. We need accurate credit reporting, they say, raising concerns about the unintended consequences of inaccurate data in credit-underwriting decisions.

“The challenge is that many responses to helping consumers are knee-jerk reactions,” Tayne said. “There will probably end up being more reform. Consumer protection and billing practices are constantly evolving.”

That’s been the case so far. In the past five years, 22 states have started changing their policies on debt-based driving restrictions, which are justifiably scrutinized for forcing 11 million people off the road and contributing to a vortex of negative repercussions for individual debtors. 

Does debt demand moral accountability or systemic reform?

Perhaps here we should pause and ask an uncomfortable philosophical question about debt: are we morally obligated to pay it back?

The language inside the CFPB’s latest proposal asserts that debt — particularly medical debt  — should not, in principle, cause financial hardship, especially for vulnerable individuals and communities. Good Samaritans might argue that we have a moral obligation as a society to ensure that nobody goes bankrupt because they accidentally walked into an out-of-network urgent-care center in the midst of a heart attack.

The debt-collections industry, however, frames it differently. Corlyon argues that paying medical bills is essential to maintaining the social contract that keeps healthcare providers in business. "If people aren’t paying [their balances], then the cost of services goes up for everybody because businesses need to cover their losses,” he said. He argued that this squeeze particularly affects independent family offices and smaller providers, as well as the people who rely on them. “Critical-access hospitals, dental practices, and local physician practices might have to close their doors, forcing community members to travel farther for care."

Practical strategies for dealing with medical debt

Yes, debt is probably way too easy to accumulate, but it's still important to manage — even when it’s not your fault, and even when the punitive and befuddling financial system sucks. If you have debt, use every consumer protection available and understand how different options impact your credit. Tayne makes the following suggestions:

1. Check your credit report: Regularly review it to see listed debts. Remember, new reforms might remove medical debt from reports, so you may not see everything.

2. Keep a paper trail: Medical billing is confusing, so track it. “If you're in a hospital, that bill is different from a medical office. If it's an individual doctor or a group practice, the bill might come from an affiliated healthcare-system conglomerate — it's very convoluted,” Tayne said. Her advice? Create a paper trail for yourself and any future billing or collections agencies. 

3. Be your own advocate: "Be proactive and advocate for yourself,” Tayne said. “Ask, 'Do you take my insurance?' and 'What is it going to cost?'”

4. Talk to your insurance company: If you receive a surprise bill, contact your insurance company first. Ask if your provider was in-network and if any notice was given about changes to that status. You may have signed forms acknowledging new billing updates, so ask for proof in writing.

5. Partner with billing departments: At the end of the day, Tayne said, billing departments want to get paid and will work with consumers to correct errors, especially when a bill gets kicked back from insurance companies because of a clerical mistake. “Many times they'll resubmit it,” she said. “They want to get the money from the insurance company.”

Finally, if you find invalid medical bills on your credit report or are unable to resolve debt concerns, you can submit a complaint to the CFPB. A debt-relief lawyer can assist with this process, but Tayne said it helps your case if you first take the above steps to advocate for yourself — and can show receipts.

Megan DeMatteo is a journalist who’s written for Dwell, CNBC, Yahoo, Marie Claire, and Fodor’s Travel.