The people who brought you the housing market collapse may be about to do the same thing for health care financing.
Some of the biggest names in the consumer credit business, including GE Money, Citigroup, and Chase, are pushing risky credit for financing medical procedures, according to the latest issue of Consumer Reports, which describes the new lending practices as akin to subprime mortgages.
Plastic is playing an increasing role in covering medical costs: at about $45 billion today, it could more than triple to $150 billion in 2015, the magazine says.
Overdose of debt
CR's July report, "Overdose of Debt," explains how credit cards and finance lines that are "interest free" can easily reach exorbitant rates -- up to 27.99 percent retroactively -- and they're being pitched to consumers with high pressure sales pitches, often catching them off guard in their doctors' offices or at the hospital.
The rise in doctors promoting cards and loans with unconscionable finance terms, says Consumer Reports, is cause for concern, blurring traditional lines of responsibility.
With consumers already sagging under record debt loads and soaring out-of-pocket medical costs, consumers likely will come under more pressure to pay for these expenses with credit cards or loans. What they may not understand, according to CR, is that many of these financing schemes carry dangerous pitfalls.
Lenders tout their offers as a way for patients to cover medical needs or elective procedures and they push risky credit for everything from cancer care to root canals to botox treatment. Meanwhile, the cards and financing are promoted to doctors, dentists, and veterinarians as a way for them to make more money and get paid promptly.
In addition, CR reports, hospitals are checking credit scores of patients and some are even offering their own cobranded credit cards.
But for consumers, these financing plans can turn out to be the medical equivalent of subprime mortgages, according to medical and credit experts CR spoke to.
They may appear attractive: Medical credit lines of up to $40,000 are being offered with no interest if the balance is paid off within the promotion time. If consumers fail to pay off some loans within the promotion time or miss a payment, they can be hit with retroactive interest rates of up to 27.99 percent.
Doctors or partners?
"Consumers have to be wary," said CR senior editor Andrea Rock. "Often they're in a vulnerable position when they receive these sales pitches in a doctor's office or a hospital - and they don't understand what they're signing up for. Furthermore, some consumers have said that they felt pressured by their medical providers while sedated or recovering from treatment."
By persuading patients to use these financing plans, doctors, dentists and hospitals benefit because they get paid right away. In fact, doctors and dentists have financial incentives under these arrangements to encourage patients to sign up for more expensive treatments and to steer them to extending financing plans that take a smaller cut of the practitioner's fee.
For example, if a patient were to finance $1,000 worth of dental work through GE Money CareCredit, the dentist would be paid by GE Money, minus 13.5 percent of the total as a "processing fee." Usually such fees for merchants are 2 percent or less.
But if the patient opted for a two-to-five-year plan, CareCredit would take only 5 percent of the dentist's fee, and the patient would pay an initial annual interest rate of 11.9 percent that could rise to 23.9 percent if he or she failed to pay the balance on time.
When hospitals persuade patients to pay for care with a credit card or loan, patients lose their power to bargain for discounts or even obtain charity care. "Ask questions first," Rock said. "It's always better to negotiate directly with the hospital."
In fact, as noted in CR's consumer tips, once a patient has paid an out-of-pocket medical bill with a loan or credit card, they lose their ability to negotiate the repayment amount and terms.
What to do
Consumers should be aware that hospitals are required by federal law to provide care in a medical emergency. But patients should not let themselves be pressured into using a credit card or loan to pay for out-of-pocket medical costs. Once they do, they lose their ability to negotiate the repayment amount and terms.
CR offers the following tips:
Consumers should find out whether they qualify for free or discounted care from their hospital.
When negotiating discounts or any payment terms, consumers should ask to speak to the manager of patient accounts, and get any agreements in writing.
By paying at the time of service, providers may be willing to cut consumers' bills by more than 50 percent to avoid the expense of billing.
Although hospitals generally structure payment plans for 24 months or less, consumers should try to negotiate a longer term if necessary to ensure that they can afford the monthly payment.
Hospital billing errors are common. Consumers should always ask for an itemized bill and check it for accuracy.
If consumers must rely on credit, they should shop for the best general-purpose credit card, ideally one with a low rate that can be locked in for the life of the balance.