How State Courts Can Help Address America’s Medical Debt Problem

Editor’s note: This article was updated on July 25, 2023, to clarify the benefits of specific reforms.

State and federal lawmakers have become increasingly concerned with reducing the burden of growing medical debt nationwide. The scope of the problem—more than 100 million people, or 41% of American adults, struggled to pay medical bills in 2022—and the financial consequences for families have prompted a series of reforms.

Congress, for example, enacted the No Surprises Act to protect consumers from unexpected medical bills and costs, and the Trump and Biden administrations both cited the need to reform health care billing and collection practices. And in several states, lawmakers have approved measures to regulate medical billing practices and how hospital charity care programs, which provide free or discounted care to financially eligible patients, should operate.

Still, despite these policy efforts and bipartisan prioritization of the issue, there has been limited recognition so far of the role that state courts play as a tool to collect medical debts, leaving critical gaps in reforms addressing how Americans navigate health care costs.

How medical debt ends up in state courts

Medical debts find their way to state court dockets as consumer debt collection lawsuits, the highest-volume civil court case type. Limited data on civil caseloads makes it difficult to ascertain the exact volume of medical debt cases that hit state courts, but recent research reveals the most common forms of medical debt collection lawsuits:

• Hospitals directly suing patients for past due medical bills. An investigation by Kaiser Health News (KHN) published last year found that of the 500 major hospitals analyzed nationwide, at least 300 regularly file medical debt collection lawsuits against their patients. A study in Michigan, meanwhile, found that 10% of all debt collection lawsuits brought in the state from 2010 to 2021 were filed directly by medical providers, amounting to almost 215,000 lawsuits over a decade.
• Third-party debt buyers suing patients for medical debt purchased from hospitals. The same KHN study found that at least 100 major hospitals regularly sell medical debts to third-party companies that purchase debts from hospitals for about 4 cents on the dollar These entities then sue consumers for the full amount owed, which obscures the medical origins of the lawsuit. A study in Utah that examined the origins of third-party and hospital lawsuits found that 30% of the state’s debt collection caseload resulted from medical debt, providing a more accurate assessment of the problem than would be possible if only the number of lawsuits brought by medical providers themselves was examined.
• Financial service companies suing for unpaid credit card debts that include medical payments. Almost half of patients finance their medical bills using a traditional credit card, medical credit card, or private payment plan option offered by hospitals. These financial service providers can sue for and sell these debts independently from the hospital, which, along with debt buyer medical claims, further obscures the number of medical debt cases in state courts. This suggests that medical debts could make up more than 30% of all debt collection lawsuits in some states.

Challenges with medical debt lawsuits

Once medical debt cases hit state courts, they are often treated no differently from any consumer debt collection lawsuit, despite their particular circumstances and the increased protections that are intended to apply to them. These types of civil cases tend to pose several challenges, such as low defendant understanding of and participation in the lawsuits brought against them and the reality that few defendants have legal representation to help inform them of their rights. These factors contribute to about 70% of such cases ending in default judgments, or automatic wins for the hospital or collector suing. Judgments can then be used to garnish patients’ wages, seize money in their bank accounts, or place a lien on their homes. Both hospitals and debt buyers commonly leverage these court-authorized tools to satisfy medical debts.

Additionally, most court systems do not distinguish medical debt lawsuits from other civil cases. Nor do they regularly require the debt collectors to provide documentation, such as the original medical bills and identity of the hospital, to substantiate their claims. Documentation can be particularly important in medical debt lawsuits because patients may not recognize the debt if a third party is suing them and because medical bills frequently contain errors and incorrect charges.

Further, state and federal medical debt reforms often overlook the prevalence of medical debt lawsuits and therefore don’t extend revised policies or guidance to address the role of the courts. Since 2020, 13 states have enacted legislation related to medical debt protection, but lawmakers in only five—Arizona, Colorado, New Mexico, Nevada, and New York—included meaningful litigation provisions.

Maintaining the status quo means that many patients cannot effectively use state courts to dispute, settle, or resolve their medical debt issues, which leaves them vulnerable to further financial insecurity because of unpaid medical bills. Debts that are the subject of garnishment can linger for years, a scenario that not only affects patients but also results in delays and uncertainty for providers seeking to recoup costs.

Decision-makers can recognize the role of courts in medical debt collection

As medical debt issues continue to garner national attention and action, all branches of government at different levels can act to account for the role of state courts in implementing safeguards:

• State and federal agencies. Officials charged with enforcing reforms such as the No Surprises Act and expanded hospital charity care programs should provide guidance as to how these policies should be integrated with state court processes. This could look similar to how the federal government provided direction to state courts on how to handle evictions during the COVID-19 pandemic.
• State legislatures. A few state-level medical billing reforms have included judiciary provisions that other states could follow. For example, in 2021, Maryland’s and New Mexico’s legislatures restricted the sale of medical debt to third-party debt buyers so that it can be more easily identified in court. They also limited the ability of medical debt lawsuits to result in garnishment or asset seizure, which should disincentivize use of the courts to resolve these debts. Most comprehensively, Colorado lawmakers in 2023 acted to cap post-judgment interest on medical debt, require companies suing individuals to provide documentation of medical debt when filing a claim, and instruct courts to make defendants aware that they can claim eligibility for financial assistance as a legal defense to a medical debt lawsuit.
• State courts. Civil courts and adjacent actors nationwide have taken steps to improve how courts handle debt collection lawsuits through efforts to reduce the number of invalid debts coming to court and increase defendant participation in the legal process. Such efforts can be extended to specifically include medical debt by requiring that companies suing in court identify whether their claim has medical origins and developing court forms and processes specifically tailored to medical debt. These changes would empower defendants without attorneys to understand and engage with lawsuits against them.

Filling these policy gaps can bolster the effects of reforms to health care billing and costs that states are already championing. Civil courts need clear, consistent guidance on how to handle medical debt cases. When enacting comprehensive policy reforms, policymakers should include judiciaries in the process to ensure that they are delivering results that could help millions of Americans each year.

Natasha Khwaja works on The Pew Charitable Trusts’ civil legal system modernization project.