The Ultimate Guide to Patient Financing Approaches
Everything healthcare finance and revenue cycle leaders should know about in-house, recourse, non-recourse, and alternative options like Affordability Fina
The Ultimate Guide
to Patient Financing Approaches
Everything healthcare finance and
revenue cycle leaders should know about in-house, recourse, non-recourse, and alternative options
This guide is designed to be a useful tool for healthcare RCM and Finance professionals, to help understand available approaches to patient financing, the pluses and minuses of each, and what providers should know to make the right decisions when evaluating patient financing options.
Patient balances matter more than ever
Patient balances matter more now than ever
For years, health systems have experienced a steady rise in patient responsibility balances. The inexorable increase in healthcare costs plays a role of course, but the growth of High Deductible Health Plans in the last decade has dramatically accelerated this trend.
Once a small part of Net Patient Revenues for hospitals and health systems, Patient Balances now account for over 30% of NPR.
Since the industry's collection rate on patient balances is woefully low, failure to evolve patient financing strategies can have meaningful financial impact on providers.
In 2023, a slowing economy, sectors hit by mass layoffs, fears of a recession, and inflation stubbornly hovering near 40-year highs, are all affecting patients' ability to pay.
It's time to take another look at patient financing.
In 2022, hospitals had their worst financial year since before the COVID-19 pandemic, according to recent Kaufman Hall data.
Operating margins have dropped dramatically from pre-pandemic levels; more than half of hospitals now have negative margins.
Rising healthcare costs, coupled with increased enrollment in high-deductible health plans--from 4% in 2006 to 28% in 2021--are impacting patients’ ability to pay. Out-of-pocket costs have risen 230% in the past 10 years.
The Kaiser Family Foundation found that more than 4 in 10 American adults carry medical debt, and one-fourth of that group owes more than $5,000. About 20% say they don’t expect to pay off their debt.
The good news? Patient financing offers a big opportunity for revenue capture 👉
All signs point to increasing constraints around cash flow and operating margins, with dire implications for financial performance.
Adding to the challenge: a growing array of patient financing solutions, each with different business models, pricing structures, and trade-offs for providers to consider.
But with challenge comes opportunity. Revenue cycle leaders who evaluate their current needs, understand the landscape of vendor offerings, compare different options against their current baseline, and select a best-fit approach can quickly make a meaningful impact on their organization's financial performance.
This shift in healthcare payments has been taking place for well over a decade, but we are seeing more pronounced changes in how hospital bills are paid during just the last few years…On average, healthcare consumers are now responsible for 30% to 35% of their healthcare bill. Patient payment and collection practices are highly complex, and with high deductibles, patients have evolved into a primary payer source.”
-Jonathan Wiik, author of The Patient is the New Payer
In this guide, we’ll explore and evaluate various patient financing approaches, so you can deploy the tools that will best benefit your organization and patients.
The core issue: Patient affordability
THE CORE ISSUE
Changing consumer expectations, coupled with rising out-of-pocket costs, are making affordable payment options a more crucial issue than ever.
About 114 million Americans gave poor (30%) or failing (14%) grades to the U.S. healthcare system, according to the 2022 Healthcare in America report from Gallup and West Health. Affordability is a major factor in the low scores, earning a grade of ‘D’ or ‘F’ among three-fourths of respondents.
The industry's low collection rate on patient balances is, at the root, an ability-to-pay problem. When more affordable payment options are given to patients, revenue capture - and patient satisfaction - increases substantially.
CVSHealth’s Health Care Insights Study 2022 offers insight on how affordability impacts more vulnerable patient populations:
Half of respondents had “high to moderate concern” about the cost of their care. That concern was greater among Black and Hispanic patients.
9 out of 10 providers who responded said the cost of care is a top concern for patients aged 65 and older.
Higher out-of-pocket costs for patients hit hospitals hard as well, in the form of lower collection rates and higher bad debt.
In fact, a 2022 report from Crowe Research shows that bad debt from self-pay after insurance has increased five-fold in just three years.
It’s clear that patient affordability is the core issue providers must address. In doing so, we can view the financial experience of patients and providers as two sides of the same coin. That’s because there’s a direct link between helping patients pay for care and improving collections.
Now, let’s assess financing options that promise to solve this dual issue. 👉
Review of patient financing solutions
What types of patient financing solutions can you offer?
Healthcare organizations have several options for patient financing—each with its own pluses and minuses. Here are the most common types, how they work, and what they can do for health systems and their patients.
Patient engagement portals
Recourse patient financing
Non-recourse patient financing
What do you have in place today?
- In-house payment plans
- Recourse vendor
- Non-recourse vendor
- Other solutions and/or early-out
In-house payment plans
Many health systems operate in-house payment plans, essentially acting as a “bank” for patients by financing cost of care with their own operating capital.
Typically 100% of patients are eligible for in-house plans.
Terms and monthly payments are typically limited to 12 or 24 months.
Plans are often not proactively or consistently offered due to resource and technology constraints.
Often no patient self-enrollment or automatic payment capabilities.
The default rate for 12-month plans averages 30%.
In-house payment plans come with steep hidden costs beyond default rates, including internal cost of capital and the administrative burden on staffing, training, patient communication, and more.
With in-house payment plans, organizations either employ staff or engage an “early-out” call center vendor to handle incoming patient calls. Early-out vendors deal with patients during the first phase of the collection process to make sure they understand their bills and are trying to pay them.
A/R cycles and downstream risk
Being the bank means….
Long cash cycles that adversely affect operating flexibility and financial strength.
Overall collection rates affected by payment plan enrollment and adherence efforts.
Exposure to inflation risk and uncertain repayment in challenging economic times.
Time-value of money erodes the value of payment plan collections.
Being the “bad guy” when collecting on patient plans, impairing patient experience, trust, and brand perception.
Recourse patient financing
As an alternative or complement to in-house collections, healthcare systems can engage a third-party patient financing company such as a recourse vendor.
The vendor pays the hospital or health system for the care rendered minus a financing charge, typically 12-18%.
A “recourse rate” also applies, and is typically 15-20%.
The vendor accepts 100% of patients for a payment plan, often with different program terms depending on the patient's ability to pay.
Patients may be charged interest and fees. 0% interest options can lead to interest rates as high as 18% or more, retroactively applied to outstanding balances.
Recourse plans can be for a term of up to 60 months. Some vendors will extend terms even further.
While most patients pay their loans, historically 15% to 20% of recourse accounts are returned to the provider. When that happens, the lender returns the past-due debt to the hospital or health system and pulls back the money it previously paid. It’s then up to providers to collect those unpaid debts.
When healthcare providers choose to work with recourse lenders, they risk the chance that they’ll need to reassume the medical debt and collect it themselves.
This leads to additional cost and complexity in the revenue cycle, which must be considered when evaluating recourse programs:
Providers will need to allocate resources to manage patient accounts that are returned by the vendor.
Finance teams have additional workflows to reconcile account balances and hold escrow reserves against future recourse returns.
Non-recourse patient financing
With non-recourse programs, the vendor retains the account even if the patient doesn’t pay. Providers keep the money they receive from the vendor and don’t have to be concerned with managing unpaid debt. It’s up to the lending company to collect the remaining payments from patients.
The vendor pays the provider a discounted right up-front and assumes the repayment risk on patient balances.
Non-recourse finance partners typically charge the provider a 5% to 30% fee, depending on the interest rate it charges patients and the loan term.
Most loans are for terms of 48 months or less.
Interest rates are often 0% for short-term loans or promotional periods, then increase to between 10% and 27%. Promotional periods are usually between 12 and 24 months long.
Patients must complete a credit application to be eligible for a payment plan. Typically, only ~50% of patients qualify.
With non-recourse financing, providers may receive between 70% and 95% of the balances for enrolled patients. But non-recourse finance partners usually approve only about 50% of patients, so the net impact on collection rates is often modest and can even be negative.
That’s because non-recourse lenders take the highest credit-quality, lowest-risk patients and leave higher-risk patients for the provider’s in-house payment plans, where non-performing accounts often offset any lift from the finance program.
The challenges of
Recourse and non-recourse financing
Traditional recourse and non-recourse patient financing options can help accelerate cash flow and improve a provider’s balance sheet, but they often only marginally increase the number of paying patients.
Both types of financing can be difficult to administer, and call centers often provide a poor patient experience that can harm patient satisfaction.
Additionally, recourse reconciliation can be a complex process for provider organizations and can dampen any benefits the organization may have received.
Patient engagement portals
Increasingly, health systems are deploying patient engagement portals from companies such as Flywire and Cedar, or the MyChart patient portal from dominant EHR system vendor EPIC.
These portals enable automated and personalized patient communications and self-service capabilities to improve and digitize patient experiences. They can streamline complex Patient Financial Experience challenges such as billing, statement consolidation, and payment plan offerings.
But patient engagement portals were not designed to address the core issue of patient affordability. They tend to focus on bill contextualization and checkout, with limited payment options.
Patients can often self-enroll in a payment plan through these platforms, but enrollment may be limited to whatever payment options the provider already has in place.
Additional payment plans options may be data-driven, or they may be “one-size-fits-all.”
Plans typically have short repayment terms, limiting affordability for patients with higher balances.
Providers still carry these payment plans on their books, requiring the same staffing and servicing investments, long cash cycles, and repayment risk of traditional in-house plans.
Some patient engagement portals, Such as Flywire and EPIC MyChart, support integration with 3rd party patient financing solutions. Such platforms increase the options available for patients and offer greater financial flexibility for providers.
A relatively recent patient finance option is an affordability platform, such as PayZen, which combines the best features of recourse and non-recourse programs with a patient-centric approach, bringing a new payment plan model to healthcare.
How affordability platforms work
Here’s a primer on this approach:
100% of patients can enroll, with no credit application or impact to their credit score.
The platforms provide immediate, 100% non-recourse cash acceleration on all plans.
Patients are never charged interest or fees.
Providers never risk reassuming patient accounts or returning the accelerated funds they receive.
Affordability platforms are fully automated, so they don’t impact providers’ staff.
They engage patients proactively across physical and digital channels to maximize patient adoption.
They use technology to provide the simple, intuitive patient experience expected by today's healthcare consumer.
They integrate easily with leading patient engagement and check-out platforms.
Go-lives typically take just a few weeks, with no IT investment needed.
Affordability platforms create personalized payment plan options based on each patient's unique ability to pay.
Applying personalization to patient financing
Personalization is a primary differentiator for affordability platforms. With advancements in AI, providers can now make intelligent financing offers based on a patient’s specific financial circumstances.
Platforms such as PayZen instantly analyze thousands of attributes per patient to develop a custom payment plan.
Each payment plan is based on the patient’s ability to pay, which directly improves the rate of collections and maximizes provider cash flow.
Personalization also improves the patient experience by offering peace of mind that they can afford the care they need.
Reducing the risk that people will defer or forgo care out of financial concerns ultimately translates to healthier populations, which in turn lowers the cost of care.
Benefits to providers and patients
With affordability platforms, patients benefit from zero-interest repayment terms up to 60 months with no credit application. Patients can manage their plans online directly within existing patient-facing applications, maximizing ease of use and patient adherence.
By improving healthcare affordability, solutions such as PayZen also help solve the core issues affecting collection rates on payment balances.
Depending on your specific usage of payment plans, your organization may see cash acceleration benefits while:
Reducing the cost of collections
Avoiding the expense of managing in-house plans and many 3rd-party programs
Eliminating the risk of re-assuming patient accounts
The chart on the next page summarizes key capabilities and benefits of the various patient financing solutions available to providers. 👉
How to choose the right financing approach
choose the right financing approach
Your healthcare organization should consider several factors when deciding which patient financing programs to offer.
What problems do you want to solve?
Some common problems providers look to solve with patient financing solutions include:
Increasing patient payments and decreasing the number of accounts that get sent to collections.
Strengthening the balance sheet through cash acceleration, so funds aren't tied up in long-term payment plans.
Reducing the burden on internal or 3rd-party staff, by removing the need to manage in-house payment plans.
Increasing patient satisfaction by making medical care more affordable.
What is in place today?
Complete an inventory of your KPIs, capabilities, and resources.
What terms do you currently offer? Do the offered terms cover most of your patients' needs?
What percentage of your annual patient payments are from payment plans? What is your total outstanding payment plan balance?
What are your loss rates on in-house plans? Have you computed the full cost of managing the program beyond this one metric?
What is your current staffing burden? What resources are tasked with plan management activities, that could be redeployed to higher-value initiatives?
Do you have a patient experience platform in place that patient financing options need to integrate with?
If you're working with a patient financing vendor, what is the adoption of vendor plans relative to your total patient payments, and how much time does your team spend managing the program and reconciling balances?
These factors may point you toward in-house payment plans, recourse financing, non-recourse financing, patient affordability platforms, or a combination.
What is the best fit for your patient base?
Social determinants of health (SDoH) can significantly impact a patient’s ability to afford medical care. At the same time, medical debt can affect SDoHs. Consider these questions:
What are the socioeconomic conditions among your patient base?
What’s the payer mix among your patient base? To what extent does your patient population have to pay out of pocket for care?
Can your patients afford the higher monthly payments that come with short-term plans, or do they need longer-term plans?
If you're working with a patient financing vendor, can payment plans involve interest or fees for patients? Do those programs promote equal affordability across your patient population?
For a non-recourse program what is the historical/likely approval rate, and for a recourse program what is the expected recourse rate?
How will each patient financing option influence your patients’ SDoHs?
Sharing the answers to these questing with any patient financing vendors you are considering will help them provide a specific proposal and ROI, and will give you a better sense of which options will be the right fit for you.
Benefits, costs & fees of patient financing approaches
Finally, consider the total cost / benefit of patient financing programs to make an informed decision. Ask the vendors you are considering to share an ROI analysis and hold them accountable to the promised results. Here are some factors to look at when reviewing your options.
Compare to your baseline collection rates
How does adding patient financing impact your collection rates? Providers typically collect 20-30% of patients' share of the cost of medical care after insurance.
How does the offered rate compare to your in-house plan economics? Industry-wide, the collection rate for in-house payment plans is about 70%.
When adding in your cost of capital, internal staff costs, and payments to early-out vendors and payment processors, the net to the provider is typically 50-60% of enrolled balances.
What are your economics after an account gets placed with bad debt? Bad debt liquidation rates are between 5-10% and the collection agency applies a contingency fee of 20-30% of what is collected.
Get an apples-to-apples view of vendor fees
Each type of patient finance vendor applies a different pricing model, and some vendors apply proprietary definitions to otherwise industry-standard terminology. It is therefore important to understand the differences and account for each component to accurately compare pricing across solutions.
Recourse lenders advance capital to providers after deducting a financing charge of typically 15-20%. That means providers get paid 80-85% of the amount due after the patient enrolls and makes the first payment. But the realized pricing is much different for providers.
Recourse pricing continued
Most recourse finance providers charge ancillary fees as well; for example, a fee for onboarding and/or servicing accounts in addition to the finance charge.
The total cost to providers is typically 35-40% for finance charges, recourse rates, ancillary fees, and overhead for managing and reconciling returned accounts. That means providers typically end up receiving around 60% of the original patient balance.
Some recourse vendors also charge patients interest and fees on their accounts.
Low recourse rate quotes can be deceiving. Recourse vendors may publish “headline” rates much lower than the industry average. This may be accomplished through stricter eligibility criteria or by a hybrid recourse/non-recourse program with higher discount rates. Make sure you understand how your recourse rate is defined and how it affects overall program pricing.
Non-recourse lenders have lower rates to the provider, usually no more than 30%. These vendors generally cover a large part of their economics through interest and fees from the patient. Interest can be as high as 27%.
Enrollment is generally lower than other finance programs. Non-recourse lenders typically only approve ~50% of patients -- generally the most credit-worthy -- leaving the provider with the more economically stressed patients.
Because of this credit dynamic, a lower collection rate on the patient balances remaining with the provider typically offsets the higher yield from recourse plans.
Affordability platform pricing
With affordability platforms, the cost to providers is all-inclusive: a single discount rate that accounts for patient default risk, capital acceleration, platform, and end-to-end account servicing. There are no additional fees or interest to the provider or the patient.
The amount that providers are paid depends on the credit risk levels of patients and the repayment term of each plan. The total yield received by providers is typically 65 to 68%, with no recourse back to the provider.
Affordability platforms are automated, so integrating them with existing patient workflows is easy. When a patient experience platform such as Flywire or EPIC MyChart is already deployed, affordability platforms provide an integrated payment plan experience, delivering even higher patient enrollment.
Affordability platform result
The result is that for all patient balances, whether through payment plans or lump-sum billing, overall collection rates typically increase by 20-30% with affordability platforms.
That means providers who normally collect 30 percent of unpaid patient bills would see their collection rate rise to between 36 and 39 percent - a significant increase without any new investment in staffing, technology, or additional workflows.
Which is most important to your organization?
- Maximize cash acceleration
- Offer more affordable options to patients
- Increase collection rates on patient balances
- Reducing staffing burden on patient plans
- They're all equally important
Side-by-side comparison of typical pricing options and program components
Traditional non-recourse vendors
Traditional recourse vendors
Affordability vendor: PayZen
Interest to patient
Patient approval rate
Provider collection lift
Frees up resources, reduces bad debt expense and days in A/R
Constraints capital and internal resources
Selects for lowest risk patients only
Non-paying accounts returned; complexity and bad debt expense
Cash acceleration and provider resources unconstrained
Improves patient experience and affordability
Good for shorter plan length, limited extended terms
Interest, fees, and aggressive collection, limited patient adoption
Not real-time, relies on phone transfers by provider's team
Automated, real time enrollment, embedded in MyChart, Flywire, etc.
How do early-out vendors fit?
Early-out vendors and patient financing platforms play different, complementary roles in the revenue collection process. Early-out vendors are effective at securing payment from “good payers,” or patients who were already able to pay their bills within 30 days.
But what happens when patients need extended payment terms, and the provider wants cash acceleration? Patient financing solutions offer another way to improve yield and cash flow on patient balances.
There often can be tension between early-out vendors and patient finance vendors. If you are currently using an early-out vendor, it is important to align workflows and financial incentives.
A best practice is to carve out cash received from patient finance or affordability platforms, from the percentage the early-out vendor earns on collections. Many patient finance vendors are willing to share economics with the early-out directly for the promotion of the program.
It's also important to establish clear rules of engagement, including who engages patients when, and what is the longest repayment period an early-out may setup for provider in-house plans, so provider value from 3rd-party payment plans is maximized.
Emphasizing that all vendors need to work together in the best interest of the provider and patients, and providing clear direction to all parties on desired outcomes, is important for success.
The bottom line: Healthcare systems can benefit from using early-out vendors and patient financing platforms in tandem to maximize revenue capture. Make sure your vendors are working in your best interest, which may include economic arrangements between vendors that fit the needs of everyone involved.
Proactively offering longer payment terms to qualified patients, and making it easier for them to enroll, can increase collections rates by 20% to 30%.
Innovation is reshaping the patient financing landscape, while patient centricity grows even more critical. These factors are motivating healthcare organizations to consider new solutions for solving long-standing problems within revenue cycle management. In light of the sector’s rough financial forecasts, rethinking patient financing can be a quick and easy win for RCM leaders.
A strategic approach to patient financing allows your organization to improve its financial performance and help patients afford the care they need. However you help your healthcare system navigate this complex decision, keep three things in mind:
Hospitals and health systems shouldn't also be “the bank”; scrutiny of your in-house payment plans can benefit financial performance.
Traditional patient financing approaches come with trade-offs. Consider the full impact on cost and collection rates, not just headline pricing.
Patients benefit from customized payment plans that account for their unique ability to pay, based on real-life data. When done right, providers can benefit as well.
While numerous financial constraints impact both providers and patients, healthcare organizations can take steps to counteract these pressures and prepare for the future. Choosing the right patient financing approach allows your organization to drive cash acceleration, strengthen your financial position and increase affordability--all while delivering on the promise of quality patient care.