How medical debt affects patients
For patients, medical debt places pressure on their financial circumstances. Bankruptcy has a profound financial impact, and approximately two-thirds of bankruptcies are related to medical care costs and debt, including “indirect collection.”14 Even when the financial effect is not so devastating, it is often substantial, as the above case demonstrated. In a 2018 survey, almost 30% of those with health insurance had medical debts in some form of collection action, and 25% of those individuals said they did not know they owed the money.15 The same survey found that 20% of respondents had medical debt that adversely affected their credit scores and access to credit.15
At work, although employers are not supposed to treat employees adversely because of garnishment, some employers may not adhere to that rule. Furthermore, employees may believe or be concerned that the very existence of garnishment may penalize them at their current job or make it difficult to move to a better one.16
Lastly, patients with medical debt may be reluctant to seek needed medical care. They may be concerned about adding more medical debt or embarrassed or afraid that they would not be welcome at the hospital where they owe money.7
Public perception of hospitals
Lawsuits against patients also have a negative effect on hospitals—and it is not limited to the relatively few institutions that file many of these lawsuits each year. Press reports about lawsuits against patients garner great public interest and anger, and this tarnishes the image of heath care facilities in general because many people often do not distinguish the actions of a few institutions.
The sensitivity of health care organizations to bad publicity from debt collection practices was seen in a follow-up study of the previously discussed Virginia data. In the year following this report, there was a 59% decrease in the number of lawsuits filed, including a 66% decrease in garnishments.17 Eleven hospitals in the state that had been filing debt lawsuits stopped doing so.17
Medical debt: The obligation of nonprofit hospitals
The response seen in the Virginia follow-up study may also reflect well-founded concern from board members about political consequences and even taxation problems. The majority of hospitals, including those in these studies, are nonprofit institutions with an Internal Revenue Service (IRS) 501(c)(3) “tax-exempt” status. (Note, “nonprofit” does not mean that the organization does not make a profit, but that the profit does not accrue to individuals.) The “nonprofit” status is usually granted by states, but the federal tax-exempt status is granted by the IRS. This status exempts the institutions from paying most federal taxes, and (perhaps most importantly) qualifies donors to receive tax deductions (and similar benefits) for donations made to these hospitals. This important tax treatment is granted based on the theory that their services are so valuable to the public that advancing their work through the tax exemption ultimately benefits the public more than the tax revenue would.
In return for these benefits, the organization has obligations to work in the public interest. For years, hospitals have been criticized for not providing sufficient public benefits (compared, for example, with for-profit hospitals) to justify the tax exemption. That criticism caused the IRS to begin requiring a special Form 990, Schedule H, which is attached to the usual 501(c)(3) informational tax return, “to provide information on the activities and policies of, and community benefit provided by, its hospital facilities and other non-hospital health care facilities.”18 Part III of Schedule H asks, in part, about bad debt and collection practices.
Then the ACA Section 501(r) enhanced the obligation of nonprofit health facilities to provide charitable care in two ways. First, they must have, and make available, policies to provide free and discounted care; and second, they cannot sue for payment until they make an individualized determination as to whether the patient should have received discounted care or financial assistance.19
Thus aggressive collection practices (which should include “indirect collection”) invite special scrutiny by local officials and the IRS. In the longer-term, concern that tax-exempt hospitals are not truly operating in the public interest is undoubtedly amplified by these aggressive debt collection practices. How can a hospital claim it is truly operating in the public interest when it sues dozens of modest-income individuals each year?
Regulating medical debt and its collection
The No Surprises Act
In December 2020, Congress adopted the No Surprises Act to address some of the problems of patient debt.20 Among other things, the act protects patients “from receiving surprise medical bills when they receive most emergency services,” or when they are in an in-network hospital but receive services from out-of-network providers (such as anesthesia and radiology).21 Several states also have similar legislation, so the federal law specifically states that where state laws are more protective of patients, the state’s higher protections apply, and vice versa. The act took effect on January 1, 2022, though there is an “interim final” regulation that will be subject to change, and there is already litigation over those regulations.22 The real complexity of the rules will arise through the regulations, which are likely to change several times over the next few years. To help with this, the American Medical Association has an extensive toolkit for health care providers.23
Continue to: Additional regulations...