Healthcare organizations can work toward a more efficient patient payment process by analyzing the cost of payment plans.
As rising deductibles and out-of-pocket responsibility strained the ability for people to pay hospital bills, many providers began supporting patients and mitigating bad debt by offering interest-free extended payment options. Although growth has been substantial, with many organizations building large portfolios of such loans, providers are often unaware of the true cost of offering these payment programs.
The first tool and one of the most effective and illuminating methods to determine the built-in costs of payment plans is using a net present value (NPV) of cash flows. Sometimes called discounted cash flow analysis, this approach simply calculates the value in today’s dollars of a future stream of incoming and outgoing cash flows. The tool enables organizations to quantify and compare the impact of extending monthly payments interest-free for varying lengths of time.
3 essential NVP calculation components
The three essential components of the calculation are as follows.
Weighted average cost of capital (WACC). An organization sets an expected return on invested capital, which is usually much higher than its cost to borrow money. The blend between desired return and borrowing cost is the WACC. This rate is used to discount the cash flows received from payment plans to current dollars.
Servicing cost. Collection costs consist of actual expenses associated with FTE servicing of the payment plans (phone calls, payment posting, etc.), credit/debit card acceptance fees, monthly statements, delinquent notices, nonsufficient funds fees, bank processing fees and other outlays. Note that, except for the card acceptance fees, these servicing costs generally do not vary based on the amount being collected. That means smaller balances are costlier on a percentage basis than larger ones. At $5 per account monthly service cost, a patient paying $20 per month is effectively receiving a 25% discount, while someone paying $50 is receiving a 10% discount.
Bad debt rate. The bad debt rate is directly available by isolating and tracking defaults specifically for payment plans. However, most healthcare organizations lump payment plans together with all self-pay accounts, skewing the numbers. Payment plans should perform better as a rule than the entire self-pay portfolio because patients have verbally committed to the loan terms and payment amounts. A provider’s demographics, service lines, service quality, repayment terms and ability to service payment plans effectively will all affect bad debt rate.
It is also important to address that there is often a temptation for an organization to pass on some of the costs associated with payment plans to those utilizing the option. However, while the rationale for such an approach might be justifiable, the reality is for many patients already in a tough situation, a provider passing on hidden costs in the form of plan fees or interest would create further financial hardship.
Bringing it all together: An illustration
The exhibit below shows how the second tool, a simple calculator can be constructed using these variables.