David C. Hammer

As never before, banks stand ready to enter a partnership with providers to secure payment for healthcare services delivered to today's new healthcare consumers-patients with HSAs.

At a Glance 

The new world of consumer-directed health care is arriving faster than many thought possible, and new trends are taking shape: 

  • Consumers in large numbers are adopting health savings accounts paired with high-deductible insurance policies. 
  • Banks, credit unions, and even insurance companies are offering HSAs and making them increasingly attractive by letting holders invest their unused deposits in mutual funds. 
  • Employers-including giants such as Wal-Mart-are pushing their employees in large numbers into these consumer-directed plans. 

"Consumerism that is engaging consumers in their health and medical decisions may encourage improved health status of the people we serve while potentially controlling rising costs."
-Consumerism in Health Care: An Initiative of the PATIENT FRIENDLY BILLING® Project 

Consumer-directed health care is the most recent in a years-long series of healthcare cost shifts. Responsibility to pay for healthcare services has gradually moved from insurance companies, health plans, and employers to a not-surprising destination-patients, who could reasonably be termed the true consumers of health care.

This shift is already beginning to change the way patients think about healthcare services. Some have embraced their status as consumers by seeking to know the true cost of services. They understand that, armed with this information, they can begin to make prudent decisions about where they spend their healthcare dollars.

A Harris Interactive survey in December 2005 reported that about 10 percent of survey respondents said that they have negotiated with hospitals on price. Other surveys have found numbers ranging as low as 9 percent to as high as 20 percent.

A Rising Challenge for Providers

The CDHC revolution is also changing the way providers-both hospitals and physicians-must interact with these new, more-empowered customers. This trend presents both opportunity and danger for providers. They need to weigh the prospect of faster payments against that of more-difficult collections. This trade-off should prompt providers to reflect and decide how they are going to address this changed landscape.

"Since 2004, some hospitals have seen their patient accounts receivable go up to 10 percent, or even 14 percent of their receivables-which for a hospital is huge," reports Catherine Warren, senior vice president and healthcare industry strategist for Bank of America Global Treasury Services. "Their ability to collect on that A/R is much more difficult and expensive. Bad debt is much higher with self-pay than with a commercial payer."

As challenging as it may be for providers to deal with third-party claims, insurance companies, Medicare, and Medicaid provide a relatively consistent stream of cash as long as providers submit claims in good time and manage claim denials effectively. When a healthcare receivable becomes a consumer debt, however, it can become an expensive and messy collection problem.

Despite the challenges CDHC poses for patients, providers, and even payers, it is a system that can produce benefits for everyone. The investment banking firm TripleTree defines CDHC thus:

At its core, CDHC places more financial responsibility on the consumer to encourage value-driven healthcare spending decisions. Tax-advantaged spending accounts such as health reimbursement accounts and health savings accounts are used to place consumers at the center of the decision-making process. In theory, this approach creates incentives for consumers to seek cost-effective care and encourages behavior changes that contribute to better outcomes and additional long-term cost savings. CDHC programs have experienced rapid growth over the last few years as employers and consumers continue to recognize the benefits of this new, patient-centric model.a 

In short, hospitals and physicians have a critical need to understand the growth of CDHC and how they can begin planning now for the far-reaching change that the rise of high-deductible health plans will present.

Above all, the response of these providers to CDHC should be comprehensive, taking into account the needs and interest of all stake-holders. Alexander Domaszewicz, principal and senior consultant in the Consumer Practice at Mercer Health & Benefits, emphasizes the importance of this point: "You've got to address the needs of all the stakeholders in this; any solution that meets the needs of one group and disenfranchises another group is not going to work." 

HSAs Propel Trend

The forces driving CDHC have been gathering for many years, and the most obvious is the pressing need to control costs. Healthcare expenditures have been reported to be as high as 17 percent of the U.S. gross domestic product, roughly equal to the reported GDP of China.b An increasing number of employers have begun passing along more costs to employees or dropping coverage completely. By giving consumers a larger financial stake in the process once they become patients, CDHC proponents hope to inject the forces of consumerism and market competition into healthcare spending.

At the heart of this movement are HSAs, which pair a high-deductible insurance policy ($1,050 or more) with a tax-favored savings account from which the patient is able to pay unreimbursed medical expenses.

Until recently, nearly 78 percent of all HSAs were opened directly by consumers, with just 22 percent opened by employers. As more employers push their workers into these accounts, however, the fraction of employer-sponsored accounts will rise rapidly. "Next year, two-thirds [of HSAs] will be purchased by consumers, and one-third by employers," says JoAnn Laing, president and CEO of Information Strategies, Inc., a marketing and information firm based in Palisades Park, N.J.  "It will be a 50/50 split in 2008."

These accounts were first authorized by Congress in 2003. According to consulting firm DiamondCluster International, just 144,000 HSAs were opened in 2004, and deposits totaled $134 million. In 2005, the numbers rose to 1.1 million accounts with $1.2 billion in deposits. Last year, they hit 3.6 million accounts with more than $5.1 billion on deposit. In 2007, those numbers will more than double again, with consumers opening 8 million accounts and funneling at least $13.6 billion into them.

"Now, let's fast-forward to 2010, when we are expecting 23.7 million accounts and $94 billion in deposits," says Laing. "We are going to have one out of four [workers] in an HSA account, and that will rise to one out of two in 2015."

Banks Jump In

It is no surprise that one of the biggest trends in the world of HSA accounts is the surge of banks, credit unions, and other financial institutions now offering these accounts to their customers. At first, HSAs were offered only by niche banks catering to small-business owners and the self-employed. As more consumers began to open HSAs and increase the funds on deposit, however, the trend caught the attention of the major banks.

It has been reported that nearly 1,100 banks were offering these accounts in 2006, with more on the way.c 

Insurance plans also are forming their own banks to take advantage of this bonanza of dollars. United Healthcare, for example, has launched Exante Bank to handle its HSA accounts. In November 2005, Empire Blue Cross contracted with American Express for a payment solution for its HSAs. And the Blue Cross Blue Shield Association hopes to begin operating Blue Healthcare Bank by early 2007.d Other banks and payers have followed suit, or are sure to do so.

This trend is producing a snowball effect. As more banks enter the HSA business, consumer awareness will grow and lead to even more widespread adoption of HSAs. The numbers will also change rapidly as employers begin forcing more of their workers into these types of accounts. Already, 26 percent of U.S. companies with 500 or more workers say they are likely to offer these plans, according to a recent survey by Mercer Health & Benefits LLC.

In fact, Wal-Mart recently announced that its HSA plans will be its primary health insurance option for new hires. With an average employee turnover rate of 80 percent in the retail industry, the new offering is projected to become the dominant coverage among Wal-Mart's 1.3 million U.S. employees.e 

"We call it consumer-driven healthcare, but it's really employer-driven health care because it shifts the burden of the cost of health care from the employer to the consumer in today's economy," says Bank of America's Catherine Warren.

These accounts are also becoming more attractive to consumers as fees drop and investment options expand. At first most accounts simply offered a small rate of return, but now they resemble full-fledged brokerage accounts that allow holders to invest in a selection of mutual funds. For some HSA holders, the accounts are becoming another form of retirement savings as they pile in the contributions without having to withdraw them to cover medical-related payments. 

The Technology of CDHC

As banks have begun to assume a dominant role as custodians of healthcare cash, bankers are now trying to become the central players in processing healthcare-related transactions and managing the consumer accounts that will fund a substantial fraction of these payments. Increasingly in the future, banks and IT vendors may affiliate to create the "invisible business office" infrastructure that will speed these transactions. More and more, providers will need to use automated tools to help manage their growing self-pay receivables.

How will these tools change the focus of providers' efforts to obtain payment from patients? Under managed care, physicians' offices collected minimal copayments for office visits and many hospitals took a wait-and-see attitude about collecting the self-pay portions of their services. With CDHC driving a threefold increase in self-pay receivables, however, providers have entered a new world of financial exposure and risk. This new environment demands a new approach to the revenue cycle and consumer relations. As a result, the terms financial clearance and financial settlement have entered the revenue cycle lexicon.

Financial clearance. Ensuring that a patient has financial clearance is accomplished through all of the upstream activities now required of providers-scheduling, preregistration, insurance verification, and precertification-but with a critical emphasis on estimating the patient's charges and personal financial obligations before service is rendered. This process will require providers to address pricing transparency issues and become capable of obtaining up-to-date information on patients' deductibles and the remaining balances in their HSAs.

Financial settlement. To achieve financial settlement with a patient after the patient has received healthcare services, a provider must have capabilities that few providers today have: The provider must be capable of creating a claim at the point of service and reach into a patient's HSA to access the funds to settle that claim.

Implementing the electronic processes for financial clearance and financial settlement is the hurdle that banks and their healthcare IT vendor partners are positioning themselves to help providers overcome. Increasingly, healthcare IT companies are providing financial clearance and financial settlement solutions and the electronic transaction services to support these solutions. As this infrastructure continues to develop, providers will be able not only to confirm insurance eligibility electronically, but also to obtain up-to-date deductible and coinsurance information to support the increasingly important point-of-service collection efforts that CDHC will necessitate.

"[These electronic capabilities] will make a dramatic improvement in the provider's ability to collect, because now they will have an improved opportunity to request payment at time of service," says Jim Bodenbender, vice president and general manager of McKesson's Transaction Solutions Hub.

Providers will be able to verify insurance, and also find and confirm other sources of payment. This process may include checking for Medicaid coverage or qualification for a charity program, and running a credit check to obtain income information and any indication of whether the patient has credit cards with available open credit. By broadening the eligibility transaction, IT vendors will be able to help providers accomplish more in the financial clearance phase of the revenue cycle and minimize the collection issues encountered during the financial settlement phase.

In the area of financial settlement, or postservice collections, these solutions will enable providers to process claims, manage payer contracts and payments, and support both printed and online consumer communication to complete the revenue cycle. Dealing with hospitals and physicians' offices will become more like dealing with any other business, aided by access to information through web-based tools.

Consumers are already using the Internet to access "virtual business offices" at hospitals. They can log on to pay bills online, check the status of insurance claims, receive e-mail notifications when insurance payments are received, change their insurance information, pay multiple accounts all at once, and even elect not to receive paper bills.

"That's where the providers began reaching more out to the consumers. With the Internet, they can really start customizing a lot of the communication to their patient populations," says Bodenbender. "Transparency is already more than just hype-it's real. Consumers are going to begin asking questions about cost and quality, and providers must begin preparing to answer those questions."

As CDHC's effects continue to be felt, consumers are beginning to have access to increasingly sophisticated healthcare debit cards that will eventually allow transparent, efficient, and seamless revenue cycle transactions.

"The Holy Grail would be if you could truly adjudicate the claim in real time," says Chris Byrd, executive vice president of operations and development at Evolution Benefits, Inc. "That happens today at the pharmacy. They know exactly what to charge you because they are all linked to insurers in real time. They send off a claim, and it is adjudicated in 15 seconds, so they know how much they are going to get paid by the insurance plan." Unfortunately, without such instant processing and approval of hospital and physician insurance claims, transactions between these providers and patients continue to lack the seamlessness and authority of a typical purchase at the local pharmacy.

A few large insurers, however, are making strides toward a truly "smart" card that will work in physicians' offices. As part of a pilot program in Rhode Island, United Health Group is unveiling an integrated ID and debit card that will store members' identification, eligibility status, and health records. Humana Inc. is developing a similar system through Availity LLC, its electronic data interchange and real-time gateway.

These systems are still in the early pilot stages, and widespread rollout remains hindered by a variety of technical challenges. Many physician practices commonly deal with 15 or more payers, most of which have varying product lines. For multicoded services, prices and payment rules vary widely among insurers. Also, many payers continue to use a collection of claims adjudication systems that would require a substantial investment of resources to merge. And of course, extending this technology to the hospital setting would add further layers of complexity.

In the meantime, however, providers can extend their existing partnerships with banks to make use of the efficiencies that these financial institutions can already bring to everyday processes. A prime example is the medical lockbox. Although banks have long offered scanning, imaging, and digital conversion of paper remittances, the complexity of a printed explanation of benefits prevented widespread use of this technology in health care. New developments in optical and intelligent character recognition technology, coupled with requirements under the Health Insurance Portability and Accountability Act, have enabled some banks to expand their lockbox services to provide highly efficient streamlined processing of payments from a much wider spectrum of payers than was available in the past.

Taking Action

The challenges providers face in securing payment may decline over time, as evolving technologies are rolled out on a wider basis. In the long run, if CDHC helps mitigate healthcare cost inflation, these developments should be good for both patients and providers. Contrary to critics' and providers' fears, as the transaction moves upstream, risk and collection costs may actually decrease. Some glitches may occur initially, but with the increasing use of technology, revenue cycle processes should become smoother, and for many hospitals, the time lag between rendering services and obtaining payment will decrease. Physicians in clinical practices will see a more rapid service-to-payment process and a gradual reduction in the costs of managing the revenue cycle.

JoAnn Laing of Information Strategies, Inc., notes that administrative costs, currently estimated to be 33 percent to 40 percent of healthcare expenditures, may shrink by as much as 50 percent. In the future, the task for chief revenue officers, particularly in hospitals, may be managing the downsizing of the revenue cycle function and establishing charges that are profitable and sustainable for the institution.

For providers, it is time to begin developing a coherent strategy for dealing with CDHC. Hospitals and physicians should begin talking to payers about when and where they are rolling out high-deductible plans-be assured that every payer is doing so. Providers should gather as much information as possible and begin to analyze market adoption by large employers in their service areas.

Providers also should take a more aggressive stance in contract negotiations with payers, rejecting contract provisions that prohibit them from collecting patient deductibles at the time of service. Providers can no longer afford to refrain from such collection efforts.

Physicians, in particular, should begin to think about their practices as businesses, adopting policies and procedures in tune with CDHC. In keeping with this approach, they should consider making more substantial IT investments to speed payment processing by taking advantage of their banks' merchant services.

Providers should understand that in the world of CDHC, cash is still king. A provider's banking partners may have the ability to bundle services-from interest rates on lines of credit to receivables funding to sophisticated card-processing capabilities that can advance cash by securing future payments-in ways never before considered in the healthcare revenue cycle. Providers, therefore, have new opportunities to build a successful and profitable future. The key lies in understanding the nature of CDHC and taking the thoughtful steps needed to adapt to this new environment.

David Hammer, FHFMA, is vice president, revenue cycle solutions, McKesson Provider Technologies, Fort Lauderdale, Fla., and a member of HFMA's Florida Chapter (david.hammer@mckesson.com).


a. Spotlight Report: Healthcare Revenue Cycle Management, TripleTree, LLC, 2006.

b. Smith, C., Cowan, C., Sensenig, A., and Catlin, A., "National Health Spending in 2004," Health Affairs, Jan. 1, 2006, pp. 186-196.

c. Carrns, A., "Banks Pile into Health Savings Accounts," The Wall Street Journal, Nov. 14, 2006.

d. Betbeze, P., "The Banks Are Coming," HealthLeaders.com, December 2006.

e. Hudson, K., "Wal-Mart Deductible Plan to Face First Big Test," The Wall Street Journal, Oct. 9, 2006, p. A16. 

A Shared Responsibility

The following excerpt from the report Consumerism in Health Care: An Initiative of the Patient Friendly Billing Project outlines the various responsibilities of healthcare consumers (patients), the U.S. government, and providers in a world of consumer-directed health care.

Consumer engagement. Consumers must take responsibility for their health. Those with the ability to pay should expect to do so and seek appropriate health insurance for that purpose. They must also:

  • Understand the coverage and benefits afforded by their health insurance
  • Adhere to the requirements of their plan
  • Meet their financial obligations to providers in a timely manner

Standards and funding mechanisms. Government has the responsibility to facilitate improvements in health care by doing the following: 

  • Work with the private sector to develop and implement consistent standards for quality, pay-for-performance systems, safety reporting, and exchange of funds and information (including EHRs) among employers, payers, and providers
  • Ensure appropriate funding mechanisms for charity care and governmental programs, including ending the cost shift to other payers that occurs when government programs pay providers less than their total cost of providing care

Accessibility of information about price and quality. Providers must provide transparent and easily accessible information to consumers, payers, and employers by doing the following: 

  • Make available estimates of the patient's financial responsibilities before most services are provided but only after emergency patients are medically stable; a few services cannot be estimated in advance because they entail too many potential variations
  • Be able to bill payers and patients at the time that services are provided
  • Provide relevant, meaningful information about quality so consumers can make a valid determination about the overall value of care

Publication Date: Thursday, February 01, 2007

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