A growing movement is afoot to help Americans erase medical debt. It’s part of a cultural tipping point that acknowledges the financial fragility of both working and middle-class households. Many who secure treatment are unable to pay their out-of-pocket expenses – households living paycheck to paycheck before their illness or injury, and those whose illness or injury interrupted employment. In fact, most personal bankruptcies discharge medical debts. Others who struggle to save for emergency expenses, end up delaying or foregoing medical treatment just to make ends meet.

We are seeing an increased number of government interventions at the federal, state, county and municipal level.  Cook County, Ill. abolished more than $348 million in medical debt for more than 200,000 of its residents since 2022. One of the most ambitious efforts includes a plan to invest $6.5 million from the 2021 American Rescue Plan Act in Connecticut, which recently became the first state to cancel as much as $1 billion medical debt for eligible residents.

Another noteworthy initiative is taking place in New York City, which is targeting more than $2 billion in debt for up to 500,000 residents. Efforts also are under way in Washington, D.C., as well as in New Orleans, Wayne County, Mich., Akron, Cleveland and Toledo, Ohio, while the nonprofit RIP Medical Debt has been negotiating with 30 municipalities and states that include New Jersey and Michigan.

California took action in 2022 to ease medical debt collection given that monthly premiums and deductibles have risen nearly three times as fast as the median household income between 2002 and 2022. It’s not surprising that more than half of Californians say they or a family member delayed or avoided care in the past year because of cost.

In addition, the Biden administration is developing rules that shield unpaid medical bills from patients’ credit scores. If enacted, they may remove an obstacle to finding employment and housing or securing a car loan for millions of Americans.

Stepping in the Right Direction

Instead of leaving it up to government entities to clear debts after the fact, employers can do their part to help minimize this challenge by leveraging the power of their employee benefits – redesigning plans to help employees avoid this problem in the first place.

Jack Towarnicky, ERISA counsel, aequum, recommends the following actions to help prevent mounting medical debt from crushing American households:

1. Reference Based Pricing. Reference-based pricing (RBP) strategies help participants avoid significant price variations and excessive out-of-pocket costs for standard procedures performed by hospitals and providers. RBP establishes a benchmark fee schedule and payment ceiling, usually a multiplier of Medicare which is almost always lower than the negotiated fees achieved by contracting with a provider network. That design, coupled with advocacy and participant representation can help minimize out-of-pocket costs while concurrently protecting patients from balance billing.

2. Health Savings Account capable coverage. Leveraging HSAs is the most tax and financially efficient option to prepare for out-of-pocket expenses – whether incurred today or tomorrow.  Because most Americans don’t have significant out-of-pocket medical expenses in most years, too many forego HSA-capable coverage in favor of more expensive PPO coverage with a lower deductible and Rx copayments. Most Americans would be better off financially by taking advantage of the favorable tax treatment afforded to HSA contributions And, unlike a Health Flexible Spending Account (FSA), HSA funds are invested and accrue earnings tax-deferred. HSA funds, including any employer contributions, are always “vested,” and never forfeited.

3. Transparency. Arming employees with necessary and understandable information will empower them to make more informed, cost-conscious decisions about their healthcare options at both the point of enrollment and point of purchase. Transparency-in-Coverage (TiC) rules require employers to provide employees with easy access to an online tool featuring 500 shoppable services and highlighting personalized out-of-pocket cost information for covered healthcare items and services

While governments enact measures to erase crippling medical debt for the most financially fragile households, employers also have an opportunity to offer a dose of preventive medicine that will help remedy this growing national challenge.