WASHINGTON — Medical debt may prove to be one of the complex areas that the Consumer Financial Protection Bureau will tackle in its highly anticipated rulemaking on debt collection next year.

The proposal itself is a massive undertaking that could have a widespread effect on the entire cycle of debt, from creditors like banks to collectors and reporting agencies. But how to treat medical debt under the plan is turning out to be a complicated endeavor.

The CFPB's jurisdiction is limited because it cannot directly regulate medical providers or health insurers, but must address how accurately and quickly medical debt is sent to collectors and reported to credit reporting agencies.

The CFPB "has the power to write rules and within that rulemaking process, they are considering implications with regard to medical debt in particular," said Stuart Pratt, president and chief executive of the Consumer Data Industry Association. "They are concerned about whether [consumers] understand the billing process and if there is confusion from the health care provider to the debt collector and ultimately, the nationwide credit reporting bureaus."

Earlier this month, the CFPB released a study and hosted a field hearing highlighting problems in reporting medical debt accurately and addressing consumer complaints or errors in a timely manner. The Dec. 11 study looked at overall consumer credit reports, but found that 52% of all debt is medical-related, and that it drives a lot of consumer complaints.

The study and field hearing came ahead of a proposal on debt collection that the agency has tentatively scheduled to release in April, though that date may change.

It's unclear if the proposal will address medical debt specifically, but even if it doesn't, the overall plan would have a significant impact on such debt because of what most believe are widespread inaccuracies related to medical debt reporting.

"This is just one piece of a bigger problem in the healthcare system that over time has developed high deductibles, high copay plans that are just difficult to sort out as a consumer," said Tom Gavinski, vice president of Healthcare at I.C. System, a collection agency based in St. Paul, Minn. "I deal with this every day and still get confused on my own coverage. I'm skeptical of whether everything has been billed properly versus other debt like a credit card where you bought something and the pricing is very clean."

One significant complication within medical debt that the CFPB may address is establishing a timeframe for when debt must be reported. Most lenders have uniform timeframes for when a debt becomes delinquent, like a mortgage, but that is not the case with medical debt.

"Today, at best there are just loosely defined guidelines on reporting medical debt to collections," said Ethan Dornhelm, principal scientist at credit scoring developer Fair Isaac Co. (FICO).

For example, medical debt can be reported anywhere "from 30 days to 180 days after the bill went out … the idea of establishing a common wait period in reporting medical debt to collections would help ensure accuracy."

CFPB Director Richard Cordray alluded to that idea during the field hearing on Dec. 11, when he noted that the IRS is proposing a 120-day hold for nonprofit hospitals reporting debt to a collector.

"We support the Internal Revenue Service's recent proposal that, among other things, requires nonprofit hospitals to give the consumer 120 days before beginning extraordinary debt collection methods, including reporting medical debts as collection items to credit reporting agencies," Cordray said at the field hearing in Oklahoma City. "In our view, consumers would benefit if for-profit hospitals and all other medical providers adopted the same approach."

FICO and VantageScore have already created new scoring models to lower the impact medical debt has on a consumer's credit score. But it would have to be voluntarily adopted by creditors and the new model, FICO 9, is still in the early stages as some lenders test out the system, according to Dornhelm.

The CFPB's study has "been a good benchmarking confirmation that we felt was supportive of this decision" to launch a new FICO system, Dornhelm said.

Another issue the CFPB could address through rulemaking is requiring greater accuracy from data furnishers and credit reporting agencies. This is a particularly prevalent problem with medical debt because there are often multiple billing parties involved when medical providers send a bill to an insurance company, which then determines what it will cover based on certain billing codes — a process largely not seen or verified by the consumer until they receive the final bill, sometimes months after the procedure.

"With medical debt, by the time it gets to the credit reporting agencies, generally, there are all sorts of problems with respect to errors like the insurance company is slow to cover the medical bill and the healthcare provider had already sent it to collections … or maybe the consumer thought the insurance company would pay for it" when it wasn't in the plan, said Pam Banks, senior policy counsel at the Consumers Union. The CFPB could "require that the information that the furnisher provides is accurate information. And the same could be applied with credit reporting agencies in that the reporting of debt is accurate and they do a proper investigation of complaints."

As a result, many believe the CFPB will require furnishers to give notices upfront to consumers about their debt. The CFPB and observers argue that medical debt is often not planned nor structured in a way like mortgages or credit cards when a consumer is notified of the price and terms of what they are purchasing in advance.

The CFPB could "require that before a medical debt or any other debt is sent to collections that the consumer or patient gets a proper notice of the debt owed, either in writing or by phone," Banks said.

One of the more notable changes that the CFPB has already made in the debt collection process is requiring the credit reporting agencies to list by name the furnishers and industries that are getting the most consumer complaints. Sources in the credit reporting and collection industry said the CFPB has already sought out this information on a company-by-company basis in recent years. However, now the CFPB has made it more widespread by requiring it in a formal announcement.

"They have been providing that information to the CFPB but now they want a little more extensive reporting and more detail. And now it's not voluntary," said Gavinski, who's also a board member of ACA International which represents the credit and collection industry. "What the CFPB is really doing is investigating and digging deeper into where the issues are with inaccuracies in credit reporting. It could be stressful to furnishers, especially if they are reporting inaccurate information, but it's really all a part of the CFPB's investigation into where the problems lie and how it will deal with that."

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