How to Reduce Bad Debt in Healthcare: Office Ally's Tips

Discover what bad debt is and how it impacts hospitals across the United States, and then learn how to reduce bad debt in healthcare with strategic efforts.

What is Bad Debt?

In healthcare, bad debt refers to the amount of money providers cannot collect from patients or insurance companies after rendering medical services. Bad debt is often called a “write-off” and can prevent hospitals from reaching revenue goals.

Bad debt differs from charity care, where services are provided for free or at a reduced cost based on the patient’s financial need. Instead, bad debt represents anticipated revenue that is never realized due to non-payment.

Bad debt can occur in several different circumstances, including:

• Billing, coding, and registration errors
• Misunderstandings between the provider and insurance company 
• Healthcare events patients do not expect or anticipate
• Limited in-network options
• Lack of awareness of financial assistance programs
• Uninsured or underinsured patient accounts

The most common cause of bad debt is uninsured or underinsured patient accounts. Patients with these accounts must cover the entire cost themselves or have a health plan with out-of-pocket expenses they cannot afford. The account becomes bad debt when patients cannot pay and the healthcare provider has exhausted all reasonable collection efforts. 

How Common is Bad Debt

The amount of bad debt incurred by American providers is widely studied, with numbers varying yearly. Between 2015 and 2018, bad debt rose by $617 million nationwide, and the situation has only worsened since the COVID-19 pandemic. 

• At the pandemic's start, outpatient services declined by 34% and inpatient services by 19%.
• Between 2019 and 2020, one-third of hospitals reported their operating margins dropped 100%.
• Nearly half of hospitals reported higher levels of uncompensated care and bad debt.
• Ultimately, it is estimated that the pandemic will result in $323 billion in lost revenue for hospitals.
  

The end of the pandemic also prompted Medicaid redetermination, where patients who did not have to renew their Medicaid coverage during the pandemic were re-evaluated. Many were ultimately removed from Medicaid, becoming self-pay. In 2018, an estimated 11.1% of bad debt came from self-pay patient accounts. In 2021, that number skyrocketed to 57.6%. 

Bad debt doesn’t just impact hospitals. America has a major medical debt problem. According to the Kaiser Family Foundation, nearly half of all adults (around 100 million Americans) have some sort of medical debt. Of these, three million people owe more than $10,000. 

Medical debt can be a significant source of stress and can prevent patients from seeking further care. Finding insurance coverage and preventing bad debt from getting worse is in the best interest of both the hospital and the patient. 

What is the Difference Between Uncompensated Care & Bad Debt?

Not all bad debt is uncompensated care, but there are two types of uncompensated care: bad debt and charity care. 

As noted, bad debt occurs when the provider expects payment for the account and does not receive it. Charity care, meanwhile, occurs when the provider knows the patient cannot pay and does not expect to receive payment. Charity care is an expected, predictable operating expense, while bad debt is not. 

The American Hospital Association reports that US hospitals have accumulated over $620 billion in uncompensated care over the past twenty years. A significant portion of this amount resulted from bad debt write-offs.

Why Should You Reduce Bad Debt

Healthcare providers often classify bad debt as an operating expense, significantly impacting their financial health. Bad debt can affect the overall cost of healthcare, as providers may increase prices to compensate for losses incurred from unpaid bills.

It can also impact the quality of care and services a hospital can provide. Higher rates of bad debt often lead to lower patient satisfaction.

8 Strategies to Reduce Bad Debt

1. Recognize Your Exposure to Bad Debt

Detecting potential bad debt early in a patient encounter is crucial. Hospitals can reduce bad debt by identifying financially at-risk patients before their appointments or services.

Implementing a hospital bad debt policy that includes registering and financially clearing or flagging each patient before their procedure day can prevent write-offs. If a patient is flagged as a financial risk, the health system can set up a payment plan or require a deposit for non-emergency procedures to mitigate hospital bad debt. This approach also helps patients manage their medical expenses more effectively.

2. Reduce Billing Errors

Medical coding is a common source of claim denials, which can lead to bad debt. 

Using outdated or incorrect procedure codes or submitting inaccurate patient information can cause a claim to be denied.

Hospitals should mitigate billing errors by training staff, implementing failsafe procedures to avoid errors, and investing in internal upgrades, like medical billing software. This approach ensures claims are coded accurately.

3. Collect Payments Upfront When Possible

Often, bad debt stems from delayed cash flow. The longer the patient account remains unpaid, the more likely it will end up as a write-off. Offer patients multiple ways to pay as early as possible using a payment processing solution - even when the bill is only a good faith estimate.

4. Explore a Charity Care Policy

During the pandemic, millions of families lost their employer-sponsored coverage. Though the Public Health Emergency for COVID-19 has ended, some folks still have not regained this coverage. Hospitals should consider this and update existing financial assistance policies to address this new reality.

Remember, there are two types of uncompensated care: charity care and bad debt. Hospitals can reduce unexpected bad debt by anticipating the need for expected charity care.

5. Train Staff to Communicate Financial Responsibility to Patients

Bad debt also occurs when patients don’t know how or when to remit payment. All staff should understand hospital financial policies and be trained to educate patients via pre-service financial counseling.

Patient education includes breaking down each bill by line item, explaining payment plan policies, and educating the patient on how to pay online via a patient portal. In some cases, a patient advocate can lead the efforts to help patients understand their financial responsibilities and payment options before their appointment or service. 

6. Bolster Insurance Discovery Efforts

Inaccurate patient insurance coverage is the number one reason claims are denied or rejected. To combat this, providers should improve insurance discovery efforts for patient accounts. 

This automated process includes an exhaustive check of government and commercial payers to identify Medicaid, Medicare and commercial claims eligibility for patients identified as self-pay. Insurance discovery is an easy first line of defense against bad debt as it allows hospitals to convert existing accounts receivables into revenue with little effort.

7. Use Office Ally’s Healthcare Solutions to Enhance Your Revenue Cycle

Using technology to identify and prevent risk within the health system can significantly reduce bad debt exposure. Typically, debt spends considerable time in accounts receivable and collections before it becomes bad debt. Data-driven analytic and automation technologies can help health systems identify bad debt risks early and streamline AR and collection processes, thereby reducing the overall risk of bad debt.

Office Ally offers tools, including MAPS and Insurance Discovery for hospitals, to help your organization reduce bad debt and improve financial health. 

We provide a free assessment using standard file extracts to demonstrate the significant impact Insurance Discovery can have on your organization’s revenue recovery services. This risk-free evaluation does not require any technical resources from your organization. Charges only apply if Office Ally successfully recovers revenue, resulting in higher returns for your organization.

‍Take control of your organization’s bad debt challenges. Get more information on your free insurance discovery assessment.