Hospitals today are struggling with increasing bad debt. They are struggling to collect payment from uninsured people, and with the rise of high deductible health plans, they are also being snubbed by insured patients who can’t or won’t pay skyrocketing out-of-pocket costs.

Bad debt refers to patient debt that is considered unrecoverable. Providers may report bad debt when unemployment or bankruptcy prevents patient payment, according to a new accounting standard that changed the definition of bad debt in 2018 — called the Revenue from Contracts with Customers (or Topic 606).

In 2018, 11-hospital Piedmont Healthcare had $250.7 million in bad-debt expense (about 8% of its $3 billion revenue that year — up from 6.5% of revenue in 2017). According to the American Hospital Directory, the national average for bad debt expense as a percentage of revenue for US acute care hospitals in 2018 was 1.73%.

A survey of 100 hospital executives conducted by Sage Growth Partners in 2018 revealed the following:

  • 36 percent of executives reported their health systems face more than $10 million in bad debt
  • 6 percent reported bad debt of over $50 million
  • About half of these executives indicated their hospitals could recover more than 10 percent of what they’re owed

As of 2018 data, hospitals have provided $41.3 billion in uncompensated care (i.e. care for which no payment was received from the patient or insurer). Uncompensated care is the sum of a hospital’s bad debt and the financial assistance it provides (charity care).

According to a study from TransUnion, more than two-thirds of patients are also not paying their entire hospital bills, and that number could increase to 95 percent by 2020.

Reducing bad debt continues to be an uphill battle that hospitals face. Hospitals have employed a variety of strategies to address this concern, including point-of-service collections (with some hospitals requiring 25% upfront payment). Other strategies include providing enhanced technology for better cost estimates and offering low-cost financing or payment plans.

Patient Financial Education

A common feature among the different strategies is educating patients about their financial responsibility. Providers can give their patients a huge amount of support just by educating them about the portion of their medical bill that is their responsibility and taking into account the specifics of their insurance plan (what is and is not covered by their health insurance). Also, letting patients know which providers, services, and facilities are in their insurance network.

Providers should seize the opportunity to educate patients in the pre-registration process, informing patients of their responsibility. By engaging patients early in the process, hospitals avoid potential miscommunications regarding scheduling, collections, bad debt, and ultimately payment. A patient who knows what they are paying and why will have a better experience.

Sufficiently Identify Charity Care and Potential for Bad Debt Up Front

Healthcare providers often have difficulty in distinguishing bad debt from charity care. If hospitals identify patients who are eligible for charity care early in the process, hospitals can spend less time pursuing bad debt and more time focusing on high-level concerns.

With 501(r), non-profit hospitals are required to make “reasonable” efforts to determine whether or not a patient is eligible for charity care before engaging in “extraordinary collections” against the individual. Failure to fully adhere to the 501(r) requirements can result in the hospital losing tax-exempt status.

Depending on a variety of factors, including whether a patient completes an application for financial assistance, care may be classified as either financial assistance or bad debt. Even when hospitals have streamlined documentation requirements for charity care eligibility process, patients fail to fill them out.

Here are some reasons:

  • There may be language barrier problems
  • Some patients are just plain embarrassed and don’t apply
  • Some patients think charity care doesn’t apply to them
  • Some patients are unaware such an option exists

The challenge lies in finding out who qualifies for charity care within the steady flow of patient accounts (hundreds or thousands of new accounts every day). It is estimated that about 20% to 30% of bad debt could have been handled by diverting to charity care or other payers (e.g. Medicaid, marketplace exchanges, disability insurance, third-party payers, etc.), offering patient discounts, charging to available credit balances or offering extended payment arrangements, nonrecourse loans or other financial options.

Here are other points to consider:

  • Providers need to proactively keep charity out of bad debt.
  • Put in place processes to identify who can and cannot afford to pay in order to anticipate whether the patient’s care needs to be funded through an alternative source.
  • Providers should also continue efforts to identify patients who are unable to pay during the billing and collection process.

Leverage Data Analytics

Many hospitals are turning to predictive analytics to make valid assumptions about who is likely to be eligible for charity care. By using third-party data, hospitals can also identify which self-pay accounts can be pursued for collections and which accounts are presumptively eligible for charity care.

Leveraging data analytics can also enable a hospital’s financial counselors to provide consistent (unbiased) and efficient methods for identifying which patients are eligible for financial assistance.

Using data analytics allows hospitals to accelerate the segmentation of aged self-pay accounts into different buckets: for payment, for charity, and for bad debt. By segmenting patients into the “charity bucket” even as early as pre-service, hospitals can cut down on bad debt and facilitate reimbursements for greater cash flow.