What Can You Do When Patients Don't Pay?

Breaking down your options for dealing with uncollected patient debt.

October 25, 2021

It's no secret that collecting patient responsibility payments has become a thorn in the side of healthcare providers–especially those working in small, local clinics. Over the last decade, high-deductible health insurance plans have grown in popularity while medical debt has continued to rise. This unfortunate combination illustrates clinics' struggle to collect a significant portion of their revenue. This uncollected revenue exists in every practice in America in the form of medical debt. It's fees owed to doctors that patients, for one reason or another, haven't paid.

While the problem is clear, the solution is not. Surely the local family physician is trying to collect patient payment efficiently! Of course, your dentist wants to avoid medical debt! But still, not for lack of effort, the problem persists.

So what should providers do? How should they respond when patients don't pay?

Should they sell the debt to collection agencies? Or "write it off" for tax purposes? Should they just forgive it? Or keep trying to collect internally? 

The options are many, and there is no one-size-fits-all answer. But through this article, we'll break down the ins and outs of each option to help you decide just how to deal with your uncollected patient debt!

Option #1: Utilize a collection agency.

For a long time, a healthcare provider’s obvious first step when a patient failed to pay a bill was to employ the services of a collection agency. Why this is many businesses' first reaction is fairly plain to see–when you're trying to run a business, you don't have time to hunt down patient payments! On top of that, patient payment historically comprised a much smaller portion of practices' revenue, so its impact was felt much less when it went uncollected. However, in today's healthcare industry, uncollected bills account for a meaningful amount of revenue, with it estimated that, as of 2014, the median family physician left $23,000/year in patient obligations uncollected.

In light of this shifting status quo, providers must ask themselves whether relying on collection agencies is a feasible solution. The answer lies in the data. With an average collection rate of 21.8% for non-hospital healthcare providers combined with typical contingency fees ranging between 25% and 50%, providers are, on average, only collecting between 10.9% and 16.35% of every dollar turned over to a collection agency. These figures cannot be considered acceptable by clinics relying on effective patient responsibility collection practices to drive a third of their revenue!

But before simply writing off collection agencies as ineffective, it’s worth exploring just why that is the case. 

First and foremost, collection agencies are inherently working with old debt. While the age of each bill depends on the internal collection practices of each clinic, in many states, the debt must be old before the clinic can sell or assign it to a collection agency. Some state laws require clinics to attempt to collect for a certain number of days before utilizing a collection agency. For example, in the state of Washington, a hospital must attempt to collect (in good faith) for 120 days before allowing a collection agency to do so. This means that collection agencies are fighting an uphill battle right off the bat–they must convince patients to pay bills that in many cases are long forgotten.

But beyond the age of the debt, other factors also prevent collection agencies from effectively collecting. One of these factors is the negative connotation that accompanies collection agencies. Generally, people dislike collection agents. Many consumers feel that these companies are essentially paid to harass people for their debts. And that’s not a feeling that is especially far from the truth, as the collection industry has proven so predatory that Congress felt it necessary to pass the Fair Debt Collection Practices Act to restrict their deceptive and harmful collection efforts. A consequence of this reality is the skeptical and defensive response of the average individual whenever they receive a letter from a collection agent. And this unsavory representation hurts the providers seeking the agencies’ services, as it diminishes their returns.

Another factor affecting collection agencies’ effectiveness is providers’ internal collection efforts. Unfortunately, patients often receive letters from collection agencies requesting payment for bills that never made it to them! And whether the bill never arrived because the postal service lost it, the patient moved, or the provider forgot to send it, it matters not–when a patient’s first contact requesting payment for a bill is from a collection agent, it’s not going to go over well. And, honestly, why should it? You wouldn’t pay a collection agency if you’d never seen the bill in the first place, would you? No, you’d call the doctor and ask, “What in the world happened? Why am I getting a letter from a collection agency?” So when your collection efforts are ineffective (even if by no fault of your own), it decreases collection agencies’ ability to assist you effectively. 

A final factor impacting collection agencies’ effectiveness is the reality that collection agencies’ tactics don’t change a patient’s financial circumstances. While collection agencies do have a fair amount of leverage–namely, threatening to report the bill to the credit bureaus or sue the patient–if they’re attempting to collect a bill the patient actually didn’t have the means to pay, their threats are unlikely to have much effect! If a patient can’t pay, they can’t pay. Threats don't change that.

But even if you pretend that collection agencies are effective at collecting (and the data suggests they’re not), this ignores the largest problem with collection agencies: you alienate and harm your patients by turning over their bills. 

Collection agencies typically report patients’ unpaid bills to the credit bureaus, an action that will harm your patients' credit scores significantly. And collection agencies may take their efforts even farther by attempting to garnish patients’ wages or charge them interest on unpaid bills. If a patient experiences these consequences after you’ve sent their bill to collections, why would they ever return to your office? Even if doing so does motivate them to pay their bill, the patient-provider relationship will still be damaged–and likely irreparably so. A relationship that was supposed to improve a patient’s health has done just the opposite, so why should they stay and risk being hurt again? Especially when research has consistently shown that financial stress has a devastating impact on mental and physical health. It’s a no-brainer for patients: If your doctor sends you to collections, don’t go back. And maybe that’s an inherent consequence that you’re intentionally accepting when you utilize a collection agency. But if it’s not, it’s one worth factoring in–because whether you mean to or not, sending a patient to collections means hurting them.

Option #2: Just forgive it.

Okay, so maybe you decide that a collection agency just isn't for you. Maybe you value your patients' financial health too much to subject them to a collection agency's wrath. Maybe you just want to give up on trying to collect the bill. Maybe you think it's better to just cut your patient a break. Before you decide upon this route, it’s worth exploring the implications of this option a bit further. 

First and foremost, there’s the question of whether or not simply forgiving the bill is something you can do. And the answer to this question is a tricky one–one that, if not carefully thought about, could result in a provider exchanging their scrubs or lab coat for an orange jumpsuit.

The main concern behind forgiving medical bills is that you could be accused of insurance fraud. Providers need to recognize that it's a felony to regularly waive copays or deductible payments. And beyond the (much worse) threat of imprisonment, maintaining insurance contracts with insurance providers will likely prove difficult if you continually do this.

However, this doesn't mean you can never forgive bills. If a patient is experiencing financial hardship or an emergency, this might be an appropriate time. Or after you've made a sincere, good-faith effort to collect the debt. Still, you should be careful to thoroughly document your collection efforts and practices to avoid any unfounded claims of insurance fraud.

If you decide that it would be appropriate (and not illegal) to forgive a debt, should you immediately just forgive it? Isn’t there some sort of tax benefit to “writing off bad debt”?

The answer is more complicated than a simple yes or no. While it is common for hospitals and large health systems to write off uncollected bills–though this practice has been heavily restricted in recent years–the assumption that small or medium healthcare providers should also use this practice is misguided. The perceived “tax benefit” received by these large entities is not typically realized by smaller practices due to one simple reality: you can't "write-off" an uncollected bill unless you use an accrual accounting system, which is fairly uncommon for smaller practices. And the reality is that “writing off” the debt under an accrual accounting system doesn’t actually give you a tax advantage over not writing it off under the simpler cash accounting system. This is simply because, under accrual accounting, you count the revenue when it’s owed to you, unlike cash accounting, under which you count the revenue when you receive it. So either way, forgiving the debt just means that you’re giving up on collecting it! 

But maybe forgiving the debt is the right choice! Maybe it’s an appropriate and legal situation to do so. Maybe doing so would allow your staff to focus on bills that are more easily recoverable. Or maybe forgiving the debt helps maintain the relationship with a longtime patient who may have fallen on hard times.

The factors to weigh are numerous, and it’s not an easy decision to make, so perhaps, a better question to ask yourself is this:

If we improved our collection practices, could we maintain the patient relationship and still collect the payment eventually?

The answer to that question leads us to Option #3 and holds inside it the core premise upon which Peachy has been built: Antiquated collection practices stand firmly between the provider and patients’ payments.

Option #3: Collect it yourself.

Patient billing is a practice largely stuck in the 20th century. Bills often don’t find their way to their recipient for weeks or even months after the appointment. Providers rely largely on mailed paper bills and payments sent through the mail. Payment is expected to be made in full, often within 30 days of receiving a bill. It’s a process that leads to patients (1) forgetting bills, (2) never receiving them, (3) having trouble paying them, and (4) not having the means to pay them in full. And this reality leads to many bills going uncollected. 

So whether you decide to utilize a collection agency or simply forgive the debt, an analysis of your current collection practices is still warranted. Because figuring out why you're struggling to collect is a task deserving of your effort. And one that will pay dividends in the long run.

Our article entitled “Why Aren’t Patients Paying Their Medical Bills?” is a great starting point in this endeavor. It breaks down the main choke points in clinics’ collection practices and explains why patients may not be paying. 

The next step should involve a deluge of self-inquiry. Leave no stone unturned. Understand every aspect of your collection practices and identify where you may be failing patients. 

Questions should include many of the following: Are you always requesting payment at point-of-service? If not, are you sending bills to patients? How are you currently sending bills notifications? Then, once patients receive a bill, how are you accepting payment? Do you accept cards? Checks? Cash only? Are you allowing online payments? Can patients make use of payment plans? 

Ultimately, this line of questioning will likely reveal what we already know to be true: aspects of your billing practices are stuck in the past. While this may seem a bleak fact, it presents hope in the form of its fixability. If antiquated collection practices really are the problem, then the solution is obvious–modernize your patient payment experience! 

Providers can take simple steps to bring their bill collection processes into the 21st century. It starts with sending bills in a way that works for patients: via email and text. The data overwhelmingly shows that patients want to receive texts and that text billing improves payment rates. It allows providers to remove the friction standing between patients receiving the bill and paying the bill–getting a stamp, filling out a check, mailing the letter–by embedding payment links directly into the texts or emails and enabling patients to pay in just a few clicks via Apple Pay, Google Pay, or simply by inputting their card information.

Then, after providers have efficiently delivered the bill and enabled easy payment, all is done, right? Wrong. Providers have one more underutilized trick up their sleeves: the payment plan. 

In the world we live in today, the perceived choice between payment in full and no payment at all is a false dichotomy–and presenting it in such a manner hurts providers. If patients must choose between paying rent and paying their medical bills, it’s all but guaranteed that the rent will be paid and the medical bill will not! But remember, that false dichotomy isn’t real. If patients can’t pay in full, the only other option shouldn’t be nonpayment, but paying what they can–in the form of payment plans.

Payment plans enable patients the flexibility to pay their bills on a schedule that fits in with their individual financial circumstances. Every patient is different, but every patient is asked to pay their bill on the same schedule, leading patients who could pay, if given the flexibility to do so over a few months, to never pay their bills. With payment plans, this need not happen. 

However, many providers avoid utilizing payment plans because of the administrative burden it can place on their staff. Fortunately, automated payment plans exist. Instead of asking staff members to manually track and administer payment plans, providers can simply allow a software tool to do it for them. These automated plans create flexibility for patients–within an easy-to-use bill payment user flow–without adding any administrative headache. It’s a win for patients and providers.

While this might all sound good, isn’t this a lot of work? Wouldn’t it be easier to just forget about the uncollected bills or sell them to a collection agency? The easy answer is no. In the long run, you’ll save time and money by optimizing your collection practices, and the effort that it will require to implement such an optimized system is far less than you might believe. 

Peachy exists to do just this. We help providers transform their existing collection practices into practices fit for 2021 and beyond. And we do it all with minimal work required from any members of your staff. You deserve to get paid, in full, for your hard work. Connect with us here to learn more about how Peachy can help you analyze your current collection practices and develop a path forward that fits your clinic.

Appendix
Published on: 
October 25, 2021

Note: This is not to be taken as tax, legal, benefits, health or financial advice. Since rules and regulations change over time and can vary by location, consult a lawyer or financial expert for specific guidance.

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