Credit Scores and Reports

Credit crunch may be squeezing health care payment plans


Families who relied on credit cards and loans to help pay medical costs are finding they can no longer depend on easy credit to pay for rising health care costs and medical debt as the credit market tightens.

A financing source that many families used to help pay for health care costs and living expenses while battling illness is drying up, just like student and car loans. That means medical debt — already the reason for more than half of all personal bankruptcies — may force more families into financial distress in the coming months, health care and consumer advocates say. Or worse, even more people may skip or delay medical care because they can’t afford to pay for it.

“People are delaying seeing a doctor when they’re sick, they’re skipping recommended medical treatment or follow-up, they’re not filling prescriptions,” says Michelle Doty, director of survey research for the Commonwealth Fund, a nonprofit foundation that focuses on health care issues. “This is the worry: They’re having access problems because of cost; they can’t afford it.”

Financial advisers say using credit cards to pay for medical expenses was never a good idea and urge consumers to wean themselves off of plastic spending — for all purposes. 

Special report: Health care and credit
Health care and credit
  • What’s new: Using credit cards to bridge the gap between what insurance covers and patients’ out-of-pocket expenses is an option for fewer people. The credit crunch has clamped down on all lending.
  • Why it’s important: Fewer payment options for health care costs means more families may be pushed into bankruptcy because of mounting medical debt. Or worse, other families may forgo much-needed medical care because they can’t afford to pay.

More coverage of health care and credit: 

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The credit squeeze
Tightened lending standards have meant creditors have pulled back on credit card and installment loans across the board — including those specialty health care cards and loans. Although the health credit cards and loans are still offered (see comparison chart of health care credit options, lenders are much more selective about who can get money and how much. The reality is only those with the best credit records are likely to get financing.

Consumers who once put doctor’s office visit and prescription drug co-payments on general purpose credit cards are finding their credit limits may have been reduced or interest rates hiked. They can turn to plastic even less today to pay rising out-of-pocket health care costs.

Two recent developments have put the future of specialty health care credit cards in doubt:

  • Sweeping new credit card industry rules announced by the Federal Reserve in December 2008 may make borrowing more expensive for all credit card users and restrict loans to only the most qualified borrowers. 
  • Many of the banks that funded the health cards have been brought low by the Wall Street financial crisis, face rising defaults on their credit card portfolios and are getting billions in public assistance from federal bailout funds.

Health care reform advocates have high hopes for President Barack Obama’s administration. Revamping the nation’s complex and costly health care system is a top priority for Obama, who recounted stories of his late mother during his presidential campaign. She died of ovarian cancer but was more distressed over her mounting medical bills than her illness, Obama says. He pledged to push for bankrupcty reform measures that give exemptions to people with medical debt.

“The current economic slowdown makes it even more urgent for a new administration to make universal and affordable health insurance a high priority in 2009, to ensure that no American suffers financial hardship as a result of serious illness,” according to Commonwealth Fund president Karen Davis.

Borrowing to pay medical bills
A September 2008 Commonwealth survey found that nearly 79 million adults had medical bill problems or medical debt in 2007. Nearly a third (30 percent) of respondents in the foundation’s biennial health insurance survey said they took on credit card debt to pay health care bills. The survey found that an estimated 21.3 million people used credit cards for medical expenses in 2007. 

A 2008 survey of 1,004 American adults found nearly 1 in 10 would use a revolving credit card account if hit with a medical bill of more than $1,000. The poll, conducted Jan. 18-20, 2008, by GfK Roper Public Affairs & Media, also found that 10 percent of Americans say they would seek an installment payment plan, while 8 percent would apply for short-term loans from banks or credit unions. Three percent would borrow from their 401(k) retirement plans to pay medical bills and 8 percent would seek loans from friends or family members.

Both surveys were conducted before the Wall Street meltdown, when many people lost some 30 percent of the value of stocks, 401(k)s and other investments, before plummeting housing values wiped out equity that could be used for borrowing and before unemployment rates went to their highest levels in 30 years.

Doty, from the Commonwealth Fund, says they are planning another survey in the fall of 2009 to assess the impact of the economic downturn on health care costs. Until then, they can only speculate about how families are coping. “I’m sure people are having trouble,” Doty says. 

“People are delaying seeing a doctor when they’re sick, they’re skipping recommended medical treatment or follow-up, they’re not filling prescriptions.”

Rising out-of-pocket costs
The rise in health care credit cards and installment loans was fueled by health insurers, credit card issuers and banks stepping in to fill a growing gap between household incomes and rising out-of-pocket costs for health care. Families — already accustomed to putting everything from groceries to appliances on plastic — turned to credit cards and other loan options to pay deductibles and medical bills. A report by the McKinsey & Co. management consulting firm found that $45 billion in out-of-pocket medical expenses were charged on credit cards in 2007. That figure is expected to grow to $150 billion by 2015. 

Unlike regular, multipurpose credit cards, health care financing options offer incentives to pay balances off quickly rather than rack up hefty interest charges. Some feature 0 percent interest rates similar to the “12 months same as cash” financing plans popular with furniture retailers and offer up to $40,000 in lines of credit.  The highest annual percentage rate on a health care loan is 25.99 percent for Capital One‘s Health Finance fixed rate plan. (See comparison chart of health care credit options.)

It’s “friendly credit,” says Ben Slen, director of product strategies for Humana Inc., a health insurance company that launched a Visa health credit card in October 2007 with Republic Bank.

‘Be wary’
Not everyone was happy when credit cards that targeted health care consumers began to emerge in 2005. A July 2008 special report by Consumer Reports magazine asserts that patients are unfairly hit with offers of credit in doctors’ offices when they are facing medical crises.

“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,” according to Consumer Reports Senior Editor Andrea Rock. “Furthermore, some consumers have said that they felt  pressured by their medical providers while sedated or recovering from treatment.”

health insurance costs rising
Health insurance costs continue to rise

With health insurance becoming increasingly expensive, a variety of health-related credit cards were invented in the past few years. But the combination of the credit crunch and the recession are making them a problem to obtain and use.

Financial toll on cancer patients
report published in February 2009 by the Kaiser Family Foundation and the American Cancer Society highlights the financial problems cancer patients and their families are facing. The report chronicles the experiences of 20 cancer patients. Even with health insurance, many are racking up huge medical bills for out-of-pocket expenses not covered by insurance. Some, like 52-year-old Susan Young of Florida, relied on credit cards to pay her bills.

Young, who has breast cancer, charged more than $5,000 in medical bills to credit cards. “If I didn’t put these co-pays on my credit card, I wouldn’t have enough money to pay my bills,” she told researchers.

Another breast cancer patient, Tammy Witt of Ohio, filed for bankruptcy after medical costs depleted her savings and she put basic living expenses on credit cards.  

‘A perilous act’
“Putting medical expenses on a credit card if you don’t have the resources to pay for it is a perilous act,” says Mark Rukavina, executive director of The Access Project, a Massachusetts-based nonprofit group that counsels consumers on how to resolve and avoid medical debt. He is also co-author of a January 2007 study called “Borrowing to Stay Healthy: How Credit Card Debt is Related to Medical Expenses.”

Says Rukavina: “We’ve seen people put their premiums on credit cards because they don’t have the resources to pay it and they need coverage. Then, if they get sick, they have to put that on the credit card, too.”

Much of the negative response to health care credit cards is fueled by criticism of credit card industry marketing and billing practices, including surprise interest rate hikes, penalties and fees. Critics say changes in terms of credit card agreements “at any time for any reason” are consumer traps. Banking industry representatives have responded that they re-price — or increase the interest rate — on accounts when borrowers are considered greater credit risks. 

New credit card rules
New federal rules that limit interest rate hikes were approved in December 2008 but won’t take effect until July 1, 2010.

Several members of Congress have said the federal regulations don’t go far enough fast enough in protecting consumers from unfair and deceptive practices and have pledged to push for stronger laws that take effect sooner. However, none of the proposals address financing medical debt with credit cards.

Sam, Wang, a spokesman for Citi, says it’s unclear how the new regulations will affect Citi cards and its offerings. Citi offers a City Health Care and Citi Health Card MasterCard to pay for dental, vision, hearing and veterinary expenses.

“Given the dramatic regulatory changes recently announced, we will need time to fully understand their implications and what the long-term impacts will be on our customers, the consumer economy, and our business,” Wang wrote in an e-mailed response. He added: “In these challenging economic times, Citi is also committed to providing consumers access to affordable credit, while managing its business safely and soundly.”

See related: Special report: Do credit cards offer health care Rx?, 15 tips for paying high medical bills, Compare health care credit options, poll results: credit and health care costs

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