Medical debt is one of the most common forms of debt in America. One in seven Americans has unpaid medical bills. In 2021, the major credit bureaus reported that a collective $88 billion in medical debt had been sent to collection agencies.

Unlike other forms of debt, like mortgages or student loans, medical debt is not something most people can plan or budget for. It can linger for years, not only in the form of monthly payments, but also on credit reports. Sixty percent of people filing for bankruptcy carry medical debt. It doesn’t seem fair that a single accident or emergency can have such long standing consequences.

And so in April 2023, the three major US credit bureaus announced that they were no longer including collections for medical debts less than $500 on credit reports. Following their lead, the Consumer Financial Protection Bureau (CFPB) ruled earlier this year that it would eliminate all remaining medical debt collections from credit reports. This would, it said, improve credit ratings and make it easier for debtors to get other loans. The new rule was scheduled to go into effect in June, but the Trump Administration has joined the plaintiffs of an existing lawsuit in asking the court to vacate the rule. The judge has not yet ruled on the motion to vacate.

But will this actually help debtors? Julia Fonseca, an associate professor of finance at Gies College of Business at the University of Illinois Urbana-Champaign, was skeptical. She and three Gies Business colleagues, Assistant Professor of Finance Victor Duarte, Associate Professor of Finance Julian Reif, and PhD student Divij Kohli, studied the effects of deleting medical debt from consumer credit reports. They recently shared their findings in a working paper titled “The Effects of Deleting Medical Debt from Consumer Credit Reports”, for the National Bureau of Economic Research.

Fonseca first became interested in debt collection in grad school, largely because it’s an important part of how consumer credit markets function. The purpose of a credit report, she explains, is to help creditors determine whether an individual is likely to pay off a debt or default on a loan. But medical debt, given its unpredictable nature, is perhaps not the best indicator of this.

“Medical debts are not going to be as predictive because they’re not indicative of financial mismanagement in the same way our other debts might be,” she says. “If you apply for a credit card and make purchases and then you can’t meet the bill, that might be very different from if you get into an accident and you’re taken to the emergency room and you can’t meet that bill. That’s not as informative of your ability to repay as a borrower.”

With medical debt, there’s also another factor in play – insurance companies. They determine how much of the bill the patient is responsible for, and often there are disagreements. “A lot of people with medical debts,” Fonseca says, “have failed to make payments on those debts not because they cannot make them, but because they do not feel they should have to make them.”

So given that having medical debt doesn’t really reflect a person’s ability (or willingness) to pay back a loan, would it make any difference whether it appeared on a credit report? Fonseca and her colleagues hypothesized that it probably didn’t, but they decided to test the effects of it anyway.

To do this, they compared two mathematical models using data from the Gies Consumer and Small Business Credit Panel (GCCP) from 2019 to 2024. GCCP is a rich dataset combining individual-level data on small business loans, personal credit, and alternative credit that has only started to be used in academic research. 

The first model estimated the direct effects of the credit bureaus’ 2023 decision to eliminate small medical debts from credit reports. “Because the credit bureaus only removed medical debts under $500, we could compare people with debts just below versus just above that threshold,” said Reif, a coauthor of the study and faculty scholar with Gies’ Health Care Research Initiative. “Any differences in their credit outcomes can be attributed to the debt removal.” 

The second model was a difference-in-differences approach to estimate the effects of removing the medical debt from consumers who, as a result, were reclassified as a higher default risk.

In both models, there was no evidence that erasing medical debt affected consumers’ credit scores or borrowing behavior. There was also no evidence that it had any negative effects on consumers who had become higher default risks.

“I was surprised,” Fonseca says of the results. “I knew medical collections are less predictive of default than other types of debts in collections. But I wasn’t expecting them to be pretty much uninformative given all the other variables that are available in your credit report.” 

There was nothing to indicate that lenders had been using the information about medical debts to make decisions about issuing credit, and so there was no effect on consumers’ overall financial health when the credit bureaus stopped including it on credit reports.

Other similar interventions, like buying up and forgiving medical debt, haven’t had much of an effect, either. Fonseca suspects one reason is that the interventions happen after some of the worst consequences have played out. That’s only a theory, though; economists, Fonseca says, still don’t understand why these efforts have so little impact.

Meanwhile, medical debt itself remains a very real problem. “If you look at people with medical debt,” Fonseca says, “they do seem to be suffering under the burden of it. Their financial health is suffering. And their mental health seems to be suffering as well.”

Health insurance was supposed to protect people from too much medical debt, or at least provide a buffer against accidents or emergency surgeries. But, despite initiatives like the Affordable Care Act, 30 million Americans are still without health insurance. And even people with insurance still have to pay high premiums and out-of-pocket expenses.

The real question, Fonseca says, is how do we make sure people aren’t burdened by medical debt to begin with? “I definitely don’t have the magic solution for healthcare in the United States,” she says. “I wish I did.”