Hospital Bad Debt Grows

Today’s Managing Health Care Cost indicator
is 30

Health care reform promises to increase the number of Americans who have health insurance - which is great.

Here’s a word of caution though.  The Philadelphia Inquirer reports that hospitals in the Philadelphia area see an increasingly large portion of their bad debt from patients with insurance.  In fact, bad debt attributable to insured patients rose from $490 million to $550 million from 2007 to 2008 (the last year covered by a hospital survey.)

What gives?

Insurance is changing pretty dramatically.  Many patients who previously had first dollar coverage now have insurance with high front-end deductibles, and insurance has been migrating from copayments (fixed amounts that patients owe) to coinsurance (where patients owe a portion of the total bill.)  In effect, we are moving ‘back to the future’ when health plans covered a more limited range of services, and consumers often had to pay up front and then collect 80% of the allowed charge from their insurance plan after they received services. 

There are good elements to this change. Many economists worry that when care appears “free,” there is the moral hazard which encourages people to seek more care than they would value if they had to pay directly for it.  Thus, these high deductible health plans discourage ‘discretionary’ medical care that’s of little value. Patients who have to pay more of the bill are sensitized to the cost of health care, and will theoretically refuse unnecessary care and pressure providers to lower unit costs.   

On the other side of the argument, there is fear that higher deductibles and coinsurance might convince some patients to defer or refuse outright medical care that would be valuable to them.   This survey demonstrates the collection risk for providers inherent in increased patient cost-sharing.   This could mean that health plans are becoming too "skinny," and offering benefits with too many holes.  It could also be an indication that ill patients and their families are in a poor position to argue for greater economy in their care.  

The takeup of higher deductible health plans has increased substantially over the last two years, and at the same time the economic woes have led to high rates of unemployment.  Hospital bad debt rates are a likely early indicator of an increase in medical bankruptcies - so this will be an important indicator to watch.  Increasing bad debt combined with an increase in patients covered by Medicaid (a notoriously stingy payer) will push hospital even harder to lower their cost of care delivery.