California’s New Rule for Medical Debt
In a landmark decision, California Governor Gavin Newsom signed legislation removing unpaid medical bills from Californians’ credit reports. Amid mounting concerns about the financial burden of medical bills, California has joined a growing list of states taking action to shield consumers from credit damage.
Democrat Sen. Monique Limón and Attorney General Rob Bonta championed the bill, which blocks health care providers and contracted collection agencies from sharing patients’ medical debt with credit bureaus. In the past two years, eight states have banned reporting of medical bills to credit agencies, a trend the Biden administration is considering for federal law.
Medical Debt vs. Credit Score
For many, unexpected medical bills can have far-reaching consequences, damaging credit scores and affecting opportunities for employment, housing, and loans. Lawmakers in California argue that medical debt, unlike other types of debt, doesn’t accurately reflect a person’s credit risk.
When the new law takes effect in January, it will focus on protecting credit reports used for employment checks and tenant screenings. This complements a proposed federal ban on reporting medical debt to credit agencies tied to credit cards and mortgage lenders.
Exceptions to the Rule
However, the new law has certain exceptions. Those who pay hospital bills using medical credit cards or medical-specialty loans—possibly subject to high interest rates—won’t see the debt removed from their credit reports. The exceptions, deemed essential by representatives of collection agencies, were due to the difficulty in differentiating between medical and nonmedical debt on such accounts.
The Effect on Credit Agencies and Medical Credit Card Holders
The three leading US credit agencies—Equifax, Experian, and TransUnion—previously committed to removing some medical debts, such as those under $500 and already paid debts. However, the Consumer Financial Protection Bureau reported that 15 million Americans still have medical bills affecting their credit reports.
Approximately four in 10 Californians carry medical debt, a burden disproportionately affecting low-income, Black, and Latino communities.
Further Legislative Actions on Medical Debt
Other states have also implemented laws to protect citizens from unexpected medical bills and debt. Newsom also recently signed legislation prohibiting hospitals from using liens on all real estate owned by Californians with incomes under 400% of the federal poverty level.
Hospital Collection Tactics
Hospitals frequently use credit reports as a means to pressure patients into paying their bills. This new law might make it tougher for hospitals to collect debts.
The Story of a Sacramento Resident
Sonia Hayden, a resident of Sacramento, discovered the impact of medical debt on her credit report during her home loan application process. A $200 emergency room charge from a car accident led to a significant drop in her credit score due to a hospital coding error. Despite her insurance covering most of her medical bills, the incident highlighted the emotional and financial stress medical debt can cause. This real-life story underscores the importance of the new law in preventing credit damage resulting from unforeseen medical expenses.
The new law signifies a significant step towards limiting the financial impact of medical debt on consumers, although some exceptions to the rule persist. The future of federal laws to protect consumers from medical debt remains uncertain but is keenly watched by all.