Here's Why Medical Debt Is Crippling Millions of Americans, and What You Can Do About It

Credit card and financial debt may get all the hype, but medical debt collected by third-party collections agencies is roughly three times as large as both combined.
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Credit card and financial debt may get all the hype, but medical debt collected by third-party collections agencies is roughly three times as large as both combined, according to a new study from nationwide personal finance site NerdWallet.

Medical debt is so out of control that debt collectors will contact one in five -- or 51 million -- American adults in 2014 alone. In addition, more than one-third of dollars paid to third-party collectors is for medical debt.

Paying for health care is affecting American's finances in a big way

Last year NerdWallet found medical debt to be the largest driver of personal bankruptcy. The study estimated that, in 2013, 1.7 million Americans lived in households that would declare bankruptcy due to an inability to pay medical bills.

The most recent report by NerdWallet found that American households lost $2,300 in median income from 2010 to 2013. During that time period, however, health care expenses increased by a whopping $1,814.

Despite recent policy advancements, including the Affordable Care Act's health insurance Marketplace launch and alterations to FICO score calculations, Americans are still struggling to pay rising medical debts. And the personal health care debt crisis shows no signs of slowing down. The report found that, by 2023, out-of-pocket spending is expected to accelerate to a 5.5 percent annual growth rate -- that's double the rate of real GDP growth.

Overcharging often results from preventable billing errors

Much of this medical debt lies with overcharging, the report found. As part of NerdWallet's 2014 study, a nationwide Harris Poll was conducted. About 63 percent of survey respondents reported having received medical bills that cost more than expected. In addition, about 57 percent of consumers reported being confused by their medical bills.

This confusion may not result from patient error, but from preventable erroneous charges on the part of hospitals. In order to estimate how many hospital bills contain errors, NerdWallet also analyzed all 2013 Medicare Compliance Reviews of U.S. hospitals. We found that none of the hospitals was fully compliant with Medicare's medical billing requirements. In plain English, 49 percent of audited claims were found to contain billing errors.

"The medical system is a minefield for the average consumer," says Christina LaMontagne, general manager of health at NerdWallet and author of the study. "While expenses mount for households, bills are riddled by a shameful number of hard-to-detect medical billing errors." Medicare billing issues, she adds, may be symptomatic of more widespread medical billing errors throughout the overall healthcare system.

In addition to errors, patients are often charged differently for care and procedures based on hospital and even region. The study found hospital charges to be highest in California and New Jersey, while the lowest prices are in Midwestern and Southern states.

Additionally, hospital charges for the same inpatient treatment can be 50 times more expensive at one hospital compared to another. This highlights the importance of shopping around to find the highest quality, lowest cost care for your hospital treatment.

How can consumers avoid medical debt?

Millions of Americans are unable to afford medical care. However, about 73 percent of those surveyed indicated that they could make better health decisions if they were armed with pricing information before receiving care.

Patient advocate Martine Brousse stresses that consumers need to consult their health insurer to fully explain benefits and coverage and steer them toward the right providers -- before receiving any care.

"The insurance has to be on your side. Oftentimes it becomes the enemy, but that's because it has to deal with things after the fact," Brousse says. "If you put the insurance company on your side you will lower your costs, you will avoid being surprised down the line and will also probably get better and prompter care than if you were just on your own."

Brousse adds that if consumers need to see a specialist, insurance companies may be able to contract outside the normal net of providers or negotiate with an out-of-network facility to get the care that is needed.

You should also comparison shop before going in for care using price transparency tools. You can even use these tools after receiving care if you're trying to negotiate your bill down with your provider -- you may be able to prove to your provider that other facilities charge less, and therefore bargain for a lower price. Once you get your bill, make sure to check for errors, such as duplicate charges or incorrect patient information, among others. If you find errors or think that something should have been covered by your insurance but was not, you can appeal your claim to negotiate your bill down. Detecting errors and negotiating can be tricky, however, so you can always hire a medical billing advocate, who will take care of these details for you.

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