Are Healthcare Providers Lenders? The Patient Financing Debate

By Deirdre Ruttle, Vice President of Strategy, InstaMed
Twitter: @InstaMed

Trends in healthcare payments tell us patients owe more for healthcare services. However, the data also suggest many patients have trouble paying that responsibility. According to a report by the Federal Reserve in 2017, 40 percent of Americans would need to borrow funds in some way to cover a medical expense for more than $400. With the average deductible more than $1,500, it is no wonder healthcare providers are searching for new collection solutions, including patient financing. Yet, are healthcare providers ready to be lenders? Let’s breakdown the patient financing debate to answer that question.

What Is Patient Financing?
Patient financing is when a healthcare provider becomes a lender for the amount owed by a patient. There are many variants to financing medical services, but all mean that the provider holds the balance until the patient pays the amount in full.

Is Patient Financing New?
No. Healthcare organizations have always sought lending solutions for cash flow problems. Patient financing offerings have been in the market since the nineties. Patient financing is the strongest and most mature offering
for elective procedures, such as cosmetic surgery.

What About Patient Financing for Non-Elective Procedures?
Non-elective procedures are medically necessary and/or essential to the patient. The market for such procedures is fraught with challenges, and churn of business models and lending structures. In spite of the challenges, non-elective procedures garners attention because it is the largest slice of the $3.5 trillion healthcare economy.

What Are the Models for Non-Elective Patient Financing?

  • Self-funding occurs when the provider carries the amount due as a receivable. Then, the provider tries to collect directly from the patient.
  • The recourse lending model occurs when the provider works with a lender. First, the provider must pass the lender’s underwriting criteria. As patients elect to join the program, their receivable is then funded to the provider by the lender. The funding is given to the provider in exchange for a one-time discount fee and ongoing service fees. The lender recovers losses from the provider if the patient doesn’t pay.
  • The non-recourse lending model also occurs when the provider works with a lender. However, while the provider agrees to lender’s terms and fees, it’s the patient who must pass the underwriting criteria. Any losses are borne by the lender without recourse to the provider. The lender can accept or deny the patient based on its underwriting. If the patient is denied, the provider is not funded by the lender.

What Is the Downside of Financing for Non-Elective Procedures?

  • Recourse models have high recourse rates for patients with weak credit and poor ability to pay. Therefore, providers do not receive much value in exchange for all the fees charged by the lender.
  • Non-recourse lending may result in patients facing very high interest rates and fees. For the lender, this is the only way to offset potential losses. Additionally, patients who have weak credit and are more likely to need lending will probably be denied by the lender.

What Are Alternatives to Patient Financing?
For providers who prefer to remain self-funding, payment plans offer an attractive alternative to working with a lender. Payment plans can yield high collection rates without the fees associated with lending. However, to be effective, payment plans must be deployed with robust collection processes and industry solutions with high technical standards for security and compliance. In effect, the self-funding model powered by payment plans replaces the lender with technology and collection best practices.

This article was originally published on InstaMed and is republished here with permission.