The Cost of Forgiving Medical Debt

The CFPB wants to bar non-payment of healthcare bills from credit scores

WSJ editorial. 

"The Biden Administration is canceling student loans and easing mortgage payment terms. Now the Consumer Financial Protection Bureau (CFPB) wants to erase unpaid medical bills too. Does this Administration believe in having to repay any debt? 

The CFPB on Tuesday proposed a rule that would remove medical debt from credit reports. Its goal? Help people with low credit scores qualify for mortgages and loans they can’t afford. “I just don’t want to see the credit reporting system be weaponized,” director Rohit Chopra said. But who’s really weaponizing credit reporting?

Mr. Chopra says noting the nonpayment of medical bills is unfair given the vagaries of illness. But this is a reason to carry health insurance. Very few Americans with insurance rack up enormous medical debt. Affordable Care Act plans have deductibles and co-pays, but the ACA’s subsidies can offset premiums. Patients often prioritize other loan payments so cars aren’t repossessed or homes foreclosed. A credit-report blemish is the only tool healthcare providers have to encourage payment.

Credit-reporting agencies in recent years have removed delinquent medical debt that has been paid, as well as debt that is less than $500 or has been in collection for less than a year. According to the CFPB, these actions have reduced the share of Americans with medical debt on credit reports by about two-thirds.

Medical debt affected the credit scores of roughly 15 million Americans as of last June, averaging about $3,100—far from a terrible burden. Most also carried other forms of debt. Progressives say medical expenses can drive Americans into bankruptcy, and this happens. But providers are usually willing to reduce or extend payments for those who can’t afford care.

Removing a credit notice for not paying medical bills will result in more unpaid bills. It will also reduce the incentive to buy health insurance, which will undermine the Administration’s goal of increasing coverage.

Providers will raise prices charged to insurers to compensate for unpaid bills, which will push up premiums. Providers also say they’ll demand more upfront payments for care, which could reduce access for low-income patients. This is simple economics.

But this White House doesn’t believe in moral hazard or consider unintended consequences. The Administration has forgiven hundreds of billions of dollars in student debt, in part by capping payments at a nominal share of income. Even if you can afford to make your full payment, why would you? The Administration has even suggested that borrowers could make more than $100,000 by investing their “savings” from reduced payments.

Estimated costs of its loan forgiveness continue to be revised up in part because its forecasts don’t consider the incentives for borrowers to take out more debt and colleges to raise tuition. The Administration is also stealthily reducing payments for struggling homeowners to prevent foreclosures. This limits housing supply and pushes up prices.

The President’s endless debt relief makes credit scores less indicative of credit-worthiness. Don’t be surprised if lenders rely more on income, resulting in less credit for lower-income Americans who pay their bills. It will be another case in which Mr. Biden’s policies to buy votes do more harm than good."