Do Medical Bills Hurt Your Credit Score?

MarketWatch recently addressed the issue of unpaid medical bills and the effect that those unpaid bills have on one's personal credit. The reader asked if medical bills are treated the same as outstanding credit card debt and whether it affects the FICO score.

According to the MarketWatch reporter, medical bills are treated differently than credit card debt and as a result, "don't always have a direct effect on your FICO score." That's because medical debt is not always reported to the credit bureaus – just the debts that have been sent to a collection agency. And the debt owed for medical bills does not count toward your total debt utilization ratio – that is, how much you owe on your credit card balances compared to your credit limits.

However, your Credit Mama has a few words of caution. Once your unpaid medical debt is forwarded to a collection agency, the debt is very likely to be reported to the credit bureaus. And as a collection debt, it will have a significantly negative impact on your FICO score.

If you are trying to qualify for a mortgage or car loan, a lender will look closely at any unpaid bills, including medical. Most mortgage lenders require that any unpaid bills over $500 (or multiple bills adding to $500) be paid in full before they will lend for a home or investment.

Fannie Mae guidelines generally require that collection accounts (including medical) in excess of $250 per individual account or $1,000 in the aggregate must be paid in full.

Given the current credit crisis, I believe most underwriters will not waive this requirement.

Medical bills are one of the top three reasons people file for bankruptcy, accounting for half of all U.S. bankruptcies. Most frightening is that 75.7% of those whose illnesses led to bankruptcy had insurance at the onset of the illness, according to a study published in the journal Health Affairs.

Bankrate.com suggests contacting the hospital directly to see whether you can qualify for low-income waivers or financial assistance, and researching nonprofit organizations that specialize in helping people with high medical debt to negotiate on your behalf to reduce the balance. Once you get sent to collections, you are dealing with a for-profit company that is not interested in you – just your repayment of the debt.

In case you missed it - a previous post on the new medical FICO scoring system that is being developed.

Will the Doctor Still See You After Looking at Your Credit?

Every 30 seconds in the United States, someone files for bankruptcy in the aftermath of a serious health problem. According to a Harvard study, illness and medical bills are the cause of half the personal bankruptcies filed in U.S. An estimated one million Americans are financially ruined by illness or medical bills each year - more than half of them are college educated, homeowners, with good jobs. Surprisingly, more than 75% were insured at the start of the bankrupting illness.

Now I'm going to throw another number at you: 80 percent. That's the number of hospital bills that contain multiple errors, according to the Medical Billing Advocates of America.

Here's one final stat: 250,000. That's the number of medical identity theft victims reported to the FTC each year.

Now there is talk of a medical FICO score being developed by a company called Healthcare Analytics. Like your credit score, which calculates the level of risk via algorithms and the consumers' credit history, the medical FICO score calculates which patients are more likely to pay their medical bills. Healthcare Analytics is already gathering payment information from large hospitals around the country.

Supposedly the benefit of a patient scoring system is to help hospitals decide whether to write off some delinquent bills as charity cases rather than report them as delinquent accounts. According to msbnc.com, American hospitals face $40 billion in unpaid bills every year.

But with so many people already uninsured (47 million in 2007), and with out-of-pocket costs rising, and two million people filing bankruptcy each year due to medically-related issues, this medFICO is a serious concern for consumers and privacy advocates.

Add to that the frustrations of inaccurate billing, and you've got the same headaches as with the credit bureaus - who also have a dismal 79% error rate (nearly 8 out of 10 credit reports contain serious errors).

Will the doctor or hospital decide not to perform certain services or provide inferior care (ie: reducing the length of stay) after looking at a patient's medFICO score? Will an employer decide not to hire someone because they are too expensive to insure? They SAY these things won't happen, but the risk assessment industry is too lucrative for this information NOT to be used in other ways.

Who is Healthcare Analytics? The investors include Fair Issac Corp. (founder of the FICO scoring model) and Tenet Healthcare Corp., one of the nation's biggest hospital operators. Former Tenet CFO Stephen Farber is its CEO.

The product is not expected to launch commercially until the end of this year.

Don't ever give your SSN to a healthcare provider. They do not need it. They need your member number from insurance, not your SSN. Furthermore, it's illegal for them to ask for your SSN unless they are going to lend you money or hire you.