Patient Liquidity at Time of Service Big New Problem for Providers, Insurers

Insured patients are liable for ever greater out-of-pocket payments, and providers will have to evaluate their creditworthiness and act accordingly

Consumers have demonstrated a strong preference for low-cost premium plans that feature high cost sharing. At the same time, there has been little effort to qualify or quantify a patient’s ability to meet the increased financial liability of high-deductible health plans (HDHPs). The inability of many consumers to pay high deductibles is likely to produce two outcomes: First, it will hurt the bottom lines of physicians, hospitals, ancillary services, and pharmacies. Second, it will inevitably lead to employee backlash as individuals realize they do not have sufficient liquid assets to pay steep deductibles.

Each segment of the health care industry will be forced to contend with the unintended consequences of less payment from consumers in HDHPs, and the resulting dynamic will strain business relations among employees, employers, insurers, and providers.

The inability of consumers to pay the high-deductible portion of their health coverage will create a crisis of liquidity that will grow as more and more consumers migrate to HDHPs. The deteriorating financial status of hospitals and physicians is described below as a backdrop for understanding why providers will be compelled to stratify HDHP patients based on ability to pay. In other words, financial stratification will become an accepted practice and will limit access to care.

Financial stratification is an assessment of the likelihood that a borrower will default on a debt. It is based on factors such as history of repayment and credit score. Lending institutions also consider the availability of assets and extent of liabilities to determine the probability of default.

Insurers, employers, and providers will each need to devise creative solutions to address this new challenge.

Employer-sponsored health plans

In the past six years, employers have seen the amount they spend on employee health care increase by 40%. Over this same period, employee out-of-pocket and payroll costs for health care have increased 82% per year.

Average monthly premium contributions paid by workers for single and family coverage, 1999–2012

*Estimate is statistically different from estimate for the previous year shown (p<.05).
Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 1999–2012.

As a result, employers have been adopting aggressive self-defensive cost-shifting strategies to contain their medical costs. Consumers now pay more for health care than do their employers. This cost is split among direct payment of noncovered services, out-of-pocket expenses after insurance, deductible obligations, and the consumers’ share of premium expenses.

The primary employer strategy dealing with medical costs has been to implement high-deductible health plan designs. At present, 31% of small employers, 33% of mid-size employers and 40% of large employers offer high-deductible health plans. Within these HDHPs, 20% of employees assume between $1,000 and $1,500 per year in deductible cost exposure; 30% face up to $2,000 per year; another 30% face $3,000; while the remaining 20% face $3,000 and above in annual deductible expenses.

Private market transition

Employers are shifting health care costs to the beneficiary

Percent of employers offering a high-deductible plan

Source: Kaiser/HRET Survey of Employer-Sponsored Health Benefits, 2011; Employers with 1000+ employees

Increasing deductible thresholds
Deductible % Meeting deductible
$2,500 11%
$5,000 4%
$7,500 3%
$10,000 2%
Source: eHealthInsurance

The Affordable Care Act (ACA) is increasing patients’ exposure to liability. When employees seek coverage through the ACA’s health insurance exchanges, they are encountering higher-than-expected out-of-pocket costs.

The maximum amount a consumer with single coverage will pay out of pocket in 2014 will generally be $6,350, while a family could pay up to $12,700. Those totals include copayments and deductibles, but not premiums, and they apply only to plans that are not grandfathered under the law.

The consequences of transferring financial liability to consumers are significant. As employees take on higher and higher deductibles, coinsurance, and copayments, they shoulder much of the financial risk traditionally borne by defined-benefit plans. From a market perspective, insurance companies are moving away from first-dollar coverage plan options and returning to their traditional role as catastrophic underwriters. In essence, most consumers are now self-funding their medical care costs.

High-deductible health plans

The rapid growth of high-deductible health plans is redefining the direction and structure of the private market. The figure “Private Market Transition” at right demonstrates the evolution of HDHP models from 2005 to 2011.

Enrollment in HDHPs rose 19% in 2012 to 39 million workers, up from 33 million in 2011, according to the American Association of Preferred Provider Organizations’ Survey of Consumer-Directed Health Plans 2012. The employee expense in an employer-sponsored health plan ranges from 89% with a $2,500 deductible to 98% with a $10,000 annual deductible threshold. This liability is in addition to the employee cost for the health plan premium, coinsurance, and copayment requirements.

Financial status of consumers

According to the Bureau of Economic Analysis, health care costs accounted for just 9.5% of all personal consumption back in 1980. Today they account for 16.3%. Roughly three quarters of Americans are now living paycheck to paycheck, with little or no emergency savings, according to data generated by Further, 22% of the 1,000 people surveyed had less than $100 in savings to cover unexpected expenses, and 46% had less than $800, according to The problem for providers is that many patients now lack the financial reserves to pay for obligations required by their health plans.

As of 2012, 75 million people reported problems paying their medical bills or were paying off medical debt.

As of 2012, 75 million people reported problems paying their medical bills or were paying off medical debt. This is up from 73 million in 2010 and 58 million in 2005. An estimated 48 million people were paying off medical debt in 2012, up from 44 million in 2010 and 37 million in 2005, according to the Commonwealth Fund.

In 2010, 41% of working-aged adults (ages 19–64) reported having medical debt or trouble paying medical bills, and 22% had been contacted by a collection agency for unpaid medical bills, the Commonwealth Fund reports. More than half of the bankruptcies in the United States are for medical debt, according to an article in the August 2012 issue of the American Journal of Medicine. Most are well-educated, own homes, and have middle-class occupations — and three-quarters have health insurance.

These figures are alarming and simultaneously affect care delivery and provider revenue. In 2012, 43% of adults, 80 million people, said they had skipped or delayed getting needed care or filling prescriptions because of cost. This is an increase from 75 million who reported such problems in 2010 and 64 million in 2005. More than a quarter of adults with a chronic health condition said they had skipped doses or not filled a prescription because of cost.

Financial status of providers

“Bad debt” is an accounting term referring to debts that are deemed uncollectible. In health care, this refers to patients who do not pay. For the average provider, this figure can range from a few percent of revenue to much more than 10%.

Patients do not pay either because they lack funds or they simply choose not to pay, according the Deloitte Center for Health Solutions. In 2003, the Federal Reserve reported that 52% of all collection actions by collection agencies and creditors were associated with medical bills.

Uncollectible consumer debt for medical care is rising throughout the country, and recovery rates are startlingly low. For hospitals, the rate is 11.3%, according to ACA International’s Top Collection Markets Survey for 2012, which also reports that the recovery rate for physicians is 16.7% on aged accounts receivable.

Moreover, many who receive coverage through state insurance exchanges will also have much larger out-of-pocket costs than they are used to paying. In California, the state medical association estimates that an individual could face as much as $6,400 in uncovered expenses, and a family up to $12,800 during a calendar year in addition to premium costs.

Many of the patients who gain coverage via exchanges will have pent-up demand for health care because they have previously been uninsured or underinsured. Thus, the rate of service utilization is likely to be high during the first three months of coverage. The resulting level of A/R bad debt will be disproportionately born by practicing physicians.


Hospitals are facing an unprecedented decline in third-party revenues as a percentage of billed charges. The following table reports why hospital cost shifting is not a viable strategy because private payers will no longer cover shrinking hospital margins resulting from lowered Medicare and Medicaid rates. The table summarizes projected yield on billed charges for hospitals out to 2020.

Changes in yield on billed charges
Year Best-estimate scenario
Current 44%
2016 41%
2020 39%
Yield indicates the percentage of billed charges a hospital collects.
Source: Milliman Healthcare Reform Briefing Paper, June 2010

Milliman points out that most of the decline in billed charges comes from private third parties, such as employers and insurers, that no longer fund cost shifting by hospitals to support shortfalls in Medicare and Medicaid payments.

According to the American Hospital Association, Medicare enrollees make up about 15% of the U.S. population. In 2009, the AMA says, Medicare and Medicaid paid hospitals a combined total of $38 billion less than hospitals’ expense for Medicare and Medicaid patients. Medicare paid hospitals an average of 10% below their costs of car­ing for Medicare patients, and Medicaid paid hospitals an average of 11% below their costs for Medicaid patients.

U.S. hospitals provided $41 billion in un­compensated care in 2011, 5.9% of annual hospital expenses, the AMA says. In addition, the national average for bad debt is 3.2%; for charity, 2.2%; and for total uncollectible accounts, 5.4%, according to the Hospital Accounts Report Analysis on Fourth Quarter 2012.

The market for hospital bonds reflects the patient revenue and public insurance underpayment realities. According to Moody’s, hospital bonds recently have not fared as well as the Dow Jones average. Last year set a record for hospital bond downgrades, as debt levels rose and hospitals faced the uncertainty of business under the Affordable Care Act. Volumes are flat to declining, especially on the inpatient side.

Moody’s downgraded bonds worth $20 billion last year, the most ever. That is about 10% of the hospital debt that Moody’s follows, and far more than the $6.4 billion marked down in 2011. The previous record occurred in 2000, when Moody’s downgraded bonds worth $15 billion. More than half of the downgrades in 2012 belonged to three large systems: Catholic Health Initiatives, Dignity Health, and New York’s Memorial Sloan-Kettering Cancer Center.


Physicians are facing even greater economic stress than hospitals. According to the Medical Group Management Association (MGMA), pro­viders report that the average amount due per office visit is about $110.

Physicians on average receive 16.7% recovery on aged accounts receivable, according to ACA International’s Top Collection Markets Survey for 2012. Physician practices are disproportionately facing the risk of not being able to collect patients’ deductible payments. Most patients will not have exceeded their deductible limit when treated at a physician’s office, thereby putting the physician at financial risk if the patient cannot pay the deductible amount. In contrast, by the time patients have been diagnosed in a hospital outpatient setting, many will have already exceeded their policy’s deductible threshold and the medical cost will be paid by the insurer.

The table “Accounts Receivable Key Performance Indicators” below shows the percentage of accounts receivable aged over 120 days. Primary care physicians have a rate just below 19.2%. Receivables of this age disproportionately contribute to an overall collection rate of 16.7%.

Accounts receivable (A/R) key performance indicators
Percentage of total A/R 120+ days Number months gross FFS charges in aged A/R
Better performers All respondents Better performers All
Primary care 10.34% 19.17% 0.93 1.34
Medicine specialties 9.52% 16.12% 0.86 1.24
Surgical specialties 9.02% 16.55% 0.97 1.39
Multispecialty practices 10.23% 17.76% 1.0 1.28
FFS = fee-for-service
Source: Medical Group Management Association, Performance and Practices of Successful Medical Groups: 2010 Report Based on 2009 Data (Englewood Colo.; Medical Group Management Association, 2010)

Most of the aged accounts receivable (A/R) may be attributed to insured patients who have not met their deductible threshold.

Delaying claims to the health plan

Physician practices have an incentive to delay HDHP claim submittals until the deductible has been met through the efforts of the patients’ other health care providers. This is because once the deductible has been met, the practice can collect directly from the third-party payer after the claim has been adjudicated.

These debts are not eligible for collection on managed care contracts until the physician’s claim has been adjudicated. This factor contributes to the aged A/R and the resulting low rate of collections. The last two columns indicate that A/R for private fee-for-service insurance is generally aged 30 days or less, with a higher collection rate.

According to the MGMA, 30% of patients leave a physician office without paying anything. Physician offices send an average of 3.3 billing statements before a patient’s outstanding balance is paid in full or written off as bad debt, the AMGA says. Once a patient’s bad debt is turned over to a collection organization, the practice recovers only $15.77 from the collection agency for every $100 owed.

Stratification of access to care

Because of concern about the financial vulnerability of most patients, many providers are considering strategies to protect themselves from uncollectible A/R bad debt. This process is already under way in hospitals. In February 2013, the HealthLeaders Media Intelligence Report indicated that 62% of health care organizations plan to increase their spending on financial analytics over the next three years. There are two things driving this investment. The first involves the financial unreliability of patients in high-deductible health plans. The second involves the move from fee-for-service payment to value-based payment, which substantially increases financial risk for hospitals.

Financial analysis systems give facilities the ability to be aware of individual collection trends and to research any patient outliers instantly, rather than in hindsight. Specifically, the systems identify the patients’ liability before a procedure is performed, and then estimate the patient’s out-of-pocket responsibility. Armed with this information, the hospital calls patients who are scheduled for an appointment involving substantial out-of-pocket responsibility to inform them and then offer an opportunity to prepay.

The reality is that providers are not financial institutions. They can no longer provide no-interest, unsecured loans in the market. They are adapting to changing market dynamics, such as HDHPs, by assessing the effectiveness of three approaches:

  • First, adopting financial screening tech­niques that stratify access to their services based on the likelihood that payment will be received. Simply having an insurance policy will not guarantee access to care in the future.
  • Second, encouraging amortization of patient debt through credit card payment, as is done with many consumer purchases.
  • Third, accepting discounted cash payment at the time of service, which avoids uncollectible A/R. Employers can encourage employee participation in cash discount programs by waiving deductibles, copayments, and coinsurance for the particular procedure.

As more and more providers experience the inability of patients to pay their deductibles, a backlash will occur. As this backlash becomes more pronounced, insurers will face mounting pressure from employers to come up with new ways to reduce costs and protect patient access to care.

High-deductible health plans have become a principal cost-management strategy in recent years, yet increasing numbers of employees will be unable to meet their deductibles for private insurance or for coverage purchased through the state exchanges. This puts insurers, employers, employees, and providers on the horns of a dilemma for which there is no easy solution at present.

As providers grapple with the need to protect against the increase in patient bad debt, they will employ strategies that have proven effective in the financial services industry. One strategy is issuing credit cards for a limited number of medical services.

Where this has been employed (e.g., cosmetic surgery and orthodontia), card repayment rates have been exorbitant and generated consumer dissatisfaction.

Financial institutions and credit card companies will probably devise innovative products to meet the liquidity needs of this growing market. At the same time, providers will increasingly use patient stratification tools to mitigate their financial risk. More and more employers will likewise reassess how to ensure employee access to care, including offering discounted cash payments at the time of service to providers. This strategy would protect patient access to care while reducing medical spending.

No-interest loans

A new reality for physicians, hospitals, and pharmacies is the realization that A/Rs are in effect unsecured, no-interest loans from the provider to the patient.

Stratifying the creditworthiness of patients will become much more aggressive with providers importing methodologies from the financial industry to manage risk.

Without the availability of real-time information on patients’ deductible status, providers will increasingly require cash payment for services.