Medical debt consolidation: What it is and how to do it

Medical debt is a persistent and costly problem in the United States. While over 90 percent of the population has some form of health insurance, medical debt remains an issue for many American households.

If you have a lot of medical bills, you may have considered a debt consolidation plan or debt relief to remove some of the stress while lowering the amount you owe.

Medical debt consolidation is one way to pay what you owe. Before taking this route, it’s a good idea to understand how medical debt consolidation differs from combining other types of debt, along with some of the pros and cons of this approach.

The details on medical debt

Having health insurance through an employer doesn’t protect against medical debt. The Commonwealth Fund said that 30 percent of adults with workplace health coverage pay off debt from medical or dental care.

Even among those on other plans, 33 percent of adults with marketplace or individual market plans are paying off medical debt. Even 21 percent of adults with Medicaid and 33 percent of those on Medicare are facing medical debt.

How medical debt impacts your credit

If you’re struggling with medical debt, you probably wonder if medical debt consolidation is a solution. To answer this, it’s important to understand that medical debt is different from other forms of debt.

If you miss a credit card or loan payment, the creditor or lender can report that late payment to the credit bureaus once it’s 30 days past due. But medical debt doesn’t immediately impact your credit score unless all of the following apply:

• The bill is over $500.
• It’s unpaid for one year after the original delinquency date (i.e., the date when the amount initially is considered “past due”).
• The bill is sent to a collections agency.

Additionally, in 2023, the credit reporting bureaus said that medical bills of less than $500 won’t show up on credit reports after going to collections. Furthermore, medical debt over $500 doesn’t appear until one year after it ends up in collections. Finally, many health care providers won’t report late payments or non-payments until they’re in collections.

These changes give you time to handle medical debt before it becomes a significant problem and ruins your credit. You can talk to your provider and give your insurance company the time needed to pay what’s covered.

You also have rights under the No Surprises Act. Specifically, you’re protected from unexpected out-of-network bills for emergency room visits and supporting treatment. Under this legislation, providers must give you a “good faith” estimate of how much a procedure will cost. You can dispute that bill if it’s more than $400 over the estimate.

In other words, you have more breathing room with medical debt than you do with something like a credit card or standard personal loan. But this doesn’t mean you should ignore it.

Ways to pay off medical debt

There are a few methods available to help you handle debt that is specific to medical procedures.

Medical credit cards

Medical credit cards are used to pay for health care services. With this method, you apply through your health care provider, and the credit card company runs a credit check. If you’re approved, the credit card company pays your provider, and you pay the credit card company.

Many medical credit card companies offer promotional incentives such as delayed interest for six, 12 or 18 months. It can also be easier to qualify for a medical credit card. However, if you don’t pay off the balance within that period, you could owe interest retroactively from the time of your procedure.

Provider payment plans

If your medical bills are large, your health care provider might be willing to offer methods to pay them down. Contact the provider to find out if you can pay your bill in installments.

Installment plans can make budgeting more manageable. You’ll also be more likely to keep your debt out of collections by working with your provider’s billing department.

Some payback plans offer interest-free repayment over a specific period. You can also negotiate a reduced bill with your provider based on your income and ability to pay.

If you are overwhelmed with the amount you owe, consider working with a medical billing advocate. These individuals are trained to find errors and duplicate costs in your medical bills. You can find reputable advocates through the National Association of Healthcare Advocacy or the Alliance of Claims Assistance Professionals.

Medical debt forgiveness

Depending on where you live, your state or local government could help forgive some medical debt.

Some Michigan, Ohio and Pennsylvania counties partner with the nonprofit Undue Medical Debt (formerly RIP Medical Debt) to buy and forgive billions in medical debt, especially among lower-income Americans. Connecticut is purchasing and forgiving millions of dollars of such debt. New York City and New Orleans also have plans in place.

Tools to consolidate medical debt

In addition to the above, you can access traditional methods to consolidate medical debt.

Personal loan

A personal loan gives you a lump sum payment, which you use to pay off your medical debt.

The benefit is that you’re left with a single monthly payment rather than paying multiple providers. The downside is that interest charges and fees may add up to significantly more than setting up installment plans with your health care providers.

Some debt consolidation loans are available even if you have bad credit.

Home equity loan/home equity line of credit

Taking out a home equity loan or applying for a home equity line of credit (HELOC) taps into your home’s equity. You can use what you receive to pay down your medical debts.

While both types of financing use your home as collateral, here are the differences:

• A HELOC is similar to a line of credit; you borrow what you need and pay interest only on what you borrow.
• A home equity loan provides a lump sum, which you pay back in installments. Such loans can have low interest rates.

The disadvantage to these methods is that they can put your home at risk. Failure to repay could lead to foreclosure and loss of your shelter.

Non-medical credit cards

A 0 percent balance transfer card is a common way to consolidate debt, including medical debt.

With this method, the credit card company offers a no-interest introductory period, ranging from six to 18 months, depending on the terms and your creditworthiness. Like the loans mentioned above, this approach consolidates many medical bills into one monthly payment.

However, if you don’t pay off that balance by the end of the introductory period, you could be in for some hefty interest rates. You also may have to pay pay a 3% to 5% transfer fee when moving the balance to the card.

How to decide if medical debt consolidation is right for you

The main issue with more traditional approaches is that they could cost you the consumer protection you have with medical debt. Using a loan or credit card to consolidate what you owe means it’s classified as regular debt instead of medical debt.

If you want to consolidate medical debt, think about the following:

• The interest rates. While combining multiple medical bills into a single one might seem enticing, the interest rates involved can mean you’re paying your debt for a longer period. Negotiating with providers to pay what you owe in installments might mean no or low interest rates.
• Payment deadlines. You’re protected against dings on your credit score if you miss a payment on your medical bill or wait for your insurance to pay. This isn’t the case when you consolidate medical debt. You might want to rethink consolidation if you’re not certain you can make timely payments.
• Budgeting. If you can cut back on spending in other areas or get a side hustle to earn more, this could help you pay down your medical debt without incurring interest rates or fees.

The bottom line

Medical debt can be stressful. The silver lining is that there are consumer protections inherent with medical debt that aren’t available with credit card debt or loans. Because of this, handling overdue medical bills requires a different approach.

Before deciding on a medical debt consolidation plan, analyze your options and their pros and cons. Consider working with your health care provider to determine logical payment plans. Taking a careful approach can help relieve stress while paying down your balance.