A big change is coming for debt collections. FICO has announced that its newest scoring model, FICO 9, will disregard paid collection agency accounts and will place a lower weight on medical debt. Under the new score, those consumers with only medical debt on their records are expected to see an average score increase of about 25 points.
Where did this new model come from?
The new model comes just months after a U.S. Consumer Financial Protection Bureau (CFPB) study found that people with medical debt were over penalized on their credit reports. According to Fox Business, nearly 77 million people in the U.S. are in collections, and health care bills represent about 38% of all debt collected. Chi Chi Wu, staff attorney at the National Consumer Law Center, stated that “about half of the negatives on consumers’ credit reports are from medical debt,” and argued that the bills frequently end up in collections because of insurance billing problems and not because the consumer cannot or does not pay.
According to these numbers, the new scoring model will result in improved scores for millions of Americans. Such a dramatic change in consumer credit can only be a means of encouraging spending and stimulating the economy. The CFPB and lenders have been working to boost lending without creating more credit risk since the recession, and improved scores will help those borrowers previously excluded from the market or charged high interest rates because of low scores.
FICO 9 may help the lending markets and encourage spending, but how will it affect the health care industry? There may be good and bad news.
Bad news first.
The bad news is that health care providers may be looking at an even higher amount of self-pay accounts that go uncollectable. Many consumers are motivated to pay their bills in order to improve their credit scores. More lenient consequences (e.g. less weight placed on medical debt) for failing to pay outstanding bills may mean less incentive to pay those outstanding balances. As a result, it is possible the industry will see a rise in lawsuits against patients to recover outstanding balances. With the healthcare reform making it more difficult to credit-bureau report, and the bureaus failing to provide enough incentive to patients to pay their balances, providers may have to resort to the only resource they have left - legal action.
It’s not all bad.
There is also good news. FICO 9 promises to remove all paid accounts from consumer reports. Consumers who do pay off their collection accounts will be rewarded by having those accounts removed from their files entirely. This is particularly helpful for those patients who ended up in collections due to third-party billing mistakes, not because they could not pay their balance. According to the Wall Street Journal, of the 106.5 million consumers with a collection on their credit report, 9.4 million have no balance. Those consumers, and any others who pay off their existing negatives, will no longer be penalized for having been placed in collections.
When does FICO 9 go into effect?
So when should health care professionals expect to feel the impact of FICO 9? It’s unclear. The score will be available to lenders starting this fall and FICO says previous versions of its scoring model are already used in 90 percent of lending decisions. However, some lending industry leaders are saying that the new model may not be adopted right away. It can be very costly and time consuming to rebuild complex automated underwriting systems, and major lending institutions can take years to evaluate whether to make a change.
In the face of so many changes it is increasingly important for health care providers to have great relationships with their third-party collection vendors, and to feel confident that their partners are evolving with the industry and changing their approach to ensure the greatest return for their clients. For more information on building relationships with vendors, visit last month’s guest blog by Attorney Elizabeth Richards here.
Written by Ali Bechtel, Public Relations Coordinator
This information is not to be construed as legal advice. Legal advice must be tailored to the specific circumstances of each case. Although we attempt to provide up-to-date information, laws and regulations often change. We make no claims, promises, or guarantees about the accuracy or completeness of this document. For legal advice, please consult an attorney.