Out of Pocket Healthcare Payments, Part II: Transformation through prepayment models

Introduction: The Shift in Hospital Revenue Streams demands attention

Click here for Part I of our series on out of pocket payments

In Part I of our series on managing out-of-pocket payments, we delve into the growing challenge hospitals face with out-of-pocket payments and their increasing share of hospital revenue. As the healthcare market evolves, how are providers adapting to seize this emerging opportunity?

The Status quo: Bill chasing with pen and paper

Looking for frictionless, one click payments with upfront pricing? You won’t find that in healthcare. which is notoriously slow to adopt technology and consumer concepts. From Revcycle Intelligence:

While paper and pen-based activities in healthcare likely has its roots in concerns around privacy and security, the increasing responsibility hospitals have to chase down larger portions of their revenue from patients will require a dramatic overhaul of the patient billing collection system.

Small Innovation: Payment Plans, Better UI

Recognizing the need for improvement, some providers have introduced innovations focused on the most immediate problems by borrowing from other industries:

1. Consumer-like Patient Responsibility Payment Experience: Given the pen and paper / manual nature of most healthcare companies, digitizing the process is naturally a point of innovation. Companies like Simplee (now part of Flywire) and Cedar are examples of companies working on creating a consumer-like experience for patient responsibility payment and collection.

2. Payment Plans: Considering the increasing financial burden on patients, companies are borrowing a page from the consumer market to offer financing options, reducing financial burden for both patients and providers over time. Companies like CareCredit (part of Synchrony) and ClearBalance offer payment plans that allow patients to pay over time.

The Need for Preemptive Solutions

However, notice that the current approaches predominantly focus on smoothing payment processes after services are rendered, as traditionally implemented. This strategy overlooks the problems of collecting payments after-the-fact:

Delayed Revenue for Healthcare Providers:

When payment collection occurs post-service, healthcare providers essentially are first footing the bill for the cost of service, while facing significant delays in receiving revenue. This lag not only impacts their cash flow but also complicates financial planning and budgeting processes.

Increased Administrative Costs:

Chasing after payments incurs substantial administrative costs. Hospitals and clinics must allocate resources to billing departments, follow-up services, and sometimes debt collection agencies. These efforts increase operational expenses without guaranteeing payment success.

Patient Financial Stress:

Patients often experience sticker shock upon receiving their bills weeks or even months after their treatments. This delay can lead to increased financial stress and dissatisfaction, as patients struggle to reconcile these unexpected costs with their budgets. In fact, 38% of patients skip care due to high costs and uncertainty about their potential bills, with that figure rising to 6 out of 10 patients for uninsured patients.

Higher Rates of Non-payment:

Post-service billing significantly increases the likelihood of non-payment. Patients who are surprised by high costs or who find themselves unable to pay are more likely to default on their payments, leading to higher write-offs for providers.

Lack of Transparency and Predictability:

Traditional post-service billing methods contribute to a lack of transparency and predictability in healthcare costs. Patients are frequently unaware of their financial responsibility until after the fact, undermining trust and confidence in healthcare providers.

The rise of prepayment models

So long as patients receive healthcare bills after care, any efforts will diminish, but not eliminate the core problems above for patients and providers alike. So why not avoid all these complications altogether through a prepayment model?

At its core, prepayment models bring the cost of care upfront to patients before the care is administered. While this seems like a minor change, prepayment models solves many of the issues that payment after care doesn’t:

Better revenue prediction and cost control:

Prepayment models allow healthcare providers to have a more accurate prediction of their revenue stream, enabling better financial planning and resource allocation. With upfront payments, hospitals can reduce the uncertainty and variability that come with insurance reimbursements and post-care billing, leading to more stable and predictable financial operations.

Decreased administrative cost:

Prepayment models streamline the payment process, significantly reducing the need for these resource-intensive activities. This reduction in administrative burden can lead to substantial cost savings for healthcare providers, allowing them to allocate resources more efficiently elsewhere.

Increased price transparency leading to higher patient satisfaction:

Patients know exactly what they need to pay upfront, eliminating the surprise and confusion of post-care billing. This transparency can lead to higher patient satisfaction, as patients feel more in control of their healthcare spending and less anxious about unexpected bills. Furthermore, clear upfront pricing can enhance trust between patients and providers, fostering a more positive healthcare experience. In fact, survey shows that 79% of patients would want options to pay for out of pocket costs before receiving care.

Lower rates of non-payment:

Prepayment models not only ensure that providers are compensated for their services before incurring any operating costs, but also mitigate the financial risk associated with patient default, reducing the overall rates of non-payment.

Key Elements of a Prepayment model

So what elements would an ideal prepayment model need to have for healthcare?

Accurate, on demand pricing

While it sounds easy to achieve on paper, this is very difficult to do in healthcare because of a few factors:

1. Different prices for the same procedure: Not only are healthcare prices dependent the type of insurance they have as mentioned in part I, the same procedure may have different CPT codes that have different reimbursement pricing. For example, CT scans has 70 commonly utilized CPT codes, and knowing which one to list pricing for the patient is of upmost importance.

2. Pricing must integrate procedures across multiple providers in different specialties / geographical locations: Using surgery as an example, while patients may seem to be going to their provider for one single procedure, the patient journey involves services from imaging labs, diagnostic lab work, anesthesiology, and other departments. An accurate upfront pricing would require the prepayment system to collect the nature of the work and pricing from the various sites that took part in the surgery.

Personalized pricing option:

This approach allows prices to be modified based on various factors such as historical ability to pay, patient insurance coverage, provider availability, and even competition with competing local providers who may be drawing business away. Adjustable pricing offers a flexible framework that can adapt to the financial and operational realities of both parties.

Private payment portal within patient/provider interface

Having the prepayment system an integrated part of the patient’s interaction with the provider ensures that the patient stays in the providers workflow. A private portal also ensures that any major price differences from payor contracts vs cash payment are not shown publicly, as major price differences that become publicly known may adversely impact future negotiations between payor and provider.

Do Healthcare Marketplaces fit the bill?

A solution gaining popularity to the growing out of pocket payments volumes are marketplaces. Examples include MDSave (recently acquired by Tendo Systems) and Mishe. The logic is that directly connecting patients directly to providers willing to submit to an open pricing environment will allow market forces to find the most ideal pricing and become a one stop shop for purchasing healthcare services. The problem is that marketplace have downsides for both patients and providers:

Patients trust their provider’s guidance: 

Marketplaces takes patients out of their typical care journey and depends on the patient to making purchasing decision, which is counter to typical engagements where patients follow their trusted providers’ guidance. A prepayment system embedded within the patient journey will give the patient opportunity to stay within the care continuum and taking care of potential “sticker shocker” issues is a much better experience.

Pricing confidentiality: 

Open marketplaces publicizes potentially significant cash discount for advertised procedures, and could impact payor contract negotiations down the road. Considering payor contract negotiations are based more on negotiating power rather than cost-driven decision making [LINK TO PART I], any data point that could harm a provider’s negotiating power would be avoided at all costs.

Poor integration with hospital workflow: 

Marketplace listings require providers to actively provide procedure availability on the marketplace platform, which adds additional workflow to the already overworked hospital administrators, and potentially not be adopted by the most desirable hospitals, since they tend to be overbooked and don’t always need more patient volume.

Complying with the No Surprise Act: 

Pricing discovery mechanisms in marketplaces don’t help with hospitals to comply with the No Surprise Act, which require hospitals to provide accurate pricing estimates ahead of scheduled nonemergency health care services. Marketplace prices are presented based on consumerized procedure names as opposed to CPT codes, which providers actually use to get paid by insurance. In addition, marketplace prices aren’t helpful for the majority of hospital billings that cover multiple procedures and departments.

Conclusion: Embracing the Future of Healthcare Payments

The need for preemptive solutions to the growing out of pocket payments borne by patients and providers is becoming increasingly apparent. The shift towards prepayment models offers a promising path forward, tackling the core challenges of delayed revenue, administrative inefficiencies, and the financial stress placed on patients. By bringing the cost of care upfront, prepayment models not only enhance revenue predictability and reduce administrative burdens but also promote price transparency and lower the rates of non-payment.

Venture investing isn’t just about exploiting existing markets; it is also about monopolizing a path to new opportunities and customer behaviors. Tune in next week for part III as we dive into the new markets opportunities a robust prepay system creates.

If you believe that prepayment models are the right solution for out of pocket payments, please join our syndicate on AngelList to invest in companies that are leveraging prepayment models to lead the next big leap in healthcare finance.