Committee reviews S.27: $1 million appropriation to contract with nonprofit to buy down medical debt; state tax offices say debt abolition likely non‑taxable

At a Ways & Means committee meeting, office and committee staff outlined S.27, which would appropriate $1,000,000 from the general fund to the State Treasurer to contract with a tax‑exempt nonprofit to purchase and abolish qualifying medical debt for Vermont residents.

Jen Carby, legislative counsel with the Office of Legislative Council, summarized the bill’s principal mechanics: the treasurer would contract with a 501(c)(3) that would purchase medical accounts from health‑care providers at fair market value and abolish the indebtedness, notify affected individuals of the amount forgiven and the provider from whom the debt was purchased, and coordinate with providers to remove adverse information from consumer credit reports. The bill also adds a prohibition on credit reporting of medical debt and creates narrow exceptions to permit a tax‑exempt nonprofit to pull credit for eligibility screening.

Becky Wasserman of the Office of the State Treasurer described the operational model: “It is asking that the treasurer's office has appropriated $1,000,000 to contract with a third party, a nonprofit that will then enter into arrangements with hospitals and providers around the state, to use to buy down medical debt. And so, typically that is about, you know, a penny on the dollar for the medical debt.” She said the nonprofit would receive patient files from participating providers, determine eligibility under the bill’s criteria, buy eligible accounts from the provider, and notify patients that their debt had been abolished.

Rebecca (Deputy Commissioner, Vermont Department of Taxes) told the committee the Department’s preliminary read aligns with the treasurer’s: “Our understanding is that there's no tax consequences for the consumer that gets their debt abolished. … Because this is going through a nonprofit who's a disinterested party, there are IRS rules that indicate that that sort of charitable use of funds to pay off debt would … be considered a gift and would not be taxable.” She added a routine caveat that the Department tries to avoid definitive interpretations of federal tax law.

Committee members pressed staff on mechanics and scope. Carby and Wasserman said eligibility would be automatic on the back end (patients would not need to apply): the nonprofit and provider would exchange account information and the nonprofit would assess income and other criteria. Carby and other staff noted the bill requires the treasurer to ensure the contractor will abolish the debt “with no cost or tax consequences for the debtor” and to coordinate removal of adverse credit reporting.

Carby summarized eligibility set in the draft: a debtor must be a Vermont resident and either have household income at or below 400% of the federal poverty level for household size or owe medical debt equal to 5% or more of household income; the patient account must still show an outstanding balance after the provider’s routine collection efforts. The bill also requires hospitals and certain large health care facilities to participate only if they agree to sell their medical debt to the nonprofit for the purpose of abolition, and it prevents providers and medical debt collectors from reporting medical debt to credit reporting agencies.

Committee members asked about where the $1,000,000 comes from. Staff said the appropriation is drawn from a previously appropriated pot held by the Treasurer’s Office (a $20,000,000 appropriation from an earlier budget, a portion of which had not been used and had been partially reallocated). Wasserman and other staff emphasized the appropriation is reimbursement‑based: the state would not pay the nonprofit in advance and would only reimburse after contracted purchases and abolitions are completed.

Several members asked about the nonprofit’s fee and the program’s administrative costs. Wasserman said she did not want to misstate contract details but noted publicly reported information: Undue Medical Debt (the organization the staff said has done this work elsewhere) follows federal guidance and has cited an indirect rate of about 15% when receiving government funding. She also said philanthropic donors supply significant funding for the nonprofit’s work; “Mackenzie Scott, I believe, gave them about $80,000,000, over the last few years to fund these efforts,” she said.

Members raised a separate policy concern about potential federal scrutiny of nonprofit partners. Rebecca (Deputy Commissioner) said she was not aware of the specific federal matters in the news and could not advise on federal enforcement risk; Wasserman said she was not currently able to identify a programmatic risk to the state and repeated that the bill is written so the contract is contingent on the contractor structuring purchases so that abolition would not create tax consequences for recipients.

Committee staff said the bill also would bar credit reporting agencies from maintaining information about medical debt and would create a limited exception permitting a 501(c)(3) to access a consumer’s credit report for eligibility screening for medical debt abolition; the bill exempts “large health care facilities” (hospitals, hospital outpatient clinics and ambulatory surgical centers) from that exception so hospitals could not use the exemption to pull consumer credit in place of current patient‑financial‑assistance rules.

The committee did not vote on S.27 at the hearing. Staff said the group would take additional time to review details and that the committee expected to resume consideration at a later date.

Ending

Committee staff and witnesses said they will follow up with written clarifications about administrative fees and contract terms. The treasurer’s office emphasized the appropriation is reimbursement‑based (no prepayment), and legislative counsel said language in the bill will be adjusted if necessary to track changes in the budget pot from which the $1,000,000 is drawn.