Ask John:
Medical Collections. . .Oh, what Trouble they Cause

“Mr. Ulzheimer, we still have not received payment for services from your insurance company. If we do not receive a payment of $3,675 in the next week we’ll be forced to turn your account over to our collection department.”

Have any of you ever run into this dilemma before?  If so, you’re certainly not alone. This happens tens of thousands of times each year. Either you don’t have medical insurance or your insurance carrier processes paperwork slower than your doctor likes or perhaps there are some disputed charges that the insurance company will not cover.

The bottom line is that medical debts can easily turn into medical collections. And medical collections can destroy credit scores as easily as any other collections. The most frustrating thing about medical collections is that in most cases the consumer isn’t the cause, yet they still pay the price.

Let’s face it, if we don’t pay our credit card bills then we know what could happen…collections. If we skip out on our apartment lease with six months left to pay then we know what could happen…collections. If we ignore our power bill for three months then we know what could happen…collections (in addition to being in the dark). But what we don’t expect is inefficient communication between our physicians and our insurance company to wreck our credit.

An Industry Conflict

There is, however, a segment of the credit world that doesn’t care as much about your medical collections. According to Lyndal McLaughlin of Fairway Independent Mortgage, medical collections take on a very different meaning when they are evaluated as part of the mortgage or home equity loan process.

“It used to be that when a live underwriter looked at the applicant’s loan file then they would make the determination as to what had to be paid off and what didn’t and typically medical collections were ignored. FHA comes right out and says in their guidelines that they are not overly concerned with medical collections” says McLaughlin.

This is very much in line with what other industries have quietly been saying for many years. They simply do not view medical collections to be as damaging as non-medical collections or other negative credit data. So the question that must be asked is “why do medical collections still lower your credit scores as much as non-medical collections?”

Here are the reasons….

1. First and foremost, as long as Fair Isaac’s FICO® scores count them like any other collection, they will lower your scores. This isn’t a criticism of Fair Isaac but it is a criticism of the credit reporting agencies. Read on…
2. As long as the credit reporting agencies allow collection agencies to report medical collections then lenders, credit scoring models and insurance companies will see them and the scores that have been damaged by them. This could easily be changed if the credit bureaus would implement new policies that do not allow medical collections to be reported if they were caused by insurance claim inefficiencies. This would put the burden of proof of the validity of the collection on the doctor’s office and the collector…as the Fair Credit Reporting Act intends. This however isn’t going to happen because…
3. Collection agencies would flip out if Fair Isaac or the credit bureaus changed the negative impact of medical collections to consumer’s scores. After all, what would be the motivation to pay them if they had no negative impact to your scores?  Right?  Collection agencies are huge clients of the credit bureaus and they would throw their significant weight around if they ever found out that a movement was afoot to change how medical collections are reported or treated.

So What do I do?

There’s no easy answer to that one. Your best bet is to avoid them if at all possible and that means coming out of pocket to pay medical debts until the claims are processed and paid by the insurance companies. The problem with that strategy is that not everyone has the funds available to do that. And charging the services to your credit cards will almost always lead to lower credit scores because of what highly utilized credit cards can do to them.

In this case there is no simple answer or silver bullet. It’s a dreadful design error of the credit reporting industry. And until the architects of that industry decide to change the status quo, I’ll continue to get hundreds of emails from consumers who have poor scores because their insurance companies don’t know how to process paperwork quickly enough.

If you have a question or comment for John you can reach him at AskJohn@credit.com.

Thanks to Lyndal McLaughlin for her contribution to this month’s issue. She has been a part of the mortgage industry since 1987. She can be reached at 317.205.9912 or at lyndalm@fairwaymc.com.

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