How Hospital CFOs Can Improve Medical Bill Collections
Co-Authored By: Adam Tibbs, CEO Parasail Health & Chris Wyatt, VP Strategy Parasail Health
The Pareto Principle – more commonly known as the 80/20 Rule – is a well-worn truism in the business world and has been applied to any number of data sets in order to help companies understand how to focus scarce time and resources for maximum gain. So it seemed logical that this common statistical phenomenon was likely at work in the balance sheets of hospital and practice AR as well… But to our knowledge no one had yet analyzed payment data to verify this – and try to figure out how to optimize collections activities to fit how this statistical rule of thumb applies to patient balances owed to providers. So we decided to tackle it.
The basic idea, that around 80% of value is driven by only about 20% of activity, has been used by management consultants to identify which workers are the most productive, by fund managers to see which investments have the best returns and retailers to understand which customers drive the most revenue – and conversely which ones are the source of most complaints. Over many years, first as a payments executive at Emdeon and later as Parasail’s VP of Strategy, Chris Wyatt analyzed real payment data from hundreds of hospitals and had seen the tell-tale statistical distribution in the AR data across nearly all hospital patient balance sheets. As he and his team dug into additional payments data, it became clear that in nearly every typical hospital’s patient AR that we studied, a disproportionately large number of accounts had low dollar balances while a much smaller percentage were where the lion share of patient debt lies – uncollected.
“Hospitals Use The Same Approach to Collect a Medical Bill of $20,000 as They Do to Collect a Bill of $20”
With so much of their debt locked up in so few accounts, it would be logical for hospitals and providers to expend extra effort trying to collect from higher-balance accounts. Yet as we studied the methods that most providers use to collect, it became apparent that most hospitals still use the same approach to collect a bill of $20 as they do to collect one of $20,000. Even more concerning is that we discovered many providers still measure their collection effectiveness not by the total amount of dollars collected, but by the number of accounts they are collecting from or the average days to pay. With incentives for revenue teams disconnected from the dollars collected, equal effort is expended across all open accounts on the balance sheet, regardless of how much is owed.
This works well in trying maximize patient satisfaction, but not in maximizing revenue. And made sense in the era before high-deductible health plans existed, when all patient balances were mostly affordable. But now over ⅓ of insured Americans are on an HDHP, which means patients are now the 3rd largest single source of provider revenues (behind Medicaid and Medicare). In a world where 63% of Americans report being unable to afford an expense of $500 or more, this patient collections gap represents a systemic threat to providers.
Over time, a formula for collecting from patients emerged: spend about 90 days dunning, then transfer balances to early-out vendors and then to collections. This industry “best practice” has proven to be effective – but, it turns out, only for collecting low-balance bills. Recent data from Crowe Horwath corroborates our own analysis that collection rates rapidly decline when patient balances exceed $1000.
Death to the Shotgun Approach to Medical Billing
The interesting thing to note about these numbers is that if a provider were able to make even a 17% improvement in collections rates for balances over $1000 it would have a bigger impact on total revenues than a 100% increase in collections on accounts with balances below $1000. All of which leads us to conclude that the historical shotgun approach to patient collections has outlived its usefulness. The one-method-fits-all approach is a relic of a world before HDHPs. This is not to say it is completely ineffective, just that it only really works well for low-balance accounts; but it’s clearly ineffective for collecting larger balance accounts which have a much greater revenue impact for the provider.
So what can be done? Of course, patients default on bills with high balances – that’s just how it is, right? If every other industry accepted that logic, you would need a suitcase full of cash to buy a car or a house. You would not be able to add the cost of a new cell phone to your data plan. You wouldn’t be able to get the new dishwasher the same day yours breaks down. People would go back to making fruitcakes to give as Christmas presents instead of shopping on Amazon.
The solution is simple and logical; people can only pay what they can afford to pay (see chart). If you send a patient a bill for thousands of dollars with no real solution for them to pay with their actual monthly income, you should expect the patient to default on their debt. This isn’t just conjecture; McKinsey found that the number one reason patients defaulted on their medical bills was a lack of payment or financing options.
The Real Cost Associated With Credit Card Debt & Medical Bills
From an ethical perspective, those who deliver healthcare may not feel great about being complicit in mounting credit card debt for patients. Certainly if a patient puts their whole medical bill on a credit card, the practice gets paid immediately, but chances are the patient has taken a first, fatal step toward financial ruin. Medical debt is, in fact the number one cause of personal bankruptcy and the leading concern of Americans. That is because credit cards – even medical credit cards – charge compound interest rather than simple interest. The distinction may seem minor until you do the math:
The answer to affordability for patients needs to work for both patients and providers. It should not come down to an existential choice between doctors and patients of who is saddled with the cost of medical care; a zero-sum game invented by banks to extract as much money from the exchange of care as possible. Any solution must make payments affordable for patients and also pay providers fairly for their work.