Currently, people incur both unsecured and secured personal debt for the patient portion of healthcare expenses. A variety of existing products are used to incur secured debt, including various kinds of credit cards such as general consumer credit cards, credit cards co-branded with hospitals, and healthcare credit cards.  A radically different form of unsecured credit is an agreement to pay the principle amount of an undisputed bill (a “receivable” in the provider’s parlance) over time.  The CarePayment system is an example of a formalized time payment plan.

People also use debt secured by pledges of hard assets such as residential real estate using a broad range of such widely available products as first or second lien mortgages and home equity lines of credit (HELOCs).  The forms of debt drive the credit terms provided by each debt format; thus, credit terms will be more advantageous to the extent that the security being pledged is regarded as strong. Thus, secured debt should provide less expensive money than unsecured debt, first lien mortgage debt should be less expensive than second lien debt, and closed end second lien debt should be less expensive than open ended second lien debt, and so on. In addition, the tax status of debt will affect the real (after tax) cost of debt; thus, any debt secured by a residential mortgage will have a lower real cost to the borrower than debt carrying the same nominal interest rate secured by only the personal willingness to pay because the interest on mortgage debt is tax-deductible for individuals while interest on non-mortgage debt is not.

Lower income people are less likely than higher income people to have residential real estate to pledge as security to repay medical debt are so are more likely to resort to unsecured forms of debt. Not only are these likely to carry higher real rates of interest than secured debt, but they will be variable rather than fixed rates of interest, introducing another element of uncertainty into the explicit or implicit budgeting behavior of the borrower.  The most urgent challenge is to find ways to improve unsecured medical debt credit terms through policy initiatives and/or product innovations.

In recent years, there has been discussion of reducing or eliminating the personal income tax exemption for mortgage interest, e.g. by eliminating the exemption for second home mortgage interest, capping the amount of interest which can be deducted from income, etc. The argument made in behalf of such proposals is that the nation’s consumption preferences have been skewed toward housing over other equally important goods such as food, health care, education, etc.  Less attention is often given to the bias of the current mortgage interest exemption toward those with high enough incomes to afford at least one home.  Exempting interest on medical debt would help redress both imbalances.

The Earned Income Tax Credit (EITC) is a relatively efficient way to provide income assistance to the working poor. Currently, neither patient portion health care expenditures which have not been made from HSAs or FSAs, nor interest charges on medical debt may be deducted from personal income in the calculation of taxes owed by the consumer to the IRS or the EITC owed to the consumer by the IRS.  Permitting the deduction of patient portion payments for non-elective medical procedures and specified wellness practices from personal income in the calculation of the EITC would assist the working poor to reduce the amount or shorten the maturity of debt they might otherwise incur as they grapple with such costs.

The CarePayment Card program developed by Aequitas Capital Management, a private equity firm in Portland, Ore. provides credit terms of 0%, fixed rate of interest with a maximum maturity of 25 months for approximately 50,000 patients treated at two dozen hospitals.  As a form of unsecured debt to the consumer, the fixed, 0% interest rate charged for this medical credit is extraordinarily attractive.  As the receivable is being purchased at an average 20% discount from the provider, CarePayment should be making an average of nearly 10%/year on each non-defaulted loan.

Can this form of unsecured credit be extended for longer maturities in order to reduce the cash flow burden of rapid principal amortization, possibly at reasonable interest rates?

Can cheaper forms of equity and/or debt, e.g. from philanthropic sources be substituted for market rate private equity and commercial (bank or capital markets) debt in order to reduce the cost structure of this debt formats?

If so, can these cost reductions be passed along in the form of better terms (e.g. longer final maturity, higher credit limits, etc.)?  Steven Wright reports that Aequitas Capital is already exploring such possibilities with hospital-based foundations and is interesting in talking with other possible sources of compassionate capital, e.g. non-hospital affiliated foundations, wealthy families, etc

Smoothing the Vicissitudes of Individual Financial Context in the Face of the Cost of Healthcare Events