GET THIS! Medical Bills Can Wreck Credit, Even When Paid Off

CHICAGO – Mike and Laura Park thought their credit record was spotless. The Texas couple wanted to take advantage of low interest rates, so they put their house on the market and talked to a lender about a mortgage on a bigger home in the Dallas-Fort Worth suburbs. Their credit report contained a shocker: A $200 medical bill had been sent to a collection agency. Although since paid, it still lowered their credit scores by about 100 points, and it means they'll have to pay a discount point to get the best interest rate. Cost to them: $2,500.

A growing number of Americans could encounter similar landmines when they refinance or take out a loan. The Commonwealth Fund, a private foundation that sponsors health care research, estimates that 22 million Americans were contacted by collection agencies for unpaid medical bills in 2005. That increased to 30 million Americans in 2010.

Surprisingly, even after the bills have been paid off, the record of the collection action can stay on a credit report for up to seven years, dragging down credit scores and driving up the cost of financing a home. An estimated 3.4 million Americans have paid-off medical debt lingering on their credit reports, according to the Access Project, a research group funded by health care foundations and advocates of tougher laws on medical debt collectors. Among them are Nathen and Melissa Cobb of Riverton, Ill., who tried to refinance their home last year. They didn't qualify for the loan because of $740 in medical bills that had been sent to a collection agency. The Cobbs were surprised because the bills — nearly a dozen small copayments ranging from $6 to $280 — had been paid before they tried to refinance. The collection action took their credit score from good to mediocre and is likely to mar their credit report for years.

"I'm not one of those people trying to ditch out on my bills," 34-year-old Melissa Cobb said. "I'm really frustrated." Medical bills make up the majority of collection actions on credit reports, and most are for less than $250, according to Federal Reserve Board research. The Parks had no idea a billing error they'd sorted out a year earlier — they never actually owed the $200 — could affect their credit. They didn't know the bill for a copayment on a PET scan Mike needed had been sent to a collection agency.

"We've prided ourselves in having impeccable credit. We worked hard to establish that," said Laura Park, a 51-year-old office manager married to a 53-year-old firefighter. They are going ahead with the home purchase while trying to fix their credit report.

"I'm very upset," Park said. "It's going to be a nightmare and who knows how long this is going to take to resolve."

Matt Ernst, a vice president at Mortgage Lenders of America in Overland Park, Kan., said medical collections frequently turn up on credit reports.

"We see a ton of them," Ernst said. They have an impact on financing, he said, but even he didn't realize how much until he learned that someone with a FICO score of 680 — which is considered good, but not excellent — will see their score drop up to 65 points because of a medical collection.

"I didn't know a medical collection would hammer it that hard," Ernst said. "Our investors require a 620 to even get a loan." It's a problem for insured and uninsured alike. Outright billing mistakes, confusion over whether a claim will be paid by insurance and disputes between insurance companies and doctors — all can lead to medical bills being sent to collection agencies.

Congress is considering legislation — the Medical Debt Responsibility Act — that would require credit agencies to delete paid-off medical debt from credit reports within 45 days. Debt collectors support the legislation in the House, according to ACA International, a trade association. A key foe of an earlier bill was another group representing the nation's credit bureaus. The Consumer Data Industry Association, which hasn't taken a position on the revised bill, said that lenders need to see a consumer's patterns of behavior over time and even paid-off medical debt is relevant to whether the consumer is a good risk.

Most hospitals and physician groups use collection agencies to go after late bills after 60 or 90 days, rather than hiring more staff. It makes financial sense to share the amounts collected with an agency. "If you don't collect anything, it's worth zero," said Richard Gundling of the Healthcare Financial Management Association. Hospitals started relying on debt collectors in the 1980s, said Chicago-based health care consultant Jim Unland.

"When the numbers of uninsured started to grow significantly, hospital financial staffs had the perception they were getting overloaded" with delinquent bills, Unland said. "It became easier to turn these bills over to collection agencies."

The Affordable Care Act, President Barack Obama's health care law, bars tax-exempt hospitals from using "extraordinary collection actions" until it has made "reasonable efforts" to determine whether a patient qualifies for financial assistance. But it's still unclear how that will be interpreted and whether reporting late bills to a collection agency would be considered extraordinary, Unland said.