Image: Prescription medicine expenses © Don Farrall, Photodisc, Getty Images

Maybe you thought your health insurer had paid the bill. Perhaps the hospital or doctor's office sent it to the wrong address. It's even possible you were the victim of medical identity theft.

However it happened, a medical collection on your credit reports can have a devastating impact on your credit scores and your ability to get a loan.

"If someone is squeaky clean -- they've always paid on time and their credit history is unblemished -- a single collection can have a pretty big impact on their score," said Frederic Huynh, a principal analytic scientist at Fair Isaac, the company that created the FICO score, the leading credit scoring formula. "It wouldn't surprise me at all if their score dropped by over 100 points."

The FICO formula treats medical collections the same way it treats other collection accounts, Huynh explained. The company's analysis has found that people who have a medical collection on their credit reports are more likely to default on other bills.

"It's a severe negative derogatory," Huynh said. "The population of consumers who have a medical collection is substantially riskier than the group of consumers that don't have any collections at all."

The latest version of the FICO formula, FICO 8, ignores all collections of $100 or less. But mortgage lenders and many other creditors still use older versions of the formula that take into account all collections, no matter how small.

Liz Weston

Liz Weston

Some consumer advocates question whether the outsize impact of medical collections on credit scores is fair to consumers, given how confusing billing practices can be and how easy it is for a bill to slip through the cracks.

"When someone normally pays their bills on time but winds up with a collection account on their credit, it's often a medical bill that's the culprit," said consumer debt expert Gerri Detweiler of "Unfortunately, in many cases, by the time you hear from a collection agency, it's too late to protect your credit scores."

I was aware of that when a hospital started sending us bills for an unpaid balance of $3,300 after the birth of our daughter. Every month, for more than a year, I called both the hospital and our insurance company to check on the status of this account. Every time, I told both parties: "I don't want this to go to collections. Let me know what I can do."

Sometimes, though, that's not enough. Readers have told me their medical accounts were turned over to collections without notice -- sometimes when they were making agreed-upon payments toward their balances.

A decade ago, researchers for the Federal Reserve found that one-third of consumers had at least one collection account (.pdf file) on their credit reports -- and that half of the collections related to medical bills. The amounts were pretty small potatoes. The median amount owed -- meaning half the accounts owed more, half less -- was $142. Of the medical collection accounts studied, 86% had an original balance of $500 or less.

Since then, a soured economy has left millions more people struggling to pay their medical debts. A Commonwealth Fund study found that 53 million people reported problems paying medical bills in 2010, up from 39 million in 2005. Thirty million said they had been contacted by a collection agency about unpaid medical bills, up from 22 million five years earlier.

Efforts to change how medical bills are reported and calculated into your scores have gone nowhere. The Medical Debt Responsibility Act of 2011, introduced in the U.S. House last year by Rep. Heath Shuler, D-N.C., would have required credit bureaus to remove medical collections of $2,500 or less within 45 days after they're paid. Similar bills were introduced in 2009 and 2010, Detweiler said. Despite some bipartisan support, the legislation was "referred to committee" and hasn't resurfaced since.

FICO analysts don't believe paying a bill eliminates the risk of default, in any case.

"Even consumers who have a paid medical collection . . . are substantially riskier than consumers who don't have a collection in their file," Huynh said.

If you have overwhelming medical bills, your credit scores may be the least of your concerns. One more collection account is unlikely to have much impact once your scores are battered by multiple late payments, charge-offs and other collection accounts. The information in my columns "How to haggle over medical bills," "How not to pay your bills" and "Bounce back from bad credit" may be more relevant to your situation.

If you're trying to protect your scores from the impact of a rogue medical bill, however, here's what you need to do:

  • Monitor every medical bill. Don't assume your insurer will automatically pay, even if it pre-authorized a treatment or procedure. Medical providers are often quicker to turn over an unpaid bill to collections than lenders or other creditors might be, so you want to pay close attention to the status of every bill. Once 30 days have passed, you should be on the phone to both the provider and your insurer to see what's happening. Start the appeals process with your insurer if necessary.
  • Don't pay without thinking. If an account is turned over to collections, or if you discover a collection on your credit reports, your first instinct might be to pay it to get rid of it. That typically won't work. Your leverage to get the collection deleted from your credit reports often disappears once you pay the bill, so try other methods first.
  • Dispute the collections with the bureaus. If the collection is large or recent, this probably won't work. But collection agencies may not bother to verify a smaller, older collection account, so disputing the collection as "not mine" may succeed in removing the account from your credit files.
  • Ask your provider to take back the account. Many creditors sell their delinquent accounts to collection agencies, leaving you no choice but to deal with the collector if you want to pay the debt. Medical providers, on the other hand, often place their delinquent accounts with collection agencies on a commission basis, said Nicholas Newsad, the author of "The Medical Bill Survival Guide: Easy, Effective Strategies for People Experiencing Financial Hardship." If you can pay the bill, try asking the medical provider to take back the account from collections and remove it from your credit reports.
  • Consider "pay for deletion." You'll have the most leverage if you have a lump sum and you can pay the entire bill, or at least most of it (if the amount owed is large). If that's the case, tell the collector you want the collection account removed from your credit reports as part of the deal. Don't pay until you get the collector's promise, in advance and in writing. Follow up in a month by pulling your credit reports to make sure the collections have been deleted.

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  • Remember that time heals most credit wounds. If a medical collection remains on your reports despite your best efforts, don't despair. Over time, the impact of a negative mark fades, particularly if the rest of your credit reports shows you use credit responsibly.

Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.