New Orleans residents could see tens of millions of dollars in medical debt forgiven over the next year, part of a burgeoning nationwide initiative by local governments and a New York-based nonprofit to help people whose outstanding bills for doctor’s visits or hospital stays might hinder them from seeking care.

Late last year, the New Orleans City Council voted to allocate $1.3 million in federal pandemic relief funds to RIP Medical Debt, a New York-based nonprofit. The group, which is working on similar programs in Chicago, Toledo and elsewhere, will use the money to acquire outstanding medical debts of New Orleanians and then wipe away their obligation to pay.

The organization says it is typically able to purchase $100 of outstanding debt for every $1 at its disposal on secondary debt markets. By forgiving the debt after it is purchased, the group hopes to help prevent cascading negative health outcomes that can result from deferred care.

The nonprofit estimates that New Orleanians who fall within its income criteria – those whose incomes are less than four times the federal poverty rate, or those whose debt exceeds 5% of their income – collectively owe about $130 million.

At-Large Council member Helena Moreno proposed the spending measure and is spearheading the effort with the city’s health department.

In a news release, she called it an investment that isn’t “just responding to our past challenges but propelling us toward the city we want to be – a community of peace, of equality, of justice and prosperity for all.”

Jennifer Avegno, head of the New Orleans Health Department, said she’s hopeful that residents, who don’t need to apply to have their debts forgiven, could begin receiving notices that they are debt free by sometime this year.

But there is much to be sorted out before anyone’s debt is forgiven. 

For one, the city and RIP Medical Debt must ink an agreement. And perhaps most importantly, it isn’t clear whether the city’s two dominant providers, Ochsner Health and LCMC Health, will offer to sell outstanding debt. While RIP Medical Debt typically purchases debt that has already been sold to collectors, they are now looking to negotiate directly with providers.

RIP Medical Debt spokesperson Daniel Lempert said that the organization is actively negotiating with Chicago-area health care providers after Cook County, Ill., which includes Chicago, became the first local government to sign up.

He said those deals won’t be complete for “quite some time.”

Ochsner and LCMC, which both operate as nonprofits who do not pay taxes in exchange for treating low-income patients, did not respond to requests for comment. But Avegno said both providers have given positive initial feedback.

“I think that they are very incentivized,” Avegno said. “I’m always going to start with the premise that they want to do the right thing by their patients. It’s also really great PR for both. Of course, they really would be hard pressed to turn this down, given the amount of publicity.”

A growing problem

The total amount of U.S. medical debt is tricky to calculate because it does not always show up in credit reporting and can be lumped in with credit card debt. The Kaiser Family Foundation estimates that Americans owe more than $195 billion in medical debt, with nearly three quarters of that from individuals who owe more than $10,000.

Black Americans are nearly twice as likely as White Americans to hold medical debt, Kaiser said, and a 2021 study published in the Journal of the American Medical Association indicated that the amount of medical debt in the south was more than three and a half times than in the northeast. Poor zip codes had more than four times the amount of debt than rich ones.

Unlike many of its southern neighbors, Louisiana adopted Medicaid expansion in 2016, leading to dramatic declines in the state’s uninsured rates. For instance, the percentage of Orleans Parish adults without insurance fell from 24% to 9% from 2015 to 2021, according to an LSU study.

But the rising cost of premiums and deductibles means that insurance is not a safeguard against medical debt. Out-of-pocket medical spending jumped more than 10% in 2021, according to the Centers for Medicare and Medicaid Services.

Medical debt is a problem for both patients and health care systems grappling with uncompensated care. Consumer debt in general has been linked to foregone medical care, but medical and credit card debt are far more likely than other types of debt to keep someone from seeing a doctor, according to a 2013 study in the Journal of Health and Social Behavior.

Buying newer debt

One reason Lempert said working directly with providers could have greater social impact is that it could result in the acquisition and forgiveness of newer debt.

Debt that is outside a patient’s ability to pay but only a few months old “is more top of mind for the debtor and therefore more likely to prevent someone from seeking follow up care,” according to Lempert.

Of course, newer debt is also typically less available for purchase at deep discounts, so it is not clear if RIP Medical Debt’s increasing focus on buying from providers will change whether it can buy debt for one penny on the dollar.

Still, focusing too much on the total dollar amount of forgiven debt obscures the social purpose of mass debt forgiveness, said Wesley Yin, a UCLA economics professor. He agreed that forgiving newer debt is potentially more impactful, but he cautioned that more study is needed.

Yin said he is working with RIP Medical Debt to understand the effects of debt forgiveness.

“Maybe the damage has already been done, no further damage can be done,” Yin said, referring to older debt. “The idea is, if you get it early, you prevent all that damage in the first place.”

Another question is just how much a one-time debt payoff can improve health outcomes across a city like New Orleans.

To that end, Lempert said RIP Medical Debt aims to help providers better identify patients who need financial aid before debt piles up.

“We’re big fans of presumptive financial aid and advocate for it,” Lempert said in an email.

But Yin said there is only so much providers can do to stem the tide of patient debt, which he said culminates from increasing insurance costs and health disparities.

“The problem of debt is something that’s beyond what a hospital really controls, and a much larger problem about inequality and financing in healthcare systems,” Yin said. “The best place to do this is prevention, and just have more generous health insurance to begin with.”