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The VisitPay Blog | Building Better Financial Relationships

Why Bad Debt from Patient Receivables Can No Longer Be Swept Under the Carpet

Health systems have unwittingly become some of the biggest lenders to consumers in the markets where they operate. However, health systems aren’t consumer finance organizations in terms of their competencies and focus, or, most importantly, their mission. Banks agonize over how best to turnover, optimize and monetize assets, and correspondingly invest heavily in the infrastructure needed to do so. By contrast, health systems, despite their emergence as consumer lenders, have underinvested in the infrastructure needed for their consumer receivable business while they instead focus on their core mission of delivering patient care (and rightfully so). 

But as health systems’ revenue continues to shift from obligations due from third-party payors to obligations due from patients, we expect rating agencies will more deeply scrutinize the financial performance of the revenue cycle, specifically patient receivable portfolios. In short, health systems can no longer accept outsized bad debt rates on patient receivables. Continuing to do so will hinder their access to capital or materially increase their borrowing costs. Such balance sheet challenges will only impede a health system’s ability to perform its real purpose – taking care of people in the communities they serve. 

Fueled primarily by high deductible health plans, health systems around the country are experiencing significant growth in their patient revenue business. For many health systems, obligations due from patients now comprise more than 20% of their total revenue. At the same time, the growth of these obligations is considerably outpacing the growth in the corresponding payments collected. In other words, health systems have a significant and fast-emerging margin compression issue, caused by increasing levels of patient bad debt.

A dollar that was once reliably paid by a large commercial payor has been replaced by a dollar owed by a patient consumer. Yet the payment rate on these obligations is strikingly low, typically less than 50%. So, if a health system is collecting one-half (or worse) of approximately one-fourth of its business, this illiquidity will impose challenging cash flow and margin dynamics for providers and catch the eye of rating agencies and underwriters.

While liquidity metrics, such as “A/R Days,” are important and relevant in the near-term, they are insufficient for successfully managing a patient revenue portfolio, as our guest blogger and former CFO David Kirshner argues in this post. The A/R Days metric, for example, does not reveal anything about the underlying payment performance of a group of consumer receivables. Solvency metrics (e.g. debt coverage ratios), which are inherently more focused on the long-term, will be materially and negatively impacted by the continued underperformance of patient obligations. Put simply, yield matters for health systems. The VisitPay platform is specifically engineered to drive true yield — to turn bad debt into cash. 

While perhaps a bit fatalistic, it is clear that a tightening of the bond and debt markets for health systems is inevitable if the patient revenue dynamic remains unaddressed. Most health systems already have almost no wiggle room in their razor-thin operating margins, and, consequently, their balance sheets are stuck between a rock and a hard place. Operating in competitive markets is hard enough, but it becomes untenable when a health system doesn’t have the capital or cash required to support growth strategies and initiatives.

VisitPay’s premise is that a world-class patient experience drives meaningful and sustainable financial outcomes. To say we were clairvoyant about patients becoming the new payors when we got started 8 years ago is a bridge too far. However, health systems’ operating environments have shifted significantly since our company’s inception, and in today’s environment, new tools and approaches are now certainly needed. 

Health systems aren’t looking to return-oriented metrics such as return on equity or return on assets, but they should, at minimum, get paid for the services they render. This seemingly minimal expectation has broader ramifications than near-term liquidity. It ultimately means health systems can appropriately capitalize their organization for sustained and long-term growth to the benefit of the local communities they serve.

The good news is there are a few practical next steps health system leaders can take to address the threat bad debt growth will impose on operating margin, liquidity and credit ratings.

1. The first is to model “patient payment obligation.”  

Our recommended, back of the envelope approach is to derive the approximate amount of annual patient payment obligation in dollars and percent of annual net patient service revenue from patient accounting systems.  As noted above, we often see patient responsibility trends increasing rapidly among local and national commercial health plans and Medicare plans. This analysis almost always proves an eye-opener in terms of the magnitude of patient payment obligation and what is at stake.  

2. The second step is to compute the health system’s “historical yield %” on patient payment obligations and set a new target.

In collaboration with a firm like VisitPay, health systems can analyze and set a “target yield %.”  Typically the opportunity is about a doubling of yield %, with the use of consumer-friendly technology which encourages intelligent short and long-term payment plans that fit the needs of pre-identified credit populations. VisitPay is so confident in our ability to lift yield that we are willing to tie a large portion of our compensation to the value we drive (i.e. a gain share), making it easier to launch our program.  

3. The third is to test, measure and optimize the way to a new approach.

It is important that health systems recognize that driving yield on consumer payments is not a ‘once and done’ activity, but instead, a set of strategies put in place, tested and optimized over time, all at very large scale. Health systems need to strike a balance between a consumer’s need to pay over time with their own need to get paid quickly. One size programs do not fit all – they always result in people who need more time getting less than what is required, or people who should pay quickly getting more time than is justified. Getting the balance right is an ongoing exercise, and it requires new skills, new measurement approaches and a willingness to test and learn the way to the win-win.

If you’re interested in learning more, then consider joining us at the fifth annual Patient Financial Health Summit this October in Sun Valley. We convene some of the brightest minds from health systems around the country to discuss, debate and chart a course through this new era of consumer as payor. Click here to learn more. 

Nikolaus Trotta

Nik is the Vice President of Finance and Administration at VisitPay. He is a former US Army captain and associate in Cowen and Company’s technology investment banking group. Nik is a family man and loves coaching his eldest in little league soccer and taking ski trips with his wife and four sons.

See all posts by Nikolaus