The CFPB ban on medical debt from credit reports will harm patients

On Tuesday, the Consumer Financial Protection Bureau (CFPB) suggested a rule to remove medical debt from credit reports and prohibit lenders from making credit decisions based on medical information. While the agency aims to “eliminate medical debt that lowers credit scores for Americans,” the rule will harm the very Americans it aims to protect.

Credit reports – which include debt, payment history and credit score – are issued by credit reporting companies to assess consumers’ creditworthiness. Lenders rely on credit reports when issuing credit cards and loans, offering lower interest rates to consumers with more favorable credit reports.

The Peterson Center for Healthcare and KFF estimated that 8% of American adults have medical debt, and 86% of medical debt is less than $10,000. While some medical debt is caused by billing errors, a sweeping ban on medical debt from credit reports ignores three important facts.

First, excluding debt from credit reports discourages consumers from paying it. Second, all companies must be paid in some way to continue operating. Third, lenders must assess a borrower’s creditworthiness before lending money. When the informativeness of credit reports declines, lenders must take alternative measures to limit their exposure to credit risk.

Therefore, banning medical debt from credit reports will provide only short-term “protection” for some patients. Subsequent behavioral changes among providers and lenders will harm low-income patients.

Knowing that this ban will deter patients from paying medical bills, providers will seek alternative ways to protect their revenues, such as requiring upfront payments, limiting access to care and raising prices. Both large providers, such as hospital systems, and small providers, such as independent physician practices, will face challenges, especially the latter with financial vulnerabilities. This dynamic will accelerate the acquisition of small providers.

This ban forces credit reporting companies to exclude relevant information from their reports, reducing the value of the reports to lenders. As a result, lenders will place less weight on credit reports and seek alternative information channels when assessing the creditworthiness of potential borrowers, such as resorting to specific demographic or geographic profiles.

Taken together, all low-income people will face greater barriers to accessing both health care and credit, including those who have diligently built their credit through continued payment efforts and would otherwise deserve lower borrowing costs. Patients with medical debt will receive only temporary relief at best, reportedly providing “no improvements in financial well-being or mental health.”

Instead of suppressing the symptoms, we should focus on treating the underlying causes: high healthcare prices and low personal income. Since the majority of patients with medical debt are already insured, we should enable low-premium insurance plans and flexible benefit designs, accompanied by direct cash transfers to high-risk, low-income patients. Additionally, improving price transparency and awareness of charity care would also ensure billing integrity and benefit patients.

Regulations are made by regulators with imperfect information and self-interest that is imperfectly aligned with the public interest. Regulations often have more consequences for stakeholders and cause broader behavioral changes than regulators expect, yet regulators rarely bear the consequences themselves. This disconnect leads to well-intentioned but counterproductive regulations unless the public recognizes and rejects them.