Consumer Finance: Credit Cards Designed for Medical Services Not Covered by Insurance
Released: 2014-07-21T00:00:00

Letter

Background

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.

One Company Appears to Issue the Majority of Medical Credit Cards

Market Participants

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.

Relationship between Card Companies and Participating Providers

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.

Settlements with GE Capital Retail Bank and CareCredit

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.

Medical Credit Cards Commonly Offer Revolving Credit with Deferred Interest

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.

Agency Comments and Our Evaluation

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.

Appendix I: Objectives, Scope, and Methodology

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.

Appendix II: GAO Contact and Staff Acknowledgments

GAO Contact

Acknowledgments

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.