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How Should Policymakers Respond To Growth In Cost Sharing That Often Goes Unpaid?

The past few decades have seen a significant increase in cash liability for many patients, particularly in the commercial market. However, patient cost sharing is often unpaid, reducing payments to healthcare providers who are about to collect the costs, resulting in outstanding medical debt for patients. In this piece, we highlight what is currently known about the frequency with which patients pay their cost sharing and discuss how this phenomenon relates to other topics in health policy, including insurance design.

Patient liability has increased in some markets

In recent years, opposing trends have taken place in the insurance markets. On the one hand, coverage extensions meaningfully reduced the uninsured rate, and in turn, some patients’ financial exposure. At the same time, cost pressures in the commercial insurance market have led to an increase in patient cost-sharing. For instance, according to the Kaiser Family Foundationbetween 2006 and 2022, the average deductible for a one-off cover in the employer market has increased by about 2.5 times in real terms. Combined with rising prices, this has increased the patient’s potential financial liability among the insured population, both in percentage and absolute terms.

Increasing cost-sharing is not only changing the incentives patients face, but also impacting provider payment dynamics. Unlike the portion paid by the insurer, the cost sharing must be collected directly from the patient by the provider. While part of the patient cost is collected at the point of sale, the majority is billed to the patient after the care is delivered. As we discuss below, patient liability payment is far from guaranteed.

From the consumer’s perspective, unpaid cost-sharing represents a form of medical debt and is at least partially reflected in the global $88 billion in medical collections held on consumer credit profiles. It is not clear what proportion of this debt comes from insured versus uninsured patients, but it is noteworthy that the majority of individual debt collections are of a size that could plausibly have been incurred even under generous insurance plans (for a discussion see Batty, M., Gibbs, C., & Ippolito, B. (2022)). For providers, this means lost payment, as providers and non-payers are on the hook to collect patient payments. Meanwhile, the extent to which collecting patient payments reduces providers’ net revenue depends not only on the likelihood of payment, but also on the administrative overhead associated with billing and collection activities.

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Payment patterns in the current market

To provide context for related policy discussions, we have collected payment pattern data from publicly released reports from Crowe LLC. Crowe is a large accounting and consulting firm that partners with more than 1,000 U.S. hospitals nationwide with a specific focus on compliance and revenue optimization support. Through this work, Crowe obtains detailed, transaction-level patient payment data from most hospital customers. It has made public a number of aggregated findings and statistics from this data, which provide unique insight into patient payment patterns.

Crowe’s data indicates that a very large portion of cost-sharing remains unpaid. Average, they report that only 54 percent of commercially insured patients paid their cost sharing, a figure that’s broadly in line with proprietary data we’ve worked with. Not surprising, the collection rates decrease with the amount of the invoice. Other data suggests collection rates are higher for independent physician practices than for hospitals in Crowe’s data, which may in part reflect smaller bills. Yet only two-thirds of physician office bills over $200 were paid within 12 months.

This data also implicitly reflects broader phenomena in coverage trends. While hospital bad debts have historically been primarily due to the uninsured, about 58 percent of recently accumulated bad debts in the hospital come from people with insurance. The fact that many patients receive bills long after care has been provided is likely to lower collection rates and increase collection costs. At least in the hospital market, only about 20 percent of patient liability is currently being collected at the point of service. The majority of these payments are likely to come in the form of copays, which are generally collected at the time of visit, as opposed to coinsurance or deductibles.

Recent policy changes regarding personal medical debt will reduce the cost of not paying medical bills and potentially reinforce these trends. Especially the current administration medical debt eliminated as a factor in many federal credit programs. The major credit bureaus have also significantly reduced the impact of medical debt on consumer credit profiles. Medical debts less than $500, for example no longer appear on credit reports. Regardless of other merits of these changes, they will reduce the costs associated with failing to pay health bills, and potentially push collection rates even lower than they are today.

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Why this is important for healthcare markets

Relatively opaque price signals in provider markets and very incomplete collection of patient cost sharing hinder overall market forces. Especially when faced with coinsurance, patients have limited upfront transparency about how much they owe for services. The fact that patient liability is not fully known until after services have been provided curtails patients’ ability to respond to (or avoid) out-of-pocket charges. Variation between healthcare providers in how they handle unpaid bills further complicates matters for consumers.

From the provider’s perspective, a greater distribution of patient costs coupled with modest collection rates for those bills obscures their overall revenue for a given service. This can cloud negotiations with insurers, who weigh volume against price and require a clear understanding of both. As insurers require patients to pay a higher share of health care bills, providers can reasonably expect their total reimbursements to decrease given the low collection rates discussed above. This means that providers must negotiate higher payment rates from insurers to keep expected payments constant.

Low collection rates also create remarkable incentives for providers. All else being equal, lower collection rates increase the relative value of patients who have a lower residual liability after leaving the service location, such as patients with lower cost-sharing (e.g., lower deductibles) or who are paying a larger portion of their liability at the time of sale (e.g. via copays instead of coinsurance). If cost-sharing continues to rise or collection rates fall, the incentives for providers to more explicitly select patients with a greater likelihood of payment increase. For example, within the commercial market, providers will be less inclined to contract with subscriptions that have particularly high cost-sharing requirements. (Outside of the commercial market, low patient collection rates further increase incentives for providers to enroll eligible patients for Medicaid coverage).

Challenges related to direct debits can also lead to changes in how providers conduct them. For example, this phenomenon likely increases the appeal of medical credit cards to providers. These products are just like other credit cards, except they are limited to use for healthcare services and are often promoted by healthcare providers themselves (for example, as an option to pay a bill at a hospital). With these cards, consumers can in fact finance care and transfer liability for collection from the care provider to the lender. This makes payment more predictable for the provider, but also means patients have to pay back the loan, which can come with meaningful interest payments.

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What should policymakers do?

At a minimum, policy makers should recognize that low patient collection rates impact providers, and policy changes that allow for lower fines for non-payment could result in fewer collections and a greater impact on providers. For example, the benefits of policies that further reduce the cost of defaulting on bills must be weighed against the potential harm to providers, as well as the expected response from providers to such policies.

These Crowe reimbursement stats should also inform insurance design discussions. If patients are inconsistently paying current cost-sharing, further increases in cost-sharing may not be desirable, especially given findings from related research. For instance, past studies have shown that cost-sharing is effective in reducing costs, but may not be well targeted at low-value care. Together, these data can argue for refining and simplifying cost-sharing and other incentives imposed on consumers, rather than increasing cost-sharing in general.

One possible mechanism to simplify price signals to consumers and ease the burden on providers is to use co-payments instead of coinsurance. Research suggests out-of-pocket payments are particularly striking for patients. This suggests that insurance plans based primarily on co-pays may provide clearer cost signals and lower expenses compared to an actuarial equivalent co-insurance-based design. The advantages for providers are obvious: they not only guarantee payment in advance, but also reduce their collection costs. From a patient perspective, pricing would be more transparent up front than with coinsurance, meaning fewer post-service shock stickers or unexpected bills, and better response to pre-service pricing signals.

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