How the Affordable Care Act Can Affect Your Credit

The Affordable Care Act (ACA), also known as “Obamacare,” aims to provide more Americans with health insurance, in part by sharing the cost for those who could not otherwise afford coverage. The law establishes new patient rights, responsibilities, benefits and protections, and a marketplace where we can compare and choose health insurance. Premiums are subsidized on a sliding scale, based on household size and income. The federal marketplace and a wealth of information about the ACA can be found at healthcare.gov.

Nearly half of Americans receive their health insurance through their employer or their spouse’s employer. The ACA does not change that. ACA also does not change eligibility requirements for Medicaid. Those parameters are set by the states.

How the ACA relates to your credit

Obamacare is not directly related to consumer credit. But it is expected that, by making coverage mandatory and affordable, the ACA will enable many consumers to avert financial devastation and credit destruction due to crippling medical bills.

Historically, medical bills in the United States have been a leading cause of personal bankruptcy. Hospital and physician’s bills that go unpaid lead to collections accounts and poor marks on the consumer’s credit file. The newest FICO scoring model places less weight on unpaid medical bills compared with non-medical collection accounts, but the impact is only diminished, not eliminated.

Unpaid health insurance premiums are not turned over to collections agencies. But failure to pay may result in lost coverage. That means medical care obtained after the drop date is entirely the patient’s financial responsibility. In turn, unpaid bills for care received after loss of coverage can then lead to collections. People who buy insurance through the exchange and receive advanced tax credits toward the premiums have a 90-day grace period to bring a late account up-to-date (but some claims might not be paid until the account is current).

Medical care costs are notorious for usurping finite budgetary funds, forcing consumers with limited financial resources to choose from several critical expenses. For example, fill a prescription or pay a utility bill.

The Affordable Care Act mitigates the risk of running up crushing medical debt or facing a dearth of resources when in medical need.

What the ACA doesn’t do

Credit check to apply. Applications for health insurance are not subject to a hard credit inquiry or any other kind of credit review. Personal information provided during the initial processing is used for identity verification. Credit standing has no bearing on a consumer’s ability to purchase insurance on the exchange.

Credit tier pricing. Premiums are not based on the consumer’s credit score. Credit standing has no effect on the price paid for any plan purchased through the exchange. Premium subsidies, when offered, are based on income alone.

What the ACA does do

Mandates coverage. By law, all of us must obtain coverage that qualifies at least at the most basic level. Annual maximum out-of-pocket expenses prevent endless escalation of medical expenses. Consumers with the greatest need, those with a preexisting medical condition who previously could not obtain insurance to cover the care they required at an affordable price, are now not only able to buy insurance, they are able to do so at the same rate as anyone else in a similar income bracket

Subsidizes premiums. The cost for coverage is subsidized by the government, putting health insurance within reach of people at low income levels.

Financial fallout

Even with all of its benefits, the ACA can lead to negative financial events that affect credit. The fact that the ACA is not a credit product does not preclude financial and credit consequences.

Penalties

With few exceptions, the government will penalize anyone who chooses not obtain coverage. The penalty for 2014 is one percent of household income or $95 per adult ($47.50 per child), whichever is higher. The penalty for 2015 is two percent of household income or $325 per adult ($162.50 per child), whichever is higher. The penalty will rise again in 2016 and thereafter, and be adjusted for inflation. Some households are exempt from the penalty, mostly due to income or tax status (not employment status). Some citizens are eligible for exemption based on tribal status, religious affiliation or incarceration.

To avoid paying a penalty,

1. buy coverage, or
2. obtain an exemption (leave ample time to gather the proper documentation), or
3. make a shared responsibility payment (one percent of income above the threshold or $95 per adult)

Underpaying premiums

Each person who buys coverage on the healthcare exchange (federal or state) reports his or her expected income for the coming year. Premiums and tax subsidies are based on income reported. The subsidy is subject to retroactive changes based on the actual income that appears on the taxpayer’s return the following year. A taxpayer who underestimates income may receive a subsidy that is too large and must be repaid. (Of course, if earnings are less than expected, the additional subsidy will show up as a refund from the IRS.) The IRS pursues tax debts aggressively, and a subsidy overage may be classified as a past due tax obligation. In that case, expect the IRS to file a tax lien. As a public record, a tax lien will very likely be picked up as a negative item by the credit reporting agencies.

To avoid a tax lien, promptly pay the shortfall or set up a payment plan. Stay in compliance with your tax obligations to avoid negative action by the IRS.

Coverage confusion

Many health plans keep costs low by narrowing coverage. Furthermore, plan names are similar and coverage changes every year. No tool exists that presents an apples-to-apples comparisons of the fine print. The onus is on the consumer to know what the plan covers and to shop carefully (even for emergency services). Some may inadvertently obtain out-of-network care or other services that result in a large bill.

To avoid unexpected medical costs, read your plan carefully, and take the initiative to understand what care is available in your network, as well as the process for obtaining approval for out-of-network services. Coordinate through your primary physician. Always present your health insurance member I.D. card when checking in to an appointment, and ask the receptionist to verify coverage before you are seen.