Why healthcare providers should rethink their approach to self-pay collections | HMA

Self-pay collections present one of the core revenue cycle challenges for hospitals. Healthcare organizations should consider a new approach to meeting this challenge, involving prepayment by healthcare consumers.

The two most widely used approaches, point-of-service collections and patient statements, have inherent flaws that can make them a significant source of dissatisfaction for consumers, while they also create difficulties for providers. Prepayment, by contrast, can contribute to a more positive experience for patients as well as improved revenue cycle performance for the provider organization.

Current revenue cycle shortcomings

The self-pay approaches most commonly used in healthcare today are modeled after the approaches used widely in the business industry. The problem is that healthcare does not perform like a traditional business model. Very nearly everyone consumes healthcare services, whether voluntarily or not, at some point in their life. Healthcare also varies significantly from person to person, encounter to encounter and payer to payer. So, it makes little sense to try collecting payment as if the cost of services are predictable and easily defined.

Prepayment is a way to address healthcare’s unique limitations. To fully understand why, it is helpful to start by examining the reasons the other two approaches are ineffective for self-pay payments.

Point-of-service collections. Collecting at the point of service is fraught with inconsistencies as it attempts to predict patient responsibility based on information provided by the patient’s insurance plan and the level of service. This method cannot accurately account for differences in the level of service determined by the provider at time of service, nor does it consider a broad range of other factors, including:

• Global periods
• Bundled services
• Pre- and post-care follow-up
• Behavioral health benefit carveouts
• Copayments not available on electronic payer responses
• Patient maximum out-of-pocket limits
• Coinsurance
• Cost sharing after coordination of benefits for patients with multiple coverages
• Charge corrections
• Changes in cost sharing for rebilled charges

And the list only grows. The result is over- or under-collection from consumers in all but the simplest services, and sometimes even for those.

Mailed and electronic billing statements. The problem with such statements is that they represent only a single snapshot of patient balances taken at the start of each billing cycle. It is shocking how many times consumers pay their bill, whether late in the month or the result of a delay in cash application, only to receive another bill the next month, where they end up paying on the same balance a second time.

Billing statements also do not include how much the consumer has already accrued in credit balances, so they may continue to pay for services not knowing that the money is already available, thereby exacerbating the overpayment problem. Billing statements also fail to consider self-pay balances billed to a secondary coverage, not yet paid or covered by workman’s compensation or no-fault payer claims not yet finalized. Because payments from insurers routinely take over a month to process, the patient is receiving a statement prematurely and may be paying on that balance.

Cause for consumer dissatisfaction

Clearly, such approaches are a notable source of dissatisfaction for consumers. As providers, we have no right to collect more than what we are owed, yet we do so without consumer knowledge or consent.

And to make matters worse, there is no guarantee that self-pay refunds will be processed quickly. Automated refund processing often disqualifies self-pay refunds due to many factors. A refund will not qualify if any credit account received a new patient payment in less than 21 days or the admission date being refunded is less than 90 days old, or if there has been a recent encounter where the charges have not yet posted to the billing system. Refunds also are excluded if there are balances written off as presumptive charity or for various recoverable discounts and adjustments, or if the combined refund does not meet the minimum/maximum dollar amount thresholds.

Meanwhile, unless manual refunds are requested from the patient, they can take a long time to complete because inventory is typically worked from highest to lowest dollar value. It can take as much as three years to process low-dollar refunds, or longer depending on state escheatment deadlines.

Health systems likewise experience a negative impact because patient overpayments only add to the organization’s cost to collect. Every check or card produced as a patient refund has associated labor hours. The actions required to bill patients for services also imposes costs onto the health system and significantly increases the time to collect, thereby stagnating cash flows.

The alternative of waiting to bill to avoid overpayment is no better. Sending a surprise bill for money owed on care received months or even a year later is clearly a huge patient dissatisfier.

Prepayment as a more viable alternative

Prepayment is a solution that may be beneficial to all parties. Under this approach, consumers are given an option to prepay for healthcare services at a monthly rate that suits their financial situation, and up to a maximum that they define.  

It is important to stress that this is not an insurance product. There should be no costs to the consumer associated with accessing this payment model. Neither is this a health savings or flexible spending account: There are no tax benefits, nor does money have to be used or be lost after a year. The approach requires the consumer’s express permission, and it provides a way for the consumer to save toward future healthcare costs with a trusted health system.

Benefits to consumers. Consumers can obtain a number of clear benefits from a prepayment approach:

• They no longer need to be asked for their copayment amount or whether a copayment is even due.
• They no longer need to pay anything at time of service or receive a bill for care unless they want one.
• Their prepayment balance can be applied to services across the health system’s continuum of care, including visits to the patient’s primary care provider, an urgent care facility or the emergency department, as well as any required inpatient services.
• Being able to accrue money for these services before it is needed mitigates the financial burden of unanticipated healthcare needs, and the money can be easily transitioned into a payment plan that already accounts for the customer’s financial health.

Depending on the patient’s financial security, prepayments can cover financial obligations ranging from copayments only up to the maximum out-of-pocket. Best of all, they are in control. And should they need that money for any reason, they can request a refund with no questions asked.

Benefits to health systems. For the provider organization, prepayment plans mitigate all over- and under-collection scenarios for outpatient and professional services. They have the potential to reduce the number of self-pay refunds by thousands, simply through the agreement with customers to hold funds for future care.

This model also uniquely allows for the significant time needed for charges to be created in the billing system and for claims to be adjudicated by payers. After this time, when claims are paid and adjustments, discounts and financial assistance have been applied, the health system can determine appropriate allocation of consumer funds. For consumers with prepayment arrangements, therefore, this approach obviates the need to refund overpayments due to changes to charges or cost sharing.

It is also important to note that prepayment plans can significantly reduce the number of self-pay credit balances considered “too low to refund,” eliminating the unclaimed property burden that comes with them. Should these or any other self-pay credit balances be created, they can be applied directly back to the payment plan balance, regardless of the amount.

Prepayment in practice

What might a system like this look like in practice? From a revenue management perspective, this collections method will be similar to payment plans and future service payments collected today. These monthly payments will be set to go to a single invoice that will act as the holding account for the consumer, rather than immediately posting to individual encounter or admission invoices, which is the norm for payments collected at point of service and from billed statements.

A zero-charge procedure code could be created in the billing system to generate the invoice and to facilitate tracking or reporting. The charge amount might also be modified to represent the collection cap determined by the consumer.

Such an invoice would need to be assigned a clearly defined financial class that identifies its connection to a prepayment or future-service payment plan. Some type of electronic identifier for consumers participating in this program will be needed so patient-facing front-desk staff know collection efforts are not needed for these individuals.

Beyond these features, the organization can either use existing processes for transferring consumer dollars or create unique payment codes for tracking the flow of future service dollars through the system.

If an overpayment occurs at any point in an account life cycle, the same codes would be used to transfer the patient’s money back to the prepayment plan. Financially, such funds could be made to be an additional line item on financial statements and tracked independently on the general ledger.

Patient communication is paramount

The effectiveness of a prepayment plan will depend, first and foremost, on patient communications. Patients will want transparency into how their money is being utilized within the system both before and after services are provided. Assuming a service is scheduled with an adequate lead time, for example, the health system should provide the consumer with a projected cost prior to the service in the interest of financial transparency. The idea is to give the patient an expectation of the most likely cost of the scheduled services so they can understand the financial implications. This information also provides a reference point for when the actual cost sharing is received. (See the sidebar below for below for an illustrative example.)

The consumer’s expected cost can be communicated as an average cost sharing, based on similar encounters with the same or similar coverage, or with a more exact projection if more precise information is available. Afterward, the patient should be sent a receipt with the explanation of benefits detailing the following:

• The charges that occurred
• The actual cost sharing adjudicated
• The dollar amount transferred from the prepaid account to cover that responsibility (this amount does not necessarily agree with the amount of patient responsibility determined by the payer)
• The updated prepayment balance

Such communications are critical for consumers to understand the financial impact before care is provided and the actual dollar amount applied for the care received. The receipt also should allow individuals to submit claims for reimbursement from any flexible spending or health savings accounts they may be using as well.

These communications do not need to be sent through traditional mailers, unless requested by the consumer. In almost all cases, communicating through mobile or online platforms should be a sufficient means to ensure patients are receiving timely and transparent information on financial expectations, thereby allowing them to make better informed decisions about the care they receive.

Overpayments occurring with self-pay credit balances pose an ongoing challenge for hospitals and health systems.  Self-pay collections in healthcare therefore should be reimagined to better align with the unique nature of healthcare services with how they are paid. It is not a question of if services will be needed, but when. Allowing patients to save for both the predictable and unpredictable costs of care over time can help reduce a significant ongoing burden for both consumers and for the health systems that support them.

Prepayment on patient self-pay accounts in practice

To understand how the prepayment approach to self-pay accounts works from the patient’s perspective, consider the following scenario:

Let’s assume a patient has paid $10,000 into the system over a number of the years, and then has a procedure that costs $200,000? Let’s also assume the patient’s out-of-pocket maximum for the year is $7,000. The $7,000 would be applied to the procedure, leaving a $3,000 balance in the prepaid account.

After the patient’s maximum out of pocket is met, the insurance coverage will pay the balance remaining balance, as is defined in the coverage contract, and the patient will be notified that $7,000 was used to cover the cost sharing on the procedure. At that point, the patient can decide to continue making monthly payments to rebuild their prepayment balance or stop participating in the program. The patient also can either request a refund for the remaining $3,000 or leave the money in the account to be held for future services based on the patient’s agreed-upon time frame for participation in the arrangement

Setting the prepayment amounts and total

The patient determines the prepayment maximum and the monthly payments toward that maximum, thereby determining the time frame for the overall arrangement. The prepaid balance can be used to cover annual copayments and their deductible amount up to their max out-of-pocket obligation. In short, patients simply decide how much they want to save for future services.

If their prepaid balance does not cover the full self-pay obligation, they can simply continue to pay monthly until the obligations are satisfied and their defined savings cap is met. But because the patient has been saving, hopefully for several months, the financial burden will have been reduced with no additional impact on their budget outside of what they’ve agreed to pay monthly.

Patient’s also always can opt to make lump-sum payments and health systems can still provide incentives to patients to encourage that option.

Additional considerations

As patients begin to pursue a prepayment option, they may already have earlier outstanding balances. These balances can be resolved from the oldest outstanding balance to the newest as money is received monthly.

The prepayment approach also will initially need to be limited to the continuum of care within the health system. If a patient needs to see a provider outside of the network, the patient could request a refund, either in part or in whole, to cover those services.  Eventually, a mechanism could be designed for transferring these funds to other healthcare organizations, but the complexities of incorporating such a capability would likely relegate such a solution to being a long-term goal for this collections method.