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Bad Debt Rising

With 72 million people already struggling to pay health bills, health care providers may be in for nasty weather as a new wave of cash- and coverage-strapped patients join the ranks. Some hospitals believe high-deductible plans play a role in the trend.

November 18, 2008
Related Topics: Benefit Design and Communication, Health and Wellness, Compensation
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A s millions of Americans will testify, health insurance doesn’t guarantee affordable medical care. Just how many millions more will learn that lesson before the economy rebounds presents a looming problem for the nation’s hospitals.

    As the worsening economy enters what appears to be the decade’s second—and uglier—recession, hospitals are readying for a new wave of patients to join an estimated 72 million already struggling to pay medical bills. Insured households are increasingly among those considered at risk for financial distress from medical costs, an emerging demographic known as "underinsured" among health policymakers.

    An estimated 25 million adults were underinsured in 2007, up from nearly 16 million five years earlier, the Commonwealth Fund, a New York-based health policy foundation, reported in June. And not only did such tenuous coverage increase, but it did so across every income bracket, according to the study, which was published as a Web exclusive in the journal Health Affairs. Not surprisingly, those living in or very near poverty were most likely to be underinsured. But in the middle class (adults who earned more than $40,000 but less than $60,000), the percentage of underinsured rose to 13 percent from 5 percent five years earlier, the researchers wrote.

Expected to climb
    That figure is expected to climb as the downturn persists, say patient advocates, hospital executives and industry experts, a suspicion supported by evidence that a growing number of unpaid bills have landed on hospital balance sheets.

    Sara Collins, an economist and assistant vice president for the Program on the Future of Health Insurance for the Commonwealth Fund, co-authored the Health Affairs article. She noted the findings drew from surveys conducted prior to this year’s deepening downturn.

    For hospitals, the trend has accelerated efforts to collect from patients before treatment or adopt more sophisticated billing strategies. Such collections may prove to be increasingly difficult in an economy without ready consumer credit or home equity that helped bolster household budgets. One out of 10 underinsured in 2007 relied on mortgages or loans to grapple with medical bills and one-third took on credit card debt. Nearly half used all their savings to pay medical costs, and 29 percent skipped other basic necessities to cover medical bills, the Commonwealth Fund survey said.

    Integris Health, a 12-hospital system based in Oklahoma City’s highly competitive health care market, began overhauling its billing and collections in mid-2006 with efforts to contact patients prior to care for payment and contracting with a Maple Grove, Minnesota-based health care consumer credit company.

    "We recognize the real concern is a dollar is a dollar when you collect it upfront," says Bob Golden, director of Integris Health’s central business office. "A dollar is 30 cents when you collect it later."

    Integris’ efforts group patients into those likely to pay, those unable to pay, and the challenging group that falls somewhere in between, Golden says.

    Patients who score as likely to pay don’t need or appreciate reminders, and Integris wasted money and goodwill by pursuing them, Golden says. "It’s a marketing issue, it’s a customer-satisfaction issue and it’s a cost issue." Blindly collecting from every patient risks offending paying customers, he says. Insured but financially struggling patients need information about the system’s charity. "It’s an obligation of ours to try to take every step to contact the patient with no resources," he says.

    The rest account for a growing share of the system’s write-offs for unpaid bills, Golden says. Unpaid balances for insured patients once accounted for 30 percent of such write-offs; now they account for half, he says. Uninsured patients who pay the full bill make up the remainder. "Health care, I have found, is the last organization to get payment," says Golden, who spent 22 years in credit and collections with what was once SBC Communications before joining Integris. The system must vie for patients’ dollars, he says. "We want to make sure we’re in the mix."

Accelerated losses
    Some executives contend health plans that combine high deductibles and savings accounts in exchange for lower premiums have accelerated losses. Such plans are an attractive option for small employers, and are a product that was not on the market during the last recession. In negotiations with insurers, such high-deductible plans have prompted some hospitals to push for higher reimbursement for all privately insured patients, they say.

    "We’re not a financial institution and not in the business of financing the provision of care," says Neil Bertrand, CFO for United Hospital in Longmont Colorado, which saw charity care spike 65 percent to $22 million and bad debt increase 8 percent to $12.4 million in 2007 after major area employers began introducing high-deductible health plans two years ago.

    For the first nine months of 2008, both measures of unpaid bills have surpassed estimates thanks to the sour economy, rising unemployment and greater out-of-pocket costs for insured patients, Bertrand says. Actual bad debt—or losses on patients who fail to pay debts and do not qualify for financial assistance—was projected to reach $10.3 million through September, but in fact totaled $11.7 million.

    The 168-bed hospital has plenty of company. Unpaid medical bills ate away 2008 profits at Ascension Health, the largest U.S. private not-for-profit hospital operator. The St. Louis-based health system, which owns 77 hospitals, saw income from operations fall $66 million as its bad debt increased by $167 million, or 23 percent, financial records show. Catholic Healthcare West, a 38-hospital system based in San Francisco, closed its books in June with an 18 percent increase—or $98 million—in bad debt, compared with 3 percent the prior year. Neither system responded to requests for comment.

    Losses from insured patients suggest health care is vulnerable to the battery of economic pressures squeezing other industries. One major trade group for health care finance executives polled 1,000 members during a late-October webcast on the economic downturn and found that 80 percent expected significant increases in unpaid medical bills in the coming year. Three-quarters said they had already seen an ebb in profitable surgery patients.

    Rising individual medical expenses aren’t the only cause of household medical debt, says Carol Pryor, senior policy analyst for the Access Project, a Boston-based health care access advocacy group. Poorly understood policies can leave patients with far less coverage and substantially larger bills than expected. Patients may inadvertently end up outside of health plans’ approved networks—where out-of-pocket costs are lower—when in-network hospitals contract with out-of-network doctors for services such as anesthesiology or emergency care, she says.

    But patients’ growing share of health care spending is a significant contributor to the unpaid bills dragging down household and hospital finances, Pryor says.

    Patients with chronic conditions, who make frequent visits to health care providers, are particularly vulnerable, Pryor says. "Underinsurance both puts people in financial jeopardy and is also a serious barrier for people to get care," she says.

    Underinsured patients reported costs prevented them from filling prescriptions or seeking tests or follow-up care recommended by their doctors, the Commonwealth Fund reported. Such patients did not visit needed specialists or seek treatment for a medical condition because of cost, the survey found.

    Pryor cited two reasons why relief is unlikely anytime soon. Health plans and employers will continue to shift financial risk onto the consumer because "they are the least able to avoid it."

    Meanwhile, good health and good luck may have kept many underinsured from illness or injury—and the related expenses. "They may think they’re doing OK because they haven’t got sick yet," Pryor says. "But everybody’s at risk, and sooner or later, everybody gets sick."

The Burden of Medical Care

The estimated 25 million people considered to be underinsured have coverage that fails to protect their households from financial instability brought on by medical costs. Some of the consequences, according to surveys by the Commonwealth Fund:
Used up all of savings  46%
Unable to pay medical bills43
Took on credit card debt33
Unable to pay for basics because of medical bills 29
Contacted by collection agency 23
Took out a mortgage or loan  12
Source:Commonwealth Fund

    In St. Cloud, Minnesota, CentraCare Health System began tracking its unpaid bills from insured patients in July so future budgets include an accurate estimate of projected losses, says Kathy Parsons, the system’s director of managed care. As health plans with high deductibles gained a foothold across the dozen counties where CentraCare operates, bad debt increased, management told credit analysts with Fitch Ratings in November 2007. For the fiscal year ended June 30, 2007, the system’s bad debts climbed roughly 16 percent to $12.1 million, but remained less than 2 percent of the system’s patient revenue.

    As high-deductible plans spread with annual benefit changes in January, Parsons says more patients began to call with questions about the cost of care.

    The system operates two critical-access hospitals and the 489-bed St. Cloud Hospital and has not started asking patients for deposits or payment upfront, Parsons says, though it may do so in the future. Such a change would have "a pretty big community impact, and the community will have opinions on that," she says. "You have to be very careful in small communities."

    High-deductible health plans, which combine savings accounts with a requirement that patients pay hundreds or thousands of dollars toward their care upfront, have gained popularity with employers and enrollees since their introduction earlier in the decade. The average family deductible in such plans was roughly $3,560 in 2008, compared with managed-care or point-of-service plans, where average deductibles were $1,053 to $1,860.

    In 2008, 8 percent of insured workers were enrolled in such plans, compared with 5 percent in 2007 and 4 percent in 2006, the first year for which figures were available, according to a survey of employer-sponsored benefits conducted by the Kaiser Family Foundation and Health Research & Education Trust.

    Kathleen Campbell, who oversees high-deductible health plan product development for Aetna, says employers favor such plans because they include incentives to reduce health care’s waste and improve transparency. With more financial risk, enrollees also have greater motivation to better manage their care and seek preventive screenings, she says. Plans may include financial bonuses deposited into savings accounts that go toward medical expenses, she says.

    Campbell argued that the lower premiums for high-deductible plans give employers, particularly small businesses, an alternative to dropping insurance altogether during the downturn.

    Kate Prout, an Aetna spokeswoman, said in an e-mail that unpaid bills have plagued health care providers, but added that the insurer launched an education campaign to encourage patients to save for care. It offers automatic deductions from health-specific accounts, debit cards and checkbooks for consumer-directed plans to improve payment rates.

    "We know affordability is the No. 1 issue in health care today," says Debbie Welle-Powell, vice president of payer strategies and legislative affairs for Exempla Healthcare, which owns two hospitals and operates a third. Poorly informed patients end up with "sticker shock" when visiting the hospital and lack the resources to pay their bills.

    Roger Deshaies, senior vice president and CFO of Fletcher Allen Health Care in Burlington, Vermont, says the 437-bed hospital has entered into negotiations with expected rate increases that have caught insurers off guard. Behind the push for bigger gains are narrow margins on high-deductible plans, he says.

    "It is a hot button," Deshaies says. "We’re trying to be as transparent as we can in the logic. But it is becoming an issue."

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