Newsom signs California law banning medical debt from credit reports

By Molly Castle Work | KFF Health News

Californians with medical debt will no longer have to worry about unpaid medical bills showing up on their credit reports under legislation signed Tuesday by Gov. Gavin Newsom, adding the nation’s most populous state to a growing effort to protect consumers squeezed by unaffordable medical bills.

The bill, by Sen. Monique Limón (D-Santa Barbara) and backed by Democratic Attorney General Rob Bonta, will block health care providers, as well as any contracted collection agency, from sharing a patient’s medical debt with credit reporting agencies. At least eight states have banned medical bills from consumer credit reports in the past two years. In June, the Biden administration proposed similar federal protections, but it’s unclear when the rules will be enacted — or, if former President Donald Trump is elected again, if they will be at all.

“Nobody chooses to get sick, and then your credit gets ruined,” said Chi Chi Wu, a senior attorney with the National Consumer Law Center. “That’s why we encourage states to keep adopting laws. In case something goes wrong at the federal level, the states could protect their own consumers.”

When California’s new law goes into effect in January, it will extend these protections to credit reports used for employment and tenant screening, Wu said. This is in addition to the proposed federal ban on reporting to credit agencies that inform credit card companies and mortgage lenders.

California lawmakers noted that medical debt — unlike other kinds of debt — isn’t an accurate reflection of credit risk, and its inclusion can depress credit scores and make it hard for people to get a job, rent an apartment, or secure a car loan.

But California lawmakers have left a glaring loophole. Patients who pay hospital bills using medical credit cards or medical specialty loans — which can come with interest rates as high as 36% — won’t get that debt taken off their credit report, as residents of Colorado, Minnesota, and New York do. It’s a concession the financial industry won through late-in-the-game “hostile” amendments, which “influential entities opposed to the measure prevailed” in including, Limón said. In a 2022 KFF poll on medical debt, 15% of adults said they had used a medical credit card.

Kelly Parsons-O’Brien, legislative chair of the California Association of Collectors, which represents collection agencies, said the exemptions were essential because medical credit card holders can buy nonmedical items and medical loans can be refinanced with nonmedical debt, making it “impossible” for creditors to know what’s actually a medical charge.

“More consumers will get into situations where they cannot afford to pay, and lenders will be operating in the dark,” Parsons-O’Brien said.

The three largest U.S. credit agencies — Equifax, Experian, and TransUnion — said they would stop listing some medical debt, including paid-off debts and those less than $500, but millions of patients were left with bigger medical bills on their credit reports. The Consumer Financial Protection Bureau reported in April that 15 million Americans still had medical bills on their credit reports.

About 4 in 10 Californians report carrying some type of medical debt, which disproportionately affects low-income, Black, and Latino patients, according to the California Health Care Foundation.

Dozens of states have enacted legislation to protect consumers from surprise billing and medical debt, according to the National Conference of State Legislatures. Newsom, a Democrat, also signed legislation on Tuesday banning hospitals from using liens on all real property owned by Californians who typically earn less than 400% of the federal poverty level. It expands current state law that protects a patient’s home from debt collectors.

A KFF Health News analysis found that credit reporting is the most common collection tactic used by hospitals to get patients to pay their bills. A credit score ban might make it more difficult for hospitals to collect.

When Sacramento resident Sonia Hayden and her boyfriend applied for a home loan last year, she discovered her credit score had dropped about a hundred points. It had been downgraded because of an approximately $200 emergency room charge after a car accident years ago.

The 44-year-old said her insurance covered tens of thousands of dollars in medical bills but that the hospital miscoded the $200 charge and she never received a bill for it. That, she said, should also have been charged to insurance.

Hayden tried unsuccessfully for over a year to resolve the issue with her health insurer. It’s still on her credit report. She was eventually able to get a home loan, but her interest rates were higher because of her credit score.

“Medical bills, they’re not on purpose, you know?” said Hayden, who testified in support of the legislation. “It was already a super traumatic accident. I almost died. And then to have this super stressful medical bill — nobody’s asking for that. It shouldn’t affect your credit.”

KFF Health News is a national newsroom that produces in-depth journalism about health issues and is one of the core operating programs at KFF—an independent source of health policy research, polling, and journalism. Learn more about KFF.