Beating the self-pay problem: How 3 hospitals developed patient loan programs

Hospitals and health systems are looking for creative ways to tackle a thorny and growing problem: how to collect self-pay accounts associated with a growing number of high-deductible health plans.

Today, patients with high-deductible policies are grappling with significantly greater out-of-pocket costs. Kaiser Family Foundation reports the average annual out-of-pocket costs per patient rose almost 230 percent between 2006 and 2015. As consumers shoulder greater financial responsibility for their care, hospitals and health systems are interfacing more than ever with patients to collect on accounts many individuals simply can't afford. For insured patients, management consulting firm McKinsey & Company estimated the rate of bad debt is increasing at well over 30 percent each year in some hospitals.

As providers revisit their collection methods, some healthcare institutions are using patient loan programs to alleviate patients' financial burdens and reduce bad debt.

Orlando-based Florida Hospital has offered medical loans to cash-strapped patients for more than decade. In that time, the program has evolved significantly to suit patients' increasing financial obligations.

Before contracting with a third party financing vendor, the hospital self-administered its own loan program and charged patients interest rates upwards of 18 percent. However, low patient acceptance levels indicated the need for repayment terms that were more flexible and less punitive.

Florida Hospital partnered with patient financing firm ClearBalance in 2007 in a concerted effort to transform its patient pay strategy from one of collections, to one of resolution and repayment. For Florida Hospital, this meant striking interest rates from its loans altogether. Since implementing a zero-percent loan option, more patients have participated in CB's program than ever before, says Jeff Hurst, senior vice president of finance and Florida Hospital. In fact, Mr. Hurst says the program has out-performed all other repayment tactics, including staff follow-up, early-out and bad debt collections, for the past three years.

The program is successful, in part, because it addresses patients financially in a non-threatening way, Mr. Hurst adds. Few patients control their need for medical care, and interest-free, non-qualifying loans relieve much of the financial anxiety affecting patients' psyche during a stressful time. Zero-percent interest loans show a hospital is not out to turn a profit from the ill fate of the sick or injured. This good faith better positions hospitals to engage patients in financial conversations at any point during the episode of care and offer a friendly way to meet their obligation, said Bruce Haupt, ClearBalance president and CEO.

Patient loan programs make repayment less confusing for patients, however they can add strain on a hospital with limited resources. That's why many hospitals have turned to a new wave of financing vendors for help. Dedicated financing firms offer a level of expertise that is imperative to navigating a heavily regulated and complex industry like credit. Vendors like ClearBalance actually offer their clients return-on-investment because they can manage and collect a greater number of accounts at a lower operating cost.

But vendor companies aren't the only option available to hospitals considering alternative financing programs. Some banks are tailoring programs to meet hospital's unique needs.

St. Louis-based SSM Healthcare implemented an interest-free patient financing program in partnership with Commerce Bank in 2014. The bank advances financing with three- and five-year terms to eligible SSM patients in the health system's four-state footprint — Missouri, Illinois, Oklahoma and Wisconsin.

Paul Sahney, vice president of revenue management for SSM Healthcare, says partnering with a financial institution made sense for SSM, as the system's hospitals don't have the resources or capacity to effectively manage monthly payment plans.

The program has been wildly successful since its start two years ago. SSM and Commerce Bank have extended around $24 million in financing to 14,000 patients. "We encounter so many patients who feel dignity in meeting their financial obligation, but don't have the cash on hand," says Mr. Sahney. "We are helping to meet a very clear need in our community."

As a faith-based, nonprofit health system, SSM Healthcare isn't necessarily interested in making a ROI on its financing program. Accounts that default on payments are transferred back to SSM after a holding period, at which point SSM refunds Commerce the remaining balance. SSM does not pay Commerce Bank’s one servicer fee at all for defaulted accounts. From there the account is written off as bad debt and outsourced to a third-party collection agency.

But the risk of sending accounts to collections is far outweighed by what the program does for SSM's reputation in the community, says Mr. Sahney. "As a faith-based organization, we have a vested interest in supporting our patients as much as we can. By helping them fulfill their financial obligations, they see us as a true partner in care," he says.

Third-party financial institutions offer an undeniable value-proposition to nonprofit and for-profit hospitals hoping to expand their financial offerings. Many systems simply don't have the resources available to develop loan programs in-house. But there are exceptions: Some health systems possess the scale and desire to more fully invest in patients' financial experiences.

Like Florida Hospital and SSM, Boise, Idaho-based nonprofit St. Luke's Health System implemented a loan program after recognizing the need for creative financing options in its community. St. Luke's is one of the largest health systems Idaho, a state that chose not to expand its Medicaid program under the Affordable Care Act. Idaho routinely ranks among the lowest states in the nation by both education and income levels. Compounded, these factors impact the financial context of St. Luke's patient population.

"From a cost-of-service perspective, average [patient] income is relatively small, but patients' financial obligations in terms of care costs aren't dramatically different compared to other locations across the U.S.," says Michael Rawdan, PhD, MBA, system director of revenue cycle and patient experience at St. Luke's Health System of Boise, Idaho.

The health system has evolved its loan program substantially since first implementing it in October 2014. St. Luke's initially offered patients 18-month payment terms at zero-percent interest, but soon found most patients still failed to meet their financial obligations. "We needed to become more flexible without drastically increasing our days of accounts receivable," said Mr. Rawdan.

The health system developed a financing strategy that makes use of both interest-free and interest-bearing terms, divided into three payment periods. A participating patient has up to 12 months to pay back their loan with zero-percent added interest. Once the account ages between 12 and 24 months, payment interest creeps to 5 percent. Accounts 36 months and older accrue 8 percent interest.

After capping its interest-free payment period at 12 months, St. Luke's saw its patients modify their financial behaviors. Under its original loan program, some patients with the ability to pay-off the account within one year simply chose to take advantage of the full 18-month term. Enforcing a slight rate increase at 12 months incentivized these accounts to close earlier, with a positive impact on the health system's cash-flow.

There are certain benefits to self-administering its loan program, Mr. Rawdan says. A hospital's billing process has a direct effect on patient satisfaction, largely because billing is the first and last interaction a patient has with the provider, from registration to collections. By selling and managing the system's own financial products, "we can ultimately control the experience to make it more flexible, transparent and personal," he adds.

Developing effective, efficient ways to improve the patient financial experience is an essential strategic priority for all hospitals as they navigate the shift to consumer-centric care models. Fortunately, many healthcare organizations have found a little flexibility, patience and compassion go a long way to improving both patient experience and a hospital's bottom line.

More articles on revenue cycle management issues: 

Best practices to improve your revenue cycle now: 3 experts weigh in
Wyoming hospitals look to cut services as uncompensated care costs rise
Independent emergency group taps McKesson for RCM services

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