Healthcare Costs Are Changing How Lenders Approve Credit

Have you ever rushed to the emergency room, only to spend weeks afterward dreading the bill? Or worried that your imperfect credit score might affect your future mortgage rate? You’re not alone. For most Americans, keeping tabs on medical costs and maintaining a healthy credit score are two pillars of a stable financial life.

But consumers are on shaky ground: The U.S. has one of the highest costs of healthcare in the world, and there are no signs that this will change.

According to the most recent data from the Centers for Medicare and Medicaid Services, national healthcare spending surged 7.5% in 2023, reaching $4.867 trillion — an average of $14,570 per person. This increase outpaced the 4.6% rise seen in 2022.

At the same time, U.S. consumers have taken on more debt to help pay for medical costs. A survey published in March found that about 31 million Americans borrowed money to pay for healthcare in 2024, accumulating a staggering $74 billion in medical debt.

The West Health-Gallup Healthcare Survey found that 12% of U.S. adults reported they had to borrow to pay for healthcare over the past year, and 58% were worried they would rack up medical debt if faced with a major health issue.

It’s against this backdrop that UVA Darden Professor Elena Loutskina, the Peter M. Grant II Bicentennial Foundation Chair in Business Administration, and Joonsung (Francis) Won, a postdoctoral research associate for Darden’s Richard A. Mayo Center for Asset Management, wondered: What is the relationship between healthcare costs and households’ access to credit?

Their research, detailed in a new working paper, reveals that rising healthcare costs distort credit scores — those influential three-digit grades of financial health that shape borrowing power. Credit reports help lenders decide whether to approve loans and how much to charge, from home mortgages to car loans and credit cards. A high score allows consumers to borrow more cheaply, while a low score can mean borrowers are saddled with higher-interest debts they struggle to repay. 

The Policy Debate: Medical Debt Reporting

Consumer medical debt data is unreliable and not systematically reported to credit agencies.

“Medical debt information is flowing, but it is barely flowing into credit bureau data,” says Loutskina. “That means it is also barely updated. Your medical debt might flow into the credit bureau data and then be stuck there because it’s so rarely updated, and you will be unfairly punished for having medical debt sitting there while you already paid it off.”

There are several reasons for the sluggish flow of information, including the fact that insurance adjustments, disputes and delays in processing make it difficult to determine the final amount a patient owes, says Loutskina. Also, medical debt is processed “in house” by healthcare providers and there is a long cycle of debt collection and renegotiation. Then the medical debt is ultimately transferred to small collection agencies that have few ties to the credit agencies.

Because medical debt is not systematically reported, it can be dramatically understated, but it can also be stale or incorrect. “The bottom line is that consumer medical debt information is unreliable,” says Loutskina. “All we know is that healthcare costs are driving the medical debt and related collections.”

The issue of medical debt and consumer credit is at the center of a policy debate that has played out over the past few years. On one side, credit agencies maintain that medical debt and medical debt collection accounts should be systematically reported to credit bureaus so that they in turn can offer more precise borrower quality information to lenders.

On the other side, the government argues that medical debt and collections are likely to be overstated or stale and don’t reflect the consumer’s true state of indebtedness, explains Loutskina. As a result, regulators such as the Consumer Financial Protection Bureau (CFPB) argue that credit scores underestimate borrower quality, and consumers are unjustly cut off from loans.

In 2022, credit bureaus were pressured to dramatically curtail the amount of medical debt collections they take into account when computing consumer credit scores.

Fast forward to today. A new rule barring credit agencies from including medical debts on consumers' credit reports and prohibiting lenders from considering medical information in assessing borrowers is set to take effect this month.

The CFPB, which championed the regulation, said the change would erase an estimated $49 billion in unpaid medical bills from the credit reports of roughly 15 million Americans. That could help boost those borrowers’ credit scores by an average of 20 points, helping them qualify for mortgages and other loans, the CFPB said.

Research Findings: Credit Score Distortions

As consumer finance economists, Loutskina and Won wanted to know what side of this policy debate “got it right.” Do higher healthcare costs create distortions in consumers’ credit assessments?

In other words, are we overestimating consumer creditworthiness by not including medical debt information (the credit agency view) or underestimating consumer creditworthiness because medical debt information is unreliable (the government view).

The challenge in answering this question is that medical debt and medical debt collections are not systematically observable for the majority of consumers. But the authors figured out a way to capture the differences in healthcare costs across markets: They introduce a new measure that captures what they describe as “geographic heterogeneity in healthcare costs” — that is, the measure quantifies how consumer healthcare costs vary across different regions in the U.S.

The measure relies on Medicare Spending per Beneficiary (MSPB) data, which captures how much is spent on healthcare for Medicare patients in different regions. The authors map this data to Core-Based Statistical Areas (CBSAs) — which are geographic regions used to analyze local economies.

The key idea is that healthcare costs are not uniform nationwide — some areas have significantly higher costs than others. Loutskina and Won show that these cost differences impact medical debt and collection levels.

Armed with a solid measure that captures differences in healthcare costs, Loutskina and Won looked into how these costs affect consumer credit assessments in low- versus high-healthcare-cost areas.

“Higher defaults in high-cost areas would be consistent with the credit bureaus’ view, while lower defaults would be consistent with the government view,” says Loutskina.

What did they find?

In areas where healthcare costs are high, people tend to default on loans more often than their credit scores suggest. This means that credit scores may be overestimating people’s financial health in these regions.

“The long story, short: we find that the credit agencies’ view is correct: In the geographies that have high healthcare costs, we see significantly higher defaults relative to credit scores,” says Loutskina. “The impact is much lower for individuals with very high credit scores, which is not a surprise, as these individuals have the lowest debt-to-income ratios.”

The researchers went a step further: They wanted to know whether lenders are aware of the consumer credit record distortions generated by healthcare costs. What they found is that lenders appear to recognize the risks and are offering less credit to borrowers living in markets with high healthcare costs. Lenders reject more mortgage applications and offer smaller mortgages in these areas.

The Bottom Line: Credit Score Accuracy at Risk

“Our research examines an ongoing policy debate about whether medical debt and related collections should be included in consumer credit files to ensure fair and unbiased access to credit for all,” says Loutskina. “We find that the inconsistent reporting of medical debt to credit bureaus causes credit scores to be inflated, meaning some consumers appear more creditworthy than they actually are, leading to higher default rates.”

Personal finance and healthcare are not just academic topics; they are two areas that affect almost everyone — sometimes with potentially ruinous consequences.

“If high medical costs are hampering the ability of individuals to repay their debt, individuals need to give more thought to where to live, where to work, how to borrow, and how much to borrow given the healthcare expenses they might face,” says Loutskina. “On the business side, it also raises questions about effects on the employee compensation packages and relocation options.”