Medical debt relief programs might not be the panacea that proponents hope, despite the good intentions behind such programs. That’s the conclusion reached by a team of researchers from the National Bureau of Economic Research in Cambridge, Massachusetts after completing a study in partnership with RIP Medical Debt, a New York City charity that buys and cancels medical debt.
Medical debt relief has become a growing public policy priority for philanthropists and lawmakers worried about the toll on Americans’ financial, mental, and physical health. An estimated 40% of Americans have medical debt with nearly half of those owing at least $2,500.
The Effects of Medical Debt Relief: Evidence from Two Randomized Experiments is the title of their new 126-page report. The study was conducted by analyzing the results of canceling medical debt valued at $169 million for 83,401 people between August 2018 and October 2020.
“There are reasons to be optimistic about the benefits of medical debt relief,” wrote the authors. “Debt relief in non-medical contexts — including student loans, credit cards, mortgages, and bankruptcy — has been shown to reduce financial distress, increase earnings, and improve mental health. Yet, there are also reasons for caution.”
Approximately 20% of the participants had unpaid hospital bills that had not yet been turned over to third-party debt collectors at the time of the study. The remaining 80% of accounts had already been farmed out to independent collectors. Experts queried at the time researchers began their study almost universally predicted both groups would benefit from having this debt wiped clean.
Recipients of debt relief saw some improvements to their financial well-being and ability to access healthcare but not nearly to the degree expected, according to the authors. Those expectations were based in part on the 63% of households in a 2022 Kaiser Family Foundation study that said medical debt had forced them to reduce expenditures on food and clothing and 48% that said medical debt had caused them to deplete all or most of their savings.
However, some of those who were helped reverted to not paying subsequent medical bills in what might have reflected their expectations of debt relief in the future, according to the authors. The effect of removing medical debt from credit reports that lenders, landlords, and employers sometimes use when making financial or hiring decisions also was less than expected, an outcome the authors attributed to the fact that many creditors have significantly curtailed their reporting of this debt in recent years due to concerns about data integrity and legal liability.
At the time researchers were concluding their study, 20 state or local governments had passed or were considering programs to fund $13 billion in medical debt relief over and above what charities had provided. Proponents of doing so have cited the ability to purchase this debt for pennies on the dollar due to historically low recovery rates associated with medical debt, with the $13 billion costing taxpayers around $137 million or just over 1% of the total.
“Proponents of medical debt relief often tout the low cost as a feature,” wrote the authors. Yet, the low recovery rates suggest that “the financial impacts on households may be a small fraction of the face value of the debt relieved.”