The Other Credit Crunch

Julie Basem was 20, living in New York, and pursuing her dream of becoming a Broadway dancer when a knee injury knocked her off stage. She had insurance, but it barely covered her treatment, and her savings were meager. The bills piled up—some $40,000 worth—and ultimately, bankruptcy became her only option. "Emotionally, it was very hard, because I didn't think that at that age anything was ever going to happen," Basem says. "I didn't really know how to deal with it."

If her story sounds familiar, that's because you've probably seen it on TV: she's part of a series of AARP ads that use real and wrenching bankruptcy stories to shed light on America's medical-debt crisis. The AARP campaign launched in July, but four months later it's resonating more than ever, as the economic meltdown deepens. The mortgage crisis may have dominated the front pages lately, but people strapped for cash are likely to stop paying their medical bills long before their homes go into foreclosure. A rise in this often-unavoidable debt has threatened the health of patients and hospitals alike, and both constituencies are taking drastic new measures to survive.

For many people, the struggle with rising health-care costs has already reached a critical point. More than two in five American adults under 65 had trouble paying their medical bills last year, according to a recent study by the Commonwealth Fund, a New York-based health policy research group. Of those people, 39 percent had used up all their savings, 30 percent had racked up credit-card debt and 29 percent said medical bills left them struggling to pay for basic necessities like food and heat.

Doctors and hospitals are also struggling to survive the health-care credit crunch: they endure some $60 billion in unpaid medical bills each year, according to a report last year from the consulting firm McKinsey & Co. With out-of-pocket health costs rising (the $250 billion price tag in 2005 is expected to exceed $420 billion by 2015), the percentage of unpaid bills will likely increase as we head into a new year and a new economic reality. A report released by the American Hospital Association (AHA) last week shows that over the last three months, elective medical procedures have dropped 6 percent below projected levels, while admissions are down 9 percent. Unpaid care is up by 8 percent.

With their own solvency at stake, hospitals are doing everything in their power to collect on unpaid bills. That, according to the Boston-based advocacy group the National Consumer Law Center, can mean suing patients and their spouses, failing to explain charity care options, offering credit or loans and using collection agencies and the threat of bad credit to coerce patients into settling up. A number of big banks now offer credit cards exclusively for medical procedures—and a growing number of hospitals have started checking patients' credit scores while they sit in the waiting room.

All of those tactics are perfectly legal, as long as hospitals comply with a federal law that requires them to treat anyone who comes in with an emergency—regardless of their ability to pay, says Carol Pryor, a senior policy analyst with the Access Project, a nonprofit health-advocacy organization. But how the law defines an emergency—something that could be potentially life-threatening—can be different from the way many Americans would define it when it comes to their own health. Like, for example, Dearfield, N.H., resident Maria McNamara, who suffers from a degenerative eye condition called retinal dispigmentosa and is uninsured. Her disease caused blindness in one of her eyes, but until recently she could still see and get around with a set of eyeglasses.

A year ago, however, she started losing sight in her other eye, too. Doctors discovered a retinal tear, and she underwent two surgeries at a local hospital to repair it. The hospital waived the $17,000 fee because McNamara and her husband are both retired.

But the surgeries didn't work, and McNamara was referred to a specialist in Boston, where she had two more procedures, totaling some $30,000. When McNamara showed up at Tufts Medical Center for her third surgery appointment, she was told she would only be treated if she paid up front—because she still owed for the prior treatments. Her family held a fundraiser to pay for the procedure, but during the surgery, doctors discovered another tear. Now she needs another procedure. "It's sad, because you work your whole life just trying to stay ahead of the game," says the 55-year-old. "Without my sight, I can't work. And paying off a $30,000 medical bill is just not possible."

Massachusetts does have a $448 million state financial-aid program, officially called the Healthcare Safety Net, that patients can apply for, to help reimburse hospitals for some of the cost for uncompensated care. But because McNamara is a New Hampshire resident, she doesn't qualify. And though Tufts said in an e-mail to NEWSWEEK that they've provided nearly $159 million in medical charity care over the last five years, McNamara says she hasn't been offered a dime. A Tufts spokeswoman told NEWSWEEK that patient privacy laws barred them from confirming McNamara as a patient or providing details about her care. "The issue of the uninsured is a matter of great concern for our country, and we and other hospitals are committed to finding long-term solutions," the hospital said by e-mail (See Editor's Note).

McNamara, meanwhile, has started getting collection notices in the mail, and she worries she might lose her home. The Fair Credit Reporting Act allows medical providers to report medical debts to credit reporting agencies but forbids them from indicating what treatments were involved. But rather than report delinquent accounts to credit agencies outright, hospitals often send them—or, ever more frequently, sell them—to outside collection agencies, which are more than happy to do the dirty work for them. That means threatening phone calls, lawsuits—and, in some states, agencies even going after spouses or grown children. (According to a 2003 Federal Reserve study, 52 percent of collection records that appear on credit reports are related to medical debts.)

The American Hospital Association provides guidelines on debt-collection practices—recommending that each patient receive financial counseling with appropriately trained staff, and that costs be reasonable. A number of states, meanwhile, have taken action to make sure such guidelines are mandatory. In 2007, the Minnesota attorney general signed an agreement with 50 hospitals on debt-collection practices that included a promise to offer discounts to uninsured patients with limited incomes. In New York, a 2006 law allows patients to pay in installments, and prohibits creditors from foreclosing on a patient's home. California hospitals must provide uninsured and underinsured families a 150-day period during which they can negotiate their bills before they can be sent to collection.

Those laws are good, says Chi Chi Wu, an attorney with the National Consumer Law Center, but they're by no means standard. In fact, one NCLC study showed that more than 70 percent of patients with medical debts are never offered financial assistance from their providers. As James Bentley, a senior vice president for the American Hospital Association, points out, growing medical debt and the economy have put hospitals in a situation where they not only have a responsibility for a patient, but to "maintain themselves as viable and operable within the community." "What we worry about," says Bentley, "is that hospitals will find themselves in a position where it's hard to maintain the policy that they've had."