Self-Pay Patient Financial Liability: A Hospital’s Biggest Post-Election Challenge

During his election campaign, president Donald Trump indicated that his administration would be committed to two major objectives: repealing and replacing the Affordable Care Act (ACA) and “empowering” patients to manage their own health through health savings accounts (HSAs). It seems that the president and Congress are already taking steps toward accomplishing the first of these objectives, but action toward the second is yet to be seen. In combination, these objectives have a highly likely consequence for hospitals and health systems: a significant shift in the burden of healthcare costs directly onto patients, potentially compromising providers’ cash flow.

No one today can envision what “repealing and replacing” the ACA means operationally. However, a major consequence of repealing the law with only partial replacement may be to increase the number of people without health insurance.

And as recent experiences with the sharp growth in high-deductible health plans (HDHPs) have conclusively demonstrated, many patients with such accounts have trouble paying their portion of healthcare costs, even with the modest help of money saved in tax-protected consumer accounts like HSAs.

Growing Consumer Cost Responsibility: The Most Significant Trend in Healthcare Finance

The growth in consumer financial responsibility for healthcare costs has been a major trend in the economics of healthcare provision in the past decade. This growth has, in turn, become a major financial challenge for the nation’s hospitals, tying their financial fate much more closely to that of the overall economy and the solidity of household finances.

In response to the 2008 recession, employers aggressively shifted economic risk to their workers through HDHPs. Recent data issued by Kaiser Family Foundation and The Health Research & Education Trust (HRET) point to a roughly sevenfold increase in number of covered workers enrolled in HDHPs since 2006. ^a   Today, HDHPs represent almost one-third of the 160 million people covered by employer benefits.

Percentage of Covered Workers Enrolled in HDHP/HRA or HSA-Qualified HDHP, 2006-16

This number grew further because of the 10 million Americans who entered the health exchanges created by the Affordable Care Act (ACA), especially because the vast majority chose HDHPs. It is significant that the increase in patient financial responsibility has not only far outstripped inflation, but also has not been matched by growth in wages. Consumer out-of-pocket spending rose at six times the rate of wages in the past 16 years (although more rapidly before the Great Recession than afterward), according to the Kaiser/HRET data. As I will discuss later, millions of these new HDHP insureds live in households with no or negligible reachable assets, although the Exchange users below 250 percent of poverty do get cost-sharing assistance under the ACA, which reduces their risk.

Cumulative Increases in Health Insurance Premiums, Workers’ Contributions to Premiums, Inflation, and Workers’ Earnings, 1999-2016

Practically speaking, these circumstances mean almost one in five working American families are being billed significant amounts for their healthcare use, representing an important new claim on their wages and savings.

Although some 17 million of those families can fall back on their HSA balances for a portion of this financial responsibility, the average account only contains about $14,035, according to findings of research reported by Minneapolis-based Devenir, an HSA investment provider. ^b   Money flows out of these accounts almost as fast as it flows in: In 2015, for example, nearly $23 billion was invested in HSAs, while roughly $17 billion flowed out.

For households with limited resources, the simple fact is that the growing financial responsibility for out-of-pocket healthcare expense must compete with other more formal and established forms of debt, such as mortgages, credit cards, and student loans, effectively tying the future financial position of hospitals much more directly to the economic cycle than at any time since the advent of health insurance.

The Potential Impact on Hospital Finances

This growth in consumer financial responsibility has a direct effect on hospital finances in the form of increasing hospital accounts receivable (A/R), and it poses a major revenue cycle challenge: increasing bad debts owed not by health insurers but by families.

Evidencing the effects of the first year of enrollment in the health insurance exchange under the ACA, a recent survey by Crowe Horwath found that hospitals’ self-pay patient A/R grew to almost 10 percent of total hospital A/R from June 2014 to June 2015, while uninsured patient A/R fell almost 20 percent over the same time period. ^c The gain from the ACA’s coverage expansion offset the loss from increased insured self-pay, and these  gains would be placed at risk if the law were repealed without adequate replacement coverage.

Change in Percentage of Total Accounts Receivable (A/R) Dollars

The growing patient financial responsibility for healthcare costs more tightly links health providers to the credit economy. This is a good news/bad news story.

The good news is that a combination of persistent very low interest rates and improvements in household liquidity means that the credit standing of Americans is much more solid than it has been in more than a decade. Even though total consumer debt has returned to roughly $300 billion below the peak level of $12.8 trillion immediately prior to the crash, as noted in a 2016 report on household debt and credit issued by the Federal Reserve Bank of New York (FRBNY), that debt is spread among 24 million more people and is at far lower interest rates, meaning that the debt burden for the typical U.S. household is lower as a percentage of disposable income than it has been in many years. ^d

Total Debt Balance and Its Composition

Moreover, in 2015, the median household income grew by more than 5 percent—the largest increase in nearly 30 years. ^e

The result of this improved liquidity and credit quality is that, after soaring in the run up to the 2008 financial crisis, the amount of consumer credit in delinquent accounts has fallen by roughly 65 percent in the ensuing recovery.

New Delinquent Balances by Loan Type

The only category of debt with growing delinquency rates is student loans, the fastest growing category of consumer debt (at more than $1.3 trillion in 2016), but one that is demographically skewed away from the heaviest healthcare users (who tend to be older). Some 40 percent of student loan accounts are delinquent.

Seriously Delinquent Balances by Loan Type

Interestingly, although overall consumer credit is improving, the number of accounts in collection continued growing after the recession, reaching a peak of roughly 15 percent of all consumers in 2013. Today, roughly one in eight U.S. consumers has an account in collection, and the average amount of debt in collection is about $1,300, according to the FRBNY report.

Third-Party Collections

The bad news is that healthcare accounts for more than one third of this collection activity, according to a recent survey. ^f   The percentage of collections involving healthcare accounts significantly outstrips other debt categories like student loans or credit card accounts. Of course, aggrieved asset-based lenders such as home mortgage lenders and automotive lenders can move to reclaim the asset from delinquent borrowers through foreclosure or repossession. But that recourse is simply not available to healthcare providers.

Debt Collected from Consumers, 2013

The other bad news in this emerging credit economy is that the proceeds of the economic recovery have been highly skewed toward a small number of wealthy households.

Roughly 70 percent of all household wealth ($21 trillion in 2014) is held by just 5 percent of U.S. households, while 70 percent of U.S. households hold roughly 6 percent of all wealth.

In other words, almost 86 million U.S. households have little or no savings. Moreover, their asset position has actually declined since 2008. ^g   The following exhibit may offer as clear an explanation as one can find for the angry populist political climate in the current presidential campaign.

Total Investments by Asset Tier, June 2007 to December 2014 ($ in Trillions)

These circumstances clearly suggest that the yield on any collection activity will vary substantially according to each household’s asset position, which means the potential yield on healthcare accounts sent for collection, traditionally about 15 percent of the collection amount, also will be subject to this same variability.

Implications for Care Systems

It is entirely possible that hospitals will see an increase in uninsured patients if the Trump Administration follows through on its commitment to eliminate the ACA, particularly if it is unclear how any replacement might be able to maintain the ACA’s extension of coverage to 20 million people. It seems unavoidable that, one way or another—whether they experience an outright loss of coverage or increased exposure to front-end costs—consumers will see their share of responsibility for paying the bill for their healthcare services go up when they use the hospital or see their physician. It also stands to reason, therefore, that caregivers will find it more difficult to collect the amounts owed. This will be not only a financial problem, but also a political problem because it also is likely to create a consumer backlash against hospital and physician costs.

Sensitivity to the financial stresses of patients and thoughtful efforts to collect from those who can pay will be essential to dealing with these pressures. Hospital and health system revenue cycle leaders therefore will benefit tremendously from using algorithms that rate credit quality and reachable assets to help them target their efforts where they are likely to yield results, rather than focus on households that have no realistic hope of repaying the debt.

Healthcare providers will need to tread carefully in this new realm of consumer debt, balancing the potential for consumer and political backlash against the need to remain cash positive and to be paid fairly for the important and necessary services they deliver.

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Jeff Goldsmith, PhD, is a national adviser for Navigant and an associate professor of public health sciences at the University of Virginia, Charlottesville, Va. 

Footnotes

a. The Kaiser Family Foundation and The Health Research & Education Trust, Employer Health Benefits: 2016 Annual Survey, 2016.

b. Devenir Research, 2015 Year-End HSA Market Statistics & Trends , Feb. 17, 2016.

c. Crowe Horwath, Analytic Trends Show Changing Landscape of Hospital Self-Pay Patient Collections , Crow RCA Benchmarking Analysis: April-June 2015.

d. FRBNY Research and Statistics Group, Quarterly Report on Household Debt and Credit , Microeconomic Studies, May 2016.

e. Appelbaum, B., “ U.S. Household Income Grew 5.2 Percent in 2015, Breaking Pattern of Stagnation,” The New York Times, Sept. 13, 2016.

f. LaMontagne, C., “ NerdWallet Health Study: Medical Debt Crisis Worsening Despite Policy Advances,” NerdWallet, Oct. 8, 2014.

g. Equifax, Observations and Impacts of U.S. Consumer Wealth Trends: Investment Landscape, Distribution of Assets, and Portfolio Allocation by Asset Tiers, October 2015.