Bad Debt in Healthcare: How To Reduce

Bad debt has always been an issue for healthcare providers and systems. In recent years, COVID-19 has only increased the impact of bad debt on revenue, leading to layoffs, staff shortages, and decreased morale.

Read on to learn more about bad debt in healthcare, its prevalence, and the average bad debt percentage in healthcare. We'll also discuss ways to reduce bad debt and how MD Clarity can help you with this.

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What is bad debt in healthcare?

Also known as write-offs, bad debt in healthcare is medical debt that's considered unrecoverable or no longer able to be collected. Healthcare providers and systems often incur bad debt due to:

• errors in coding, registration, and billing, such as failing to verify a patient's insurance for a surgery
• high out-of-pocket costs that uninsured and underinsured patients can't afford to pay
• misunderstandings about what insurance will pay
• limited provider networks or options
• lack of eligibility or awareness for charity care programs
• unexpected healthcare events

How prevalent is bad medical debt?

Bad medical debt is incredibly prevalent.

According to Kaiser Family Foundation's Healthcare Debt Survey from early 2022, 41% of U.S. adults have some form of healthcare debt. Another Kaiser Family Foundation analysis also revealed that 16 million adults in the U.S. owe over $1,000 in medical debt, and three million owe over $10,000.

The main reason for this uptick is the increase in self-pay-after-insurance accounts. Crowe's research showed that a whopping 57.6% of bad debt in 2021 is attributable to self-pay-after-insurance accounts, an increase from just 11.1% in 2018. Medical debt has also increased due to job losses caused by COVID-19 and a rise in high-deductible health plans.

All of these factors have increased patients' cost burdens, making it difficult for healthcare providers to collect full payment. This, in turn, leads to more bad debt and less revenue.

Average bad debt percentage in healthcare

Although bad medical debt has skyrocketed in recent years, the average bad debt percentage in healthcare has slightly dropped.

According to a Healthcare Financial Management Association report, the average bad debt as a percentage of revenue was 1.73% in 2018, down from 2.02% in 2015.

However, the total amount of debt is still relatively high. This is especially true for smaller healthcare providers, government-controlled entities, and providers operating as low-volume Medicare hospitals, which continue to have the highest ratios of bad debt expense as a percentage of revenue.

Negative effects of bad healthcare debt

High rates of healthcare debt have negative consequences for healthcare entities and patients.

Bad debt can lower revenue for healthcare entities, leading to layoffs, staff shortages, inefficiencies, and lower employee morale. These consequences, in turn, can lead to longer wait times, customer dissatisfaction, negative reviews, and lower customer loyalty rates.

Healthcare debt has even more negative consequences for patients. Specifically, it can:

• Trigger mental health conditions: Patients who can't pay for a medical service or item may experience a lot of stress, which may lead them to develop mental health conditions. Research has shown that stress associated with medical debt can worsen patients' mental health conditions like anxiety and depression.
• Affect a family or individual's financial stability: Bad healthcare debt forces tradeoffs between paying debt and saving money for necessities like food and education. The burden of medical debt disproportionately affects people of color, people in worse health, and people with disabilities. According to the U.S. Census Bureau data, 22% of Hispanic and 28% of Black households have medical debt, while only 17% of white households do. Communities of color are also more likely to experience higher median medical debt and overall financial strain.

How to reduce bad debt in healthcare

To adapt to the cash-flow impact of bad debt in healthcare, providers can focus on cost-saving strategies such as reducing overhead and service level. However, these methods have limited efficacy because they don't address the root of the problem — debt exposure or, more specifically, systemic issues that lead to revenue leaks and lapsed payments.

Here are some tips for addressing the systemic issues that lead to bad debt:

Reduce bad debt expenses

Healthcare debt doesn't just come from patients refusing to pay for services — it can also stem from systemic problems such as billing errors.

That's where revenue cycle management software comes in. Designed to help medical practices and healthcare providers track and manage revenue, revenue cycle management software can help you identify and fix all possible sources of bad debt. It can:

• monitor each patient's experience, from scheduling and registration to post-visit statuses and payment
• gather and verify the eligibility of patient insurance data
• validate insurers' copayment amount covered and adjust remainders as needed
• create and maintain an organized database of past and current claims
• catalog files according to industry standards and requirements, such as ICD-10
• organize insurance denials based on important signifiers such as reason for denial and source of denial
• send timely statements to patients explaining what they owe, what insurance has covered, and available payment methods
• spot underpayment patterns by insurance companies
• assign appeals and investigations to staff
• display task statuses all in one centralized hub

Understand the true cost of delivering care

Healthcare practices and technology have come a long way in the past decade. Unfortunately, some healthcare financial leaders still need to grasp the true cost of delivering healthcare. In other words, they only know the cost of a particular unit and the general cost of care, but they don't have access to the granular procedural and service-line level data that reveal clear opportunities for reducing bad debt. Additionally, they need to understand the true cost of care for every patient type.

As a result, financial leaders often make misinformed decisions about decreasing bad debt. For instance, leaders can write off revenue and waste resources on performing surgery if they don't understand the surgery's true cost.

The best way to understand the true cost of care at the granular level is to adopt revenue cycle management software. The right revenue cycle management software offers many advantages to your organization, including streamlined workflows and improved financials for healthcare providers. It also brings increased transparency to patients' financial experience.

Provide cost estimates to all patients

Patients may refuse to pay or cancel their appointments after receiving bills they can't pay, leading to debt and revenue loss. According to PYMNTS, 60% of consumers who live paycheck to paycheck and had issues paying their bills canceled appointments after receiving bills they couldn't pay.

Luckily, you can reduce canceled appointments by using patient cost estimate software to provide cost estimates to all patients. Patients can decide to pay upfront or pick another provider if the cost is too high. This, in turn, increases cash flow and decreases bad debt. To illustrate, Health First in Florida saw a 27% increase in cash collection and a decrease in bad debt after implementing an automatic cost estimate generation process for patients.

Collect payment upfront

Bad debt is often the result of delayed cash flow.

One of the best ways to minimize bad debt is to allow patients to make payment plan elections and up-front deposits directly from their cost estimate. According to a Healthcare Financial Management Association survey, healthcare organizations reduced their accounts receivable days and bad debt by instituting pre-payment and point-of-service collections.

Verify benefits eligibility in real-time

Insurance verification delay is another reason for bad debt.

When a healthcare provider or system registers a patient before serving them, the billing department scans and sends the patient's insurance card to the insurance company. The billing department then waits to see if the insurance company rejects or accepts the claim. If insurance denies the claim because the procedure isn't covered or the patient isn't on file, the hospital will incur debt because the service or procedure has already been performed, and it's too late to find an alternative payment method.

You can avoid this debt by using an analytics platform to verify patients' benefits eligibility in real-time. Analytics apps should empower the billing department to verify a patient's insurance immediately instead of waiting for one to two months to confirm coverage. If the insurance company rejects the claim because the patient's plan doesn't cover their procedure, you can offer alternative payment methods for the patient instead of incurring bad debt.

Automate collections

Debt also happens when you forget to collect payments from patients. Accordingly, you can reduce debt by implementing a platform or process that automatically collects payments from patients.

Case in point: Sierra Pacific Orthopedics decreased bad debt by 35% by instituting a policy where patients would be required to keep a payment on file and implementing a process where payments would automatically be collected once payment was due.

Train staff to discuss patient financial responsibility before service

Patients often miss payments because they don't understand how or when to pay.

To minimize bad debt from missed payments, you should train your administrative, accounting, and registration department team members to educate patients about their financial responsibilities. Specifically, your staff should:

• Break down and explain different parts of the bill, including gross charges and maximum and minimum procedure charges for services.
• Discuss alternative payment methods if insurance doesn't cover them, such as credit card payments, interest-free loan programs, and payment plans. Payment plans are especially popular among patients. When AccessOne conducted interviews with 47 healthcare billing executives, nearly half of the providers reported an uptick in patient requests for payment plans.
• Check whether the patient qualifies for Medicaid.
• Teach and show patients how to use your organization's payment portal to receive cost estimates and pay bills.

Here are some tips for training staff to discuss patient financial responsibility before servicing clients:

• Hire third-party trainers: If you don't know where to start, hire trainers to educate your staff. They can provide ongoing training to increase staff proficiency and confidence in patient financial communications.
• Train your staff: If you have the resources, time, and energy to train your staff, try using different training methods to educate your people. Scripting, for instance, can build staff confidence and ensure consistency. Try creating various script options for different patient types — that way, your staff can toggle between scripts depending on the situation and patient.
• Use online training modules: Online courses and demonstrations can also help staff refine and strengthen their communication skills.

Make it convenient to pay

Finally, you may have bad debt due to a lack of convenient payment methods.

Like you, patients want convenience. As such, they're less likely to pay if you don't have convenient payment methods. To illustrate, suppose you don't offer payment plans and require patients to pay in full. This may deter patients from paying, especially if they have little to no savings and live paycheck to paycheck.

Fortunately, you can address this issue by implementing a cost estimate software to collect payment online. The right cost estimate app should accept digital payment forms, allow patients to pay directly from their handheld devices, and offer payment plans.

Reduce your bad debt with MD Clarity

Locating the right cost estimate, analytics, and revenue cycle management apps for reducing bad debt can be an uphill battle, especially if you're new to such software.

Fortunately, MD Clarity's got your back with Clarity Flow. Intuitive and user-friendly, it has everything you need to reduce bad debt, including:

• Automation for creating and sending accurate patient cost estimates with the ability to collect payment upfront directly from the same estimates
• Real-time eligibility verification
• Auto-delivery of good faith estimates that comply with the No Surprises Act

Ready to experience the MD Clarity difference? Book a demo today.

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