The Dangers of Medical Credit Cards

READY FOR A new type of plastic? Meet the medical credit card. These credit cards — which used to be marketed exclusively to those opting for elective surgery, like breast enhancement and dental veneers — are increasingly being shopped to patients struggling to pay for medical necessities.

Medical facilities used to partner with these patients to offer interest-free financing. But now more ask folks to sign up for a medical credit card as an alternative to having their accounts sent to collection, says Tim Robbins, director of counseling for Consumer Credit Counseling Service of Montana. The result? More people are paying high interest rates on health-care expenses they already can't afford.

Offered by banks like GE Money (GE) and Citigroup (C), these cards are similar to regular consumer credit cards. The difference is that they can only be used for health-care expenses. Part of their appeal is their extended 0% teaser rates. GE Money's CareCredit card, for example, offers a 12-month introductory period with no interest. Like standard credit cards, if a customer makes a late payment, the 0% introductory period ends and the interest rate skyrockets. (In CareCredit's case, to at least 27%.) Since these cards are being offered to folks who are already struggling to pay their health-care obligations, there's a high likelihood they won't be able to pay them off within that first year, says Gail Cunningham, senior director of public relations for the National Foundation for Credit Counseling.

What's driving the trend is soaring out-of-pocket medical costs and a resource-strapped medical community that needs to get paid. Already, doctors and hospitals endure $60 billion annually in unpaid medical bills, according to management consulting firm McKinsey. And that figure is expected to climb. In 2005, consumers spent $250 billion in out-of-pocket medical expenses, according to McKinsey. By 2015 it's estimated to grow to $420 billion. That's led to cards that were originally targeted at the plastic surgery crowd — presumably a group with disposable income and a finite set of health-care expenses — to now be offered to those with weaker finances and bigger health issues.

David Fasoli, president of CareCredit, says his company shares the concerns of some consumer advocates and emphasizes that the CareCredit card is meant to finance only elective procedures. Over the past few months, CareCredit has even modified its program to restrict originations for hospital patients with regular medical bills. Still, he concedes that sometimes new accounts may get through since it's tough to know what the medical bill is for. (Citigroup did not provide a response by time of publication.)

The idea that patients can fund their medical care in the same way they finance flat-screen TVs is attractive to health-care providers, since they get their money right away. It's also advantageous for the banks issuing the cards. Already, consumers put about 20%, or $45 billion, of out-of-pocket health expenses on credit cards, according to McKinsey. And with the "right business model," the consulting firm believes credit-card spending could reach $150 billion by 2015.

Unfortunately, it may not be good for the patient.

By using one of these credit cards, patients convert their medical debt, which doesn't typically show up on a credit report unless it goes to collection, into revolving consumer debt. That moves the debt onto the patient's credit report — which could have broader repercussions should bills be late.

Also, once a bill is paid for with a credit card, the account with the medical provider is closed. That means patients can no longer negotiate or question the cost of their care with their doctor or hospital, warns Nora Johnson, a vice president with the nonprofit agency Medical Billing Advocates of America.

What should patients with large out-of-pocket expenses do?

First, see if the bill contains errors. Medical Billing Advocates of America estimates that 90% of the hospital invoices it evaluates contain mistakes.

Next, try to negotiate the fee with the medical provider before discussing any sort of credit card arrangement. The American Hospital Association encourages all of its members to offer discounts to the uninsured and underinsured. These breaks can be as high as 35% to 40%, says Johnson of Medical Billing Advocates of America.

Then, try to work out a payment plan directly with the medical provider. Even if the hospital only allows installment plans for a few months, that's still three months interest-free.

Finally, if you must finance medical care on plastic, use the best card available, says Gerri Detweiler, of Credit.com, a personal finance education web site. Teaser rates are only a good thing if you can pay off the debt in the time allotted. So shop around. Consumers can compare interest rates on different cards at CreditCards.com.

Also See:
10 Things Your Primary Care Giver Won't Tell You
Digging Out of Medical Debt
The Best Way to Save on Health-Care Costs