Medical bills are among the most challenging debts to repay.
Large bills for medical treatment are typically unplanned and unbudgeted. You probably have little insight into how much a procedure will cost before it occurs. This is complicated by the fact that many procedures, such as surgery, require payment to multiple providers.
If you have health insurance, your treatments will have to go through your insurance provider first. Whatever insurance doesn’t pay is billed to you. It often takes months before care providers and insurance companies settle on what is covered before you receive a bill.
Then, perhaps after you’ve forgotten about your treatment, a bill comes in the mail. It may be larger than your current income or savings can handle. And it may be quite a while before you can completely pay the medical debt in full. It's no secret that paying hospital bills after insurance is a serious burden for many Americans.
As you wrestle with repayment, you may wonder if and how this latest debt will affect your credit rating. Here's what you need to know about how medical bills affect your credit score.
Medical bills may appear on your credit report, but not right away. So if you just received a four-figure bill in the mail, don’t worry that owing that amount of money will lower your credit score several points.
Debt has to be reported to a credit bureau before it appears on your credit report. Care providers typically do not report outstanding debt to credit bureaus. Instead, they enlist collection agencies to collect money owed to them. If a collection agency fails to get you to repay your medical bills, it may report the delinquent debt to a credit bureau.
In addition, the three major credit bureaus — Experian, TransUnion, and Equifax — have recently instituted a 180-day waiting period before medical debt appears on your credit report. That means your medical bills will not appear on your credit reports for at least six months. This provides time to pay the bill yourself or to have insurance cover it. It also gives you time to negotiate with the provider on a repayment plan.
Credit bureaus have also, in recent years, adopted new credit scoring models that give less weight to medical debt than they do to non-medical debt. This means, if all other criteria were the same, a person with $10,000 in medical debt would have a better credit rating than a person with $10,000 in credit card debt under these updated models.
Unpaid medical bills will remain on your credit report for seven years. If the debt has been assigned to a collection agency, it can have a significant impact on your credit report.
More good news about medical debt: Once it has been paid in full, the credit bureaus will expunge the debt from your credit report. This is different from other collection accounts, which will remain on your credit report for seven years even if you eventually pay them in full. That’s why late or missed payments on any debt can be harmful to your credit rating.
The best way to address medical debt is to contact your care provider and your insurance company as soon as you receive a bill.
The first item to address is to ensure that the insurance company has covered all of the expenses it is contractually obligated to pay. You should also review bills, statements, and explanations of benefits to ensure you received all treatments listed and were not overbilled.
Once you’re sure the final amount due is accurate, you should be able to set up a payment plan. Most hospitals, physicians, and clinics will work with patients to set up a payment plan if your balance exceeds your payment ability. In most cases, there is little to no interest tacked on to the debt.
Determine a monthly payment you can afford to pay and get the provider to agree to that amount. Doing so will keep your debt out of collections, as the provider is better ensured that you’re working toward paying it off. As long as the debt stays out of collections, it will not appear on your credit report, even if it takes more than 180 days to pay it off.
Many providers also offer a financial assistance policy. This provides patients of a certain income level with financial help for their bills. In some cases, your bill can be cut in half or completely forgiven. Ask the provider if they have such a plan and if you qualify.
The obvious answer is to stay healthy. Of course, an adverse health event isn’t always in our control, as COVID-19 has taught us.
There are two additional methods for minimizing medical debt: insurance and savings.
In addition to having adequate health insurance, you may want to consider one or more of several types of supplemental insurance.
One example is critical illness insurance. It pays a lump sum benefit if you are diagnosed with a covered illness, such as a heart attack, stroke, or cancer. Critical illness insurance can pay for costs not covered by health insurance, such as deductibles and out-of-pocket costs. You can also use the funds for travel expenses and your regular bills.
Another valuable type of supplemental insurance is hospital indemnity insurance. Plans typically provide benefits to you when you are admitted to a hospital or ICU for a covered sickness or injury. However, there are some policies that will also pay a benefit for outpatient surgery, emergency room visits, stays in a rehabilitation facility, and ambulance services. Hospital indemnity policies typically pay a lump sum directly to you, not a hospital or medical facility. That means you can use the benefit for any purpose, whether to cover the cost of care or for a non-related purpose.
You can also minimize potential medical debt by saving enough up front to cover expenses.
A common way to accomplish this is to establish a health savings account (HSA).
An HSA is a tax-preferred savings account that enables users to set aside tax-free dollars to pay for health expenses, including regular medical care, dental and vision expenses. It can only be used in conjunction with a high-deductible health insurance plan.
There is also an IRS limit to how much you can save each year in an HSA. In 2020, the maximum contribution amounts are $3,550 for individuals and $7,100 for families. You can contribute an additional $1,000 if you are 55 and older.
If you don’t have a high-deductible health insurance plan, you should set up an emergency fund you can tap in the event you have medical expenses that your insurance plans don’t cover.
Joel Palmer is a freelance writer and personal finance expert who focuses on the mortgage, insurance, financial services, and technology industries. He spent the first 10 years of his career as a business and financial reporter.
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