Consumer Finance: Credit Cards Designed for Medical Services Not Covered by Insurance
Published: 2014-06-19T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Medical credit cards and related products (such as installment loans) are offered by financial institutions through participating providers to pay for services not covered by health insurance, such as dental and cosmetic procedures, or for veterinary care. Medical credit cards received increased attention after enforcement actions in 2013 against GE Capital Retail Bank in relation to its CareCredit product.
GAO was asked to review the marketplace for medical credit cards and related products. This report describes the participants and products in this marketplace. To address these objectives, GAO conducted a literature review and reviewed websites, product terms and conditions, and other publicly available information. GAO also interviewed staff of, and collected documents from, CFPB, 14 card companies representing a mix of size and type, and organizations that represented participating providers, financial institutions, and consumer interests and were familiar with the medical credit card marketplace. GAO also reviewed settlement agreements between CareCredit and CFPB and the New York Attorney General.
section_title: What GAO Found
paragraphs: Multiple entities offer medical credit cards, but according to market participants with whom GAO spoke, CareCredit LLC issues the majority of medical credit cards. In 2013, the company reported 4.4 million cardholders and 177,000 participating providers in its network, the majority of which were dental offices. Several other financial institutions also issue medical credit cards, usually offering their own branded product, but sometimes providing financing for retail networks or third-party companies that offer and market cards under their own names (see table). The marketplace for financing services not covered by health insurance also includes companies that assist providers in offering their own payment plans and websites that largely serve a marketing function by directing consumers to others' products. In 2013, GE Capital Retail Bank and its affiliate CareCredit entered into separate agreements with the New York Attorney General and the Bureau of Consumer Financial Protection (known as CFPB), which had alleged deceptive card enrollment processes, including failure to provide disclosures and inaccurate information given by participating providers to consumers. Both settlements required CareCredit to make several changes to its practices, such as enhancing consumer disclosures.
Medical credit cards from large banks offer a revolving line of credit with an established credit limit—akin to a conventional credit card—with some form of promotional financing (special terms and conditions, which are valid for a specified period of time). The most commonly used financing option is deferred interest, with no interest charged for a promotional period but interest charged retroactively if the balance is not paid in full before the end of the promotional period, usually 6 to 24 months. Among large banks GAO reviewed, as of May 2014, the most commonly used products had an annual percentage rate (APR) of 26.99 percent or more. Alternatively, these banks also offered revolving credit with fixed monthly payments, with an APR of 0 to 17.99 percent. Installment loans or products targeted at consumers with poor credit histories were offered by certain other market participants.
section_title: What GAO Recommends
paragraphs: GAO makes no recommendations in this report.

section_title: Letter
paragraphs: More than 4 million consumers use medical credit cards and related  products, including medical installment loans and lines of credit, to pay for  procedures that health insurance generally does not cover, such as  dental, hair removal, and cosmetic procedures, or for veterinary care.  Although consumers may have other options to pay for these  procedures—including conventional credit cards or setting up payments  through their doctor’s office—some choose to use medical credit cards to  take advantage of promotional offers, keep credit available on other  cards, or because they do not have advantageous financing alternatives.  Financial institutions offer medical credit cards through participating  providers to consumers (patients). Medical credit cards received  increased attention after enforcement actions in 2013 by the New York  Attorney General and the Bureau of Consumer Financial Protection  (known as CFPB) that led to settlement agreements with GE Capital  Retail Bank and its affiliate CareCredit LLC in relation to the CareCredit  medical credit card.
You asked us to review the marketplace for third-party consumer financial  products used to cover procedures not typically covered by health  insurance—products this report refers to collectively as medical credit  cards. The objectives of this report are to describe the (1) participants and  (2) products in the marketplace for medical credit cards. To address these  objectives, we conducted a literature review, and reviewed websites,  public filings, product terms and conditions, and information provided to  us by card companies. We interviewed or corresponded with  representatives of CFPB and the Federal Trade Commission (FTC); 14  card companies selected because they represented a mix of size and  type; a trade organization representing financial services companies; and  selected organizations that represent health care providers or consumer  interests and are familiar with the medical card marketplace. In addition,  we conducted two group interviews, coordinated by the National  Association of Attorneys General, that together included staff from the  office of the attorney general of nine states, and spoke separately with the  Minnesota Office of the Attorney General. A more extensive discussion of  our scope and methodology appears in appendix I.
We conducted this performance audit from July 2013 to June 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
subsections: section_title: Background
paragraphs: Medical credit cards are private-label credit cards that may be used  across a network of participating providers (such as dental offices or  veterinary clinics) that have contractual relationships with the card  company. Consumers typically learn about medical credit cards, or  related products such as installment loans, from participating providers,  who give information about the product and the available financing  options. Consumers often can apply immediately at the provider’s office,  sometimes with the assistance of the office staff, either online, by  telephone, or using a printed application. The card company determines  eligibility and, if the application is approved and an account is opened, is  required to provide the consumer with the account-opening disclosures  with the full terms and conditions, including fees, percentage rates, and  rate terms. Once enrolled, consumers generally interact with the card  company—rather than the participating provider—regarding use of the  card, and they direct their payments to the card company.
Medical credit cards can be used to pay for elective (planned,  nonemergency) services, such as dental and orthodontic procedures, eye  correction surgery, audiology care, cosmetic procedures, and hair  removal or restoration, as well as for veterinary services. Some medical  credit cards also may be used to pay for insurance copayments and  deductibles or to finance medical care for people who do not have health  insurance. The products generally are subject to the same state and  federal statutory provisions as other lending products, which under  federal law include but are not limited to the following:
Truth in Lending Act and its implementing Regulation Z, which  requires certain disclosures about a card’s terms and cost. The  Credit Card Accountability Responsibility and Disclosure Act of 2009  amended the Truth in Lending Act to require certain disclosures about  rates and fees on credit cards and prohibit certain practices (such as  raising the rate on an existing balance).
Federal Trade Commission Act, which prohibits unfair or deceptive  acts or practices.
Consumer Financial Protection Act of 2010, which prohibits unfair,  deceptive, or abusive acts or practices by providers of consumer  financial products or services and authorizes CFPB to take  enforcement actions to prevent providers of consumer financial  products or services from engaging in unfair, deceptive, or abusive  acts or practices in connection with transactions with consumers  involving consumer financial products or services.
Fair Credit Reporting Act, which generally prohibits creditors from  obtaining and using medical information in connection with  determining eligibility for credit. However, Regulation FF allows  creditors to use medical information “o determine, at the consumer’s  request whether the consumer qualifies for a legally permissible  special credit program or credit-related assistance program” that  meets certain requirements.
CFPB has primary supervisory authority for consumer financial protection  laws at large banks and certain nondepository entities. Smaller banks  (those with assets of $10 billion or less) are supervised by the federal  banking regulators. CFPB has enforcement authority for violations of  federal consumer financial laws, including violations of the Consumer  Financial Protection Act of 2010 and the consumer financial protection  laws, and rulemaking authority for these provisions. FTC has authority to  enforce the Federal Trade Commission Act against most providers of  financial services that are not banks, thrifts, and federal credit unions— which may include some medical credit card companies—as well as  health care providers in certain contexts. CFPB and FTC share  enforcement authority for nonbanks in accordance with a memorandum of  understanding. State attorneys general have enforcement authority under  state and federal law, including the authority to enforce the Consumer  Financial Protection Act of 2010 and CFPB rulemakings.
section_title: One Company Appears to Issue the Majority of Medical Credit Cards
subsections: section_title: Market Participants
paragraphs: One company, CareCredit LLC (CareCredit), issues the majority of  medical credit cards, according to available information, although no  comprehensive data source on the industry exists. A registration  statement (Form S-1) filed with the Securities and Exchange Commission  in March 2014 by an affiliate of CareCredit reported that CareCredit had  4.4 million active cardholders and 177,000 health care and veterinary  providers in its network and revenues of approximately $1.5 billion for  calendar year 2013. Market participants with whom we spoke cited three  other banks—Citibank, N.A. (Citibank), Wells Fargo Financial National  Bank (Wells Fargo), and Comenity Capital Bank (Comenity)—as also  among the largest issuers of medical credit cards. Representatives of  these banks generally said that data on the number of cardholders and  network providers were proprietary, but told us they believed that their  share of the market was relatively low.
Companies participating in the medical credit card marketplace play  different roles (see table 1). Card issuers generally are responsible for  marketing, origination, and underwriting of accounts, and management  and collection of payments. CareCredit, Citibank, and Wells Fargo issue  medical credit cards under their own names, while Comenity works with  third-party companies (sometimes called aggregators) or retail networks  that offer and market the product under their own names. For example,  Comenity has a partnership with Springstone Patient Financing, a  nonbank financial institution, to offer a product co-branded under  Springstone’s name. With the direct oversight of Comenity, Springstone  makes the product available through a network of participating providers,  while Comenity is responsible for the financing and servicing of the credit  card accounts.
In addition to these and other established companies, our review  identified at least 25 websites that marketed financing for health care  procedures but did not always clearly identify the corporate entity or  financial institution with which they were affiliated. In some cases, these  websites appeared to serve largely a marketing function, collecting  information that would be used to direct consumers elsewhere. Apart from  participants in the medical credit card market, some companies play other  roles related to financing procedures not covered by health insurance. For  example, some firms assist medical offices in arranging and managing  their own payment plans, or they purchase accounts receivable from such  offices and assume collections responsibilities.
section_title: Relationship between Card Companies and Participating Providers
paragraphs: Card companies contract with participating providers to offer financing  products to consumers. Card companies enroll providers into their card  networks by marketing to them through trade shows, direct marketing  sales calls, trade journal advertisements, direct mail, and e-mail. In some  cases, card companies paid trade organizations to endorse specific  products and promote them to their members. For example, CareCredit  reported that as of December 2013, it had relationships with 107  professional and other associations—such as the American Dental  Association and American Animal Hospital Association—to endorse and  promote CareCredit products to their members. The compensation for  63 of the associations was linked to enrollment of association members in  the company’s card program and the volume of product transactions by  association members.
Dental care appears to be the procedure mostly commonly financed with  medical credit cards. Among the companies we reviewed in depth, one  reported that dental practices composed approximately 64 percent of its  medical credit card business, veterinary 14 percent, cosmetic and  dermatology 10 percent, vision 6 percent, audiology 3 percent, and other  services such as weight loss treatments and procedures 4 percent.  Representatives of another company, which entered the medical credit  card market in 2003, told us that as of November 2013, dental and  orthodontia made up about 85 percent of its medical credit card business,  with the remaining 15 percent financing hair restoration, vision care, and  audiology and veterinary services. Representatives from a third company,  which entered the market in 2008, said that its largest market was for  dental and audiology services, although its card also financed veterinary  and vision services. Finally, representatives of the fourth company, which  entered the medical credit card market in 2006, said it typically financed  audiology, dental, hair removal, hair restoration, and skin care.
Participating providers compensate card companies for their clients’ use  of the cards through a transaction or administrative fee. When a  consumer’s financing is approved, the card company typically pays the  provider the full amount financed—minus the fee—within 24 to 72 hours  after service is provided. Card companies generally told us that the exact  amount of the fee was proprietary information and generally declined to  provide it to us. They said it can vary based on such factors as the  provider’s overall volume of business and the specific financing options  (such as payment plan and term length) that the provider makes available  to patients or clients. In exchange for this fee, the card company rather  than the provider is responsible for billing and collection and generally  assumes the risk of nonpayment by the borrower.
Card companies typically provide participating providers with the  informational marketing materials, applications, and disclosures needed  to enroll consumers. Card companies also often train providers and staff  on the products and enrollment process through webinars and telephone  tutorials, and in-person. Some card companies told us that they also offer  participating providers dedicated customer support.
section_title: Settlements with GE Capital Retail Bank and CareCredit
paragraphs: In December 2013, CFPB announced a consent order with GE Capital  Retail Bank and its affiliate CareCredit. CFPB said it initiated an  investigation of the company after receiving hundreds of complaints from  consumers. The consent order alleged deceptive card enrollment processes, such as unclear communication  about the terms of the deferred interest product;  inadequate disclosures, whereby consumers did not always receive  copies of the actual card agreement and did not understand the terms  of the deferred interest product (discussed in the next section); and poorly trained staff at some health care provider offices, some of  whom admitted they were confused by the product.
As part of the settlement, GE Capital Retail Bank and CareCredit must  refund up to $34.1 million to what CFPB described as potentially more  than 1 million CareCredit consumers. The company also agreed to  make several changes in its practices, including enhancements to  consumer disclosures provided during the application process and on  billing statements immediately prior to the expiration of the promotional  period, enhanced training to providers on making the terms of the credit  arrangement transparent to patients, and enhanced warnings to  consumers about the expiration of the promotional period.  (Representatives of CareCredit told us that it already had in place some  of these practices.) In addition, for dental or audiology transactions over  $1,000, consumers must apply directly to CareCredit, rather than through  the health care provider, for credit approval if they use the card for such a  transaction within 3 days of the application.
In June 2013, GE Capital Retail Bank and CareCredit entered into a  settlement agreement with the New York Attorney General, who had  alleged deceptive enrollment practices and inadequate disclosure of  product terms and conditions. This settlement required CareCredit to  provide a 3-day “cooling-off” period, which prohibits certain charges of  $1,000 or more on a CareCredit card within 3 days of an in-office  application and provides New York consumers an opportunity to consider  the card’s terms and the treatment plan. The settlement also limited what  the health care provider can charge in advance and required clearer  disclosure of the interest rates associated with deferred-interest products  (discussed below). It also required CareCredit to call consumers within 72  hours of the submission of a CareCredit application with a same-day  charge to confirm the account opening with the consumers and to inform  them of certain account terms, a practice that CareCredit has said it  adopted nationally. In addition, the settlement required CareCredit to pay  for and establish an appeals fund that resulted in cardholder refunds or  adjustments of approximately $175,000.
section_title: Medical Credit Cards Commonly Offer Revolving Credit with Deferred Interest
paragraphs: The medical credit cards we reviewed in depth resembled conventional  credit cards (offered a revolving line of credit with an established credit  limit) and offered some form of promotional financing (special terms and  conditions valid for a specified period). Most common was a deferred  interest option, which 85 percent of CareCredit cardholders had chosen,  according to the settlement agreement with CFPB. Deferred interest  plans start accruing interest from the initial purchase date based on the  stated annual percentage rate (APR). If the entire promotional balance is  paid off during the specified promotional period (generally 6, 12, 18, or 24  months, depending on the plan), the accrued interest is waived. But if the  balance is not paid in full within the specified promotional period, the  accrued interest is assessed to the account. As seen in table 2, the APR  for consumers who did not pay off the purchase amount before the  promotional period expired varied depending on the product, but our  analysis found that most cardholders had deferred interest products with  an APR of 26.99 percent or more. One company’s APR was 26.99  percent, a second ranged from 26.99 to 28.99 percent, and a third ranged  from 14.99 to 26.99 percent. A fourth company offered a variable APR of  9.99 percent that became effective October 22, 2013; before that it had  been 27.99 percent. The companies declined to provide the proportion of  consumers who did not pay off the full balance during the promotional  period, stating that this information was proprietary. Although less  common, major card companies we reviewed also offered a promotional  monthly fixed-payment option, which charged a set interest rate (an APR  from 0 to 17.99 percent) during a specified period (from 12 to 60 months).
The number of cardholders who do not participate in promotional  financing appears to be small; for example, CareCredit told us that the  vast majority of the credit extended through its medical credit card was  promotional financing. The standard APR without promotional financing  ranged from 9.99 to 28.99 percent. Representatives of the medical credit  card companies with whom we spoke said their customers typically were  prime borrowers—that is, with credit scores that put them at low risk of  default—and that the interest rates and other terms of the loan did not  vary based on the cardholder’s credit profile.
As noted earlier, in addition to the companies listed above, we identified  25 websites that marketed products—either revolving lines of credit or  installment loans—designed to finance services not covered by health  insurance. These websites did not always provide comprehensive  information about the terms and conditions of the products, which  generally appeared to be marketed by smaller companies, and we did not  verify the product information. However, some of these websites  appeared to market financing terms, such as deferred interest, similar to  those of the banks listed above. In addition, two companies marketed  products that charged interest, but refunded that interest in the form of a  rebate check if the loan was paid in full within 12 months. Some of these  websites marketed financing for persons with a wide range of credit  histories, including those with marginal or poor credit.
section_title: Agency Comments and Our Evaluation
paragraphs: We provided a draft of this report to CFPB and FTC. CFPB provided  technical comments that we incorporated as appropriate. We also  provided selected relevant portions of the draft for technical review to  CareCredit, LLC; Citibank, N.A.; Comenity Capital Bank; Springstone  Patient Financing; and Wells Fargo Financial National Bank, and  incorporated their technical comments as appropriate.
We are sending copies of this report to the Director of CFPB and the  Chairwoman of FTC. In addition, the report will be available at no charge  on GAO’s website at http://www.gao.gov.
Please contact me at (202) 512-8678 or brownbarnesc@gao.gov if you or  your staff have any questions about this report. Contact points for our  Offices of Congressional Relations and Public Affairs may be found on  the last page of this report. Key contributors to this report are listed in  appendix II.
section_title: Appendix I: Objectives, Scope, and Methodology
paragraphs: This report examines the (1) participants and (2) products in the  marketplace for medical credit cards. For the purposes of this report, we  used “medical credit cards” to refer collectively to financial products— including revolving credit lines and installment loans—that are designed  specifically to finance health care services not covered by health  insurance. This report provides an overview of this industry, but does not  necessarily describe all its products and participants.
To address these objectives, we conducted a literature review of articles  using the Proquest, PubMed, and ABI/Inform databases using search  terms such as “medical credit card,” “health care credit card,” “healthcare  financing,” and “medical financing” for the purpose of obtaining  background and context surrounding the products. We also searched the  Internet using these same search terms and also “medical procedure  financing.” We reviewed publications from, or interviewed representatives  of, organizations that study the credit card industry, such as Argus  Information and Advisory Services, The Nilson Report, and  CreditCards.com.
We interviewed representatives of companies that serve as lenders or  marketers of medical credit cards, including AA Medical Finance,  Advance Care, American HealthCare Lending, Citibank N.A., Comenity  Capital Bank, Fundmydr.com, GE Capital Retail Bank’s CareCredit LLC,  HELPcard, JPMorgan Chase & Co., MedicalFinancing.com,  MyMedicalFunding, Springstone Patient Financing, United Medical Credit,  and Wells Fargo Financial National Bank, as well as CarePayment, which  provides billing and patient financing services. These companies were  selected either because they were identified by industry and government  representatives as key players in this marketplace or because they  represented a variety of different sizes, roles, and products. We also  corresponded with the Financial Services Roundtable, a trade  organization representing financial services companies. We also  interviewed representatives of two federal agencies, the Bureau of  Consumer Financial Protection (known as CFPB) and the Federal Trade  Commission. We conducted two group interviews, coordinated by the  National Association of Attorneys General, that together included staff  from the office of the attorney general of nine states that chose to  participate (Indiana, Louisiana, Maryland, Massachusetts, Nebraska,  Nevada, New York, Ohio, and Tennessee), as well as a separate  interview with the Minnesota Office of the Attorney General, which had  been examining the medical credit card industry. We also interviewed or  received written responses from organizations representing health care  providers (American Dental Association and American Society of Plastic  Surgeons) and representatives of consumer interests (Consumers Union,  National Consumer Law Center, and Community Health Advisors).
Our review of reports and data from organizations that study the credit  card industry broadly, and interviews with industry representatives,  indicated that no comprehensive source of information existed on the  medical credit card industry and the market share of its participants.  However, based on the testimonial and documentary information we  received from the sources above, we identified four companies that  appeared to be among the largest market participants—CareCredit LLC,  Citibank, N.A., Comenity Capital Bank, and Wells Fargo Financial  National Bank—which we selected for greater examination.
In addition to our interviews with company representatives, we gathered  and analyzed the terms and conditions of these companies’ medical  credit card products, application forms, and informational and marketing  materials when publicly available or provided by the company. One card  company also provided us with a generic copy of its standard contract  with participating providers. We also reviewed, where applicable and  available, the companies’ public filings with the Securities and Exchange  Commission. We found that only the filing for an affiliate of CareCredit  reported information specific to medical credit cards. To assess the  reliability of that public filing, we reviewed the data for completeness and  consistency and found that they were reliable for the purposes of  describing characteristics of the CareCredit product.
Apart from the four companies we examined in depth, we collected and  reviewed publicly available product information from the websites of 25  other companies that provide medical credit cards and related products.  In some instances, we contacted the companies to confirm or clarify  certain aspects of the products. We generally did not independently verify  this information, but we did use it for context and to provide a broader  picture of available products and key features.
We reviewed applicable federal laws and regulations related to medical  credit cards and to lending products more generally, including Regulation  Z (which implements the Truth in Lending Act), the Consumer Financial  Protection Act of 2010, the Federal Trade Commission Act, the Credit  Card Accountability Responsibility and Disclosure Act of 2009, and the  Fair Credit Reporting Act. We also reviewed the settlement agreements  and related materials resulting from two enforcement actions against  CareCredit, one by CFPB and one by the New York State Office of the  Attorney General.
We conducted this performance audit from July 2013 to June 2014 in  accordance with generally accepted government auditing standards.  Those standards require that we plan and perform the audit to obtain  sufficient, appropriate evidence to provide a reasonable basis for our  findings and conclusions based on our audit objectives. We believe that  the evidence obtained provides a reasonable basis for our findings and  conclusions based on our audit objectives.
section_title: Appendix II: GAO Contact and Staff Acknowledgments
subsections: section_title: GAO Contact
section_title: Acknowledgments
paragraphs: In addition to the contact name above, Jason Bromberg (Assistant  Director), Rhonda Rose (Analyst-in-Charge), Bethany Benitez, Pamela  Davidson, Josephine Perez, Barbara Roesmann, and Jena Sinkfield  made key contributions to this report.