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The housing market's ripple effect on healthcare collections

By Mitch Patridge, for HealthLeaders Media, October 29, 2007
By now, we're well aware that the housing market is in the midst of significant crisis and that this crisis is causing a ripple effect throughout the U.S. economy. Recently, the Wall Street Journal reported that more than 130 million home loans were obtained in the past decade and that risky mortgages were approved in nearly every corner of the nation. According to the report, lenders made a combined $1.5 trillion in high-interest loans. The meltdown is hurting a far broader array of Americans than many realize, cutting across differences in income, race and geography. The report also states that subprime lending continued into 2006, and the effects could last through 2007 and beyond.

Many healthcare providers are wondering how the mortgage meltdown will impact the business of collecting healthcare debt. To date, there has been little or no analysis regarding the impact of the housing crisis on healthcare collections. But even without rigorous analysis, there are several clear trends.

Before and after
In the housing bubble of the last five to seven years, consumers were able to pay out-of-pocket healthcare costs in a number of ways. Many patients paid healthcare bills by tapping into their new-found home equity or by taking cash out by refinancing their homes.

Concurrently, in order to compete with the home mortgage market, underwriting standards for unsecured debt (e.g. credit cards) were loosened, providing many consumers with the ability to use credit cards to pay healthcare debt. But this is no longer the case. The meltdown in the housing market has caused a general tightening throughout the consumer lending market. Today, underwriting standards for mortgages have significantly tightened, and many credit card issuers have followed suit, cutting back offers to less creditworthy customers and lowering credit limits.

A 2005 healthcare cost survey revealed some startling statistics. Fifty-two percent of all respondents had depleted their nest eggs to pay healthcare costs, and 15 percent had declared bankruptcy. In today's financial climate it is difficult, and often impossible, for consumers to tap into home equity or obtain consumer credit lines (e.g. credit cards) to pay hospital bills. Often, those consumers are using credit cards to meet their daily needs and are already at their credit limit.
When you combine the credit crunch and housing crisis with escalating healthcare costs, the results are bound to be disastrous. Most people have less discretionary income to spend, yet out-of-pocket healthcare costs are skyrocketing and are expected to continue to do so.

As one industry spokesperson succinctly put it: "There are only so many ways to stretch a budget. Mortgage, credit card and auto payments will always take precedence over hospital and doctor bills."

Preparing for the worst
The trends are clear: Out-of-pocket healthcare costs will continue to rise, and patients will have increasing difficulty paying their debt. So how do healthcare providers prepare for this eventuality? How can providers help their patients pay their healthcare bills and avoid being sent to collections?

Here are some suggestions from hospitals that are already addressing these challenges.

1. Provide your patient finance department with additional tools enabling them to increase efficiencies, automate work processes and improve customer service.
Patient finance departments are notoriously understaffed and overworked. Even in hospitals where this is not the case, PFS departments often lack flexible payment options. Not having this tool significantly hampers collection efforts and limits the hospital's ability to adequately meet the needs of financially strapped patients. A strong loan program will enable your PFS department to meet cash goals and reduce the number of patients that are referred to collections. Implemented properly, a hospital will also be able to reduce or reallocate staff to more productive areas.

2. Stay competitive with other hospital programs. You've provided your patients with excellent healthcare services, now follow through with superior patient financing options.
As consumer credit becomes more difficult to obtain, patients are rapidly becoming more aware of the various healthcare financing options being offered by other direct and indirect (e.g. surgery centers) competitors. A patient may choose to obtain care from another provider if the patient believes that better financing options will be available. It's therefore very important for your facility to be able to offer competitive loan solutions that meet the needs of your patients.
Remember that a flexible and robust loan offering is only half the battle. It is vital that healthcare providers ensure that the lender they partner with has experience in healthcare lending and utilizes a customer service department trained in patient-centered counseling approaches and compassionate collection practices.

3. Develop clear-cut charity guidelines and make sure hospital staff is adequately trained and adhering to those guidelines.
Patients who cannot pay their obligation have a significant impact on healthcare resources. Unfortunately, significant time and resources are required to either identify these patients as candidates for charity care or collect from those who do not meet charity care guidelines. Hospitals should not substitute a loan program for a well-thought-out charity program. Instead, providers should utilize credit scoring or similar programs to quickly identify patients who may be eligible for charity. These same tools can be used to identify patients who will qualify for a loan program. Many third-party vendors provide an electronic means to identify these patients. The key is to clearly quantify the charity care parameters, automate the process, identify the qualifying patients, and apply resources in the most effective manner.

4. Develop an internal collection policy and have the PFS department adhere to the guidelines.
Virtually all hospitals have collection guidelines that specify the length of time (typically three to six months) patients will be given to pay their obligation. Yet most PFS departments frequently make exceptions to the repayment guidelines. The longer-term zero-interest payment plans create an unneeded burden on the hospital's cash flow and workload. By partnering with a lender that offers easy-to-qualify-for patient loans and low monthly payments, the healthcare provider can offer patients a needed benefit. Importantly, this type of program increases cash flow to the hospital while also decreasing costs and the hospital staff's work load associated with billing, collecting and posting cash on payment plans.

5. Consider partnering with a lender instead of offering internal patient payment plans.
Instead of acting as a both a bank and loan servicer, hospitals are partnering with experts in automated patient financing. With the right financial partner, hospitals can improve cash flow and reduce the administrative costs related to monthly billing, tracking, posting, skip tracing, and other collections activity. And, this all can be accomplished while improving the patient experience at your facility.

6. If you partner with a lender, make sure to optimize your results by choosing a vendor with direct experience in patient finance.
Any licensed lender can grant patients loans, but for best financial results for your facility and better treatment of your patients, you should partner with a lender that has direct experience in patient lending. Banks that lack experience in this field will not have the performance data or knowledge needed to grant loans to those patients who should receive them, nor the information required to decline loans to patients that will not be able to pay. Nor will the hospital or the local bank have the infrastructure to adequately service the accounts and keep them from defaulting. Hospitals will achieve considerably better results by partnering with a lender that specializes in, and has significant experience with, patient lending.

7. Develop a relationship with a patient loan company that can quickly approve and fund patient loans.
Make sure that your partner can quickly and efficiently approve and fund loans. A delay in this area will result in lost collection opportunity for the facility. Use the checklist below to evaluate possible third-party vendors:
  • Type of programs: Work with the lender to determine the type of payment plan you want to offer. Make sure that all options have low monthly payments. Other choices are almost limitless, including: zero-interest financing; flexible underwriting parameters; lines of credit for the patient's obligation to the hospital; programs that can include financing for physician groups and/or clinics; and loan programs for high balances as well as specialized programs for low balances. Lighten the PFS workload!
  • Where in the revenue cycle can you (should you) offer the loan option? Your lender should advise you on the various points in the revenue cycle that the loans can be offered. By implementing programs at various stages, hospitals can greatly increase the success of the program. Your banking partner should have the experience and the expertise to guide you in this area. Be sure that their advice is backed by actual loan results with other similar hospitals.
  • Application or non-application based loans: Do you want to spend your staff's time and energy attempting to obtain written applications or would you and your patients be better served by implementing a non-application-based program? Again, be sure that the lender's advice can be substantiated by actual loan results with other hospitals.
  • Terms of use: Terms of use can be restrictive (some loan programs can be used only for hospital charges) or flexible (charges from both the hospital and hospital-owned physician practices or clinics can be placed on the line of credit). Think about what would be best for your facility and patient population.
  • Payment options and rates/fees charged to patients: Make sure you know what the lender's policies are in regard to down payment, minimum monthly payment, punitive rates (interest rate increases due to patient delinquency), over-limit fees, returned payment fees and other charges.
  • Banking partner: Evaluate the experience of the lender as well as the flexibility and reasonableness of their contract terms. If possible, partner with a lender that has access to more than one banking partner so that you do not run the risk of the bank "exiting the market" and leaving you and your patients without a viable loan program.
  • Loan servicing/ Patient satisfaction: Know who is servicing the accounts and interfacing with your patients. Make sure that the servicing department has direct experience in healthcare lending and servicing. Banks that offer patient loan programs deploy different servicing strategies that come in many "flavors," including: billing only, placing accounts with generic credit card collection platforms, offshore collections, and industry-rated servicers that specialize in revolving lines of credit used for patient loans. A specialist will have the experience and knowledge necessary to treat your patients properly, which will result in better collections and a better patient experience.
  • Recourse rates--what can you really expect? When selecting a lender, spend time understanding the lender's experience and their ability to manage recourse. Make sure that the lender has the loan performance data sufficient to adequately quantify and manage loan risk. Understand how recourse is calculated and what the repurchase terms and conditions are. It is always best to align the hospital's interests with the lender.
  • Ensure success by partnering with a lender that provides tools to promote the loan program and patient benefits: Collateral materials, such as patient brochures, Q&A sheets, posters, press releases and other tools, can be generic or customized to your hospital. Choose a lender experienced in healthcare lending that can guide you in this area before you make a decision.
  • Service fees: Costs vary. Some lenders charge a fixed rate; others base the fee on the interest rate charged to the patient and the type of loan program chosen by the hospital. There are multiple options available to the hospital, and it is important to select a lender that has flexibility and can design a program specifically to meet the hospital's mission as well as the patient demographics for the market served by the hospital.


It's time to meet the challenges of the new economic situation with innovative solutions. Doing so will improve your hospital's bottom line as well as the overall patient experience.

Mitch Patridge is CEO of San Diego based CSI Financial Services, a provider of patient financing for hospitals and other healthcare providers. He can be reached at mpatridge@csifinanical.com.

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