The Medical Debt Cancellation Act: Implications & strategies for plan sponsors & advisors 

The Medical Debt Cancellation Act aims to relieve financial pressure for Americans who have unpaid medical bills.  But although it offers a lifeline, questions remain about its long-term sustainability and potential taxpayer impact. 

As benefits advisors, it is crucial to understand the nuances of this legislation and explore how plan sponsors can proactively assist employees in managing health care costs and avoid the burden of medical debt.

The burden of medical debt

Medical debt is a pervasive issue that cuts across various demographics, affecting a significant minority of American households. Polling found that 41% of adults have debt in the form of outstanding bills from providers or credit cards, arising out of health care treatment. National surveys by the Census Bureau show 15% of American households have unpaid medical bills – this equates to 20 million people, or 1 in 12 adults.

Also: Medical credit cards come under fire at Senate medical debt hearing

Medical debt is most concentrated among individuals with chronic conditions, such as diabetes, heart disease and cancer. These conditions necessitate continuous, expensive treatments, often leading to substantial out-of-pocket expenses. Survey data show approximately 14 million people (6% of adults) owe over $1,000 in medical debt and about 3 million people (1% of adults) owe medical debt of more than $10,000.

Interestingly, a considerable number of those encumbered by medical debt actually had comprehensive insurance coverage. The crux of the issue lies in the gap between what is charged and what insurance covers. 

Most American households live paycheck to paycheck, and a significant portion of those households are also in debt (home, car, education, etc.) and are unprepared for any out-of-pocket costs. 

So, even though Americans only pay about 10% of the cost of medical services out of pocket (the rest is covered by insurance), medical debt is a significant challenge. 

For employees, medical debt can lead to significant financial stress, affecting their overall wellbeing and productivity at work. The pressure of mounting medical bills can lead to absenteeism, decreased job satisfaction and even mental health issues. Understanding this dynamic is essential for plan sponsors aiming to support their workforce effectively.

Evaluating debt cancellation solutions

The Medical Debt Cancellation Act provides much-needed temporary relief, but falls short of addressing the root causes of escalating health care costs. To create a sustainable health care system, it is imperative to adopt measures that ensure fair pricing practices, improve rate negotiations and enhance billing transparency.

One effective strategy is the implementation of reference-based pricing. This approach involves setting limits on the amount health plans will pay for specific procedures, often based on a reasonable percentage (120% – 150%) of Medicare rates, which reflect average market costs. Doing so helps prevent excessive charges and reduces out-of-pocket expenses for plan participants. This method not only curtails inflated medical bills but also encourages health care providers to offer services at more reasonable prices, ultimately moderating the cost of coverage.

Employing third-party administrators to meticulously review medical bills can also play a crucial role. These administrators ensure that charges are accurate and fair, catching errors and overcharges that might otherwise go unnoticed. 

While critics argue that debt cancellation programs might strain taxpayer resources and provide only short-term relief, addressing the foundational issues of high medical costs is essential for long-term health care reform.

Empowering employees and legal protection

Navigating the complex landscape of health care regulations can be daunting for employees. Legal expertise can safeguard participants from unjust charges and ensure compliance with health care laws. Additionally, educating employees about their health care options and rights empowers them to make informed decisions, thus avoiding unnecessary expenses.

Health savings accounts (HSAs) and flexible spending accounts (FSAs) are powerful, tax-preferred tools that can help employees prepare to manage out-of-pocket medical expenses. 

HSAs offer a practical way for employees to save for future medical expenses. Plan sponsors should promote the use of HSAs through strategies such as matching contributions, automatic enrollment and default contribution settings, as well as by providing comprehensive education on their benefits. Additionally, promoting overall wellness through programs that encourage healthy lifestyles can reduce the incidence of chronic diseases, ultimately lowering health care costs.

Related: Connecticut becomes 1st state to cancel medical debt for eligible residents

Aligning HSA-capable health plans with other benefits like 401(k) plans can further emphasize the importance of savings and financial preparation, improving decision making at enrollment through active, informed choice. 

Many Americans lack the financial preparedness to handle unexpected medical expenses, exacerbating the economic burden of health care. Financial wellness programs can play a pivotal role in addressing this issue. These programs can educate employees on budgeting, emergency savings and debt management, thereby strengthening their financial foundation and resilience.

Ensuring transparency in health care costs is another essential step. RBP and clear, upfront information about medical costs can help employees make important decisions about their health care options, reducing the likelihood of encountering unexpected, unaffordable expenses.

Sustainable health care strategies

Plan administrators bear a fiduciary responsibility to prudently manage plan assets and ensure cost-effective delivery of health care benefits. This responsibility includes reducing unnecessary expenses.

Creating an efficient health care system requires collaboration among health plans, their TPAs, insurers and cost management advocates. By coordinating administrative and advocacy services, leveraging legal expertise and promoting financial wellness, plan sponsors can develop comprehensive strategies that address both immediate and long-term health care challenges.

Reducing debt burdens and cost is only possible if plan sponsors actively engage in managing health care costs by advocating for fair pricing and transparency. This involves negotiating better rates with health care providers, implementing cost-saving measures like telemedicine, and promoting preventive care to reduce the incidence of costly medical conditions.

Path forward: alleviating medical debt and promoting financial resilience

Addressing medical debt effectively requires a multifaceted approach that combines immediate relief with long-term solutions. While the Medical Debt Cancellation Act may provide temporary respite, it is crucial to implement sustainable strategies that do not merely shift costs to future generations, or worse, create a moral hazard that causes providers to raise prices, which raises the cost of insurance and shifts the financial impact of unpaid debts to those who do pay their out-of-pocket medical expenses. Comprehensive coverage, enhanced transparency, innovative plan designs and robust financial preparedness are key to a successful approach.

Education is a powerful tool in mitigating medical debt. Plan sponsors should invest in educating employees about their health care options, the importance of financial preparedness and the resources available to them. This education can be delivered through workshops, seminars and personalized consultations, ensuring employees are well-equipped to navigate their health care choices.

The Medical Debt Cancellation Act represents a significant step towards alleviating the financial burden of medical debt for many Americans. However, its long-term effectiveness depends on addressing the underlying issues of high health care costs and inadequate financial preparedness. 

By implementing sustainable strategies, enhancing transparency and empowering employees through education and resources, plan sponsors and their benefits advisors can help workers manage medical expenses and avoid debt burdens. These initiatives not only alleviate immediate financial stress but also promote long-term financial resilience and a healthier future for all participants. 

Through proactive measures and a commitment to reducing health care expenses, we can create a more equitable and sustainable health care system that benefits both employees and employers.

Christine M. Cooper is  the CEO of aequum and is dedicated to assisting and defending plans and patients. Jack M. Towarnick provides plan drafting and compliance services to employers and plan sponsors.