Tactics for Reducing Hospital Bad Debt

August 1, 2020

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American healthcare has a debt problem. Medical debt is now so widespread in the US that it impacts more than half of all adults roughly 100 million people according to a study by the Kaiser Family Foundation. In addition to being an enormous problem for patients and their families, hospital bad debt is a crippling problem for health systems.

By 2018, hospital bad debt already totaled $56.5 billion. Since then, the combination of a pandemic slashing high-revenue elective procedures, and high-deductible insurance plans passing more care costs onto patients who may or may not actually cover them, the debt problem has only grown worse. According to a new Kauffman Hall report, hospitals and health systems have seen four straight months of negative operating margins so far this year.

As you can guess, the COVID pandemic played a significant role in the rise of bad debt over the past few years. The statistics are rather sobering:

According to Emily Auten, vice president of Medicare Bad Debt at R1, client data patterned the up-and-down trends in utilization throughout the pandemic. “We did see clearly that once the pandemic set in, Medicare bad debt dropped for most providers. Now we see it returning to pre-pandemic levels as coinsurance and deductibles are on the rise again, and because people are actually going to the doctor again and getting those procedures they put off.”

Defining the debt problem

According to the American Hospital Association, US hospitals have provided more than $620 billion in uncompensated care over the last two decades. A sizeable portion of that came in the form of bad debt write-offs.

Uncompensated care falls into two categories charity care and bad debt. Charity care is healthcare services provided knowing the patient cannot pay and without expectation of payment. Bad debt is the unpaid balance due for services for which hospitals did expect to receive payment. Medicare is the only payer that provides some relief from bad debt incurred by patient non-payment. All other bad debt is unrecoverable and becomes a write-off for IRS purposes.

Reducing hospital bad debt

Because the best way to reduce bad debt is to prevent it in the first place, revenue cycle leaders are always seeking ways to be more proactive about collecting payments and cutting down accounts receivable days. By following some basic tenets and tactics, health systems can make important strides toward decreasing their bad debt.


1. Recover what you can.
Medicare pays back 65% of bad debt for the unpaid patient balance on billed services. However, Medicare does have requirements to qualify for bad debt reimbursement, including thorough documentation of the patient’s inability to pay. Because the amounts can be significant, more and more hospitals are employing software and third-party services to maximize Medicare bad debt reimbursement. New financial programs spawned by the Affordable Care Act may provide hospitals that serve disproportionate shares of indigent patients additional uncompensated care funding. While uncompensated care that meets governmental standards and is properly documented may yield additional reimbursement to these facilities, the program is quite complex, and it takes significant resources to optimize payment.

2. Determine eligibility and ability to pay up front.
Junk health insurance, once barred by the Affordable Care Act, and extreme high deductible health plans can often be indications of inability to pay. “When you see that a patient’s insurance has a $10,000 deductible, that’s a red flag because very few people have that kind of money in healthcare savings,” says Auten. Patients who may be a bad debt risk may have other payment avenues, including Medicaid (if eligible) and hospital charity care.

3. Be proactive with patients.
Good salespeople close early and often. Helping patients understand their obligations through financial counseling and giving them multiple payment options and opportunities can help reduce bad debt and speed up AR. The best time to ask for payment is at the initial patient encounter, but every patient touchpoint can be an opportunity to educate and collect.

4. Leverage technology to improve efficiency.
Before debt goes bad, it typically spends significant time in accounts receivable and collections. Data-driven analytic and automation technologies can help health systems identify bad debt risks early and streamline AR and collection processes to reduce overall bad debt risk.

5. Review your charity-care policy.
In exchange for providing charity care and other community services, hospitals are eligible for nonprofit status, exempting them from sales, property and income taxes. With millions of families losing their employer-provided insurance during the pandemic, health systems need to review financial-assistance polices to align them with the new realities of more underinsured, uninsured and self-pay patients requiring financial help.

The financial fallout from the coronavirus pandemic has been severe for providers, payers and patients alike. While these tactics are a good start, health systems should have a well-defined strategic plan for identifying and mitigating bad debt risk and consider partnering with an expert third-party to achieve bad debt-reduction objectives.

To learn how a 14-hospital health system cut Medicare bad debt by $7 million, download the case study.


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