Hospitals' growing financial difficulties (and their implications)

A continued shift in health plan benefit design and growth in claim denials have driven up health systems' accounts receivable balances, or what patients and insurers owe hospitals, over the last year — with some increasing by over 20%. Although hospitals and health systems try to limit the percentage of their most overdue payments for care to less than 20%, the percentage of accounts receivable past 90 days has grown to 34%, according to Matt Szaflarski, VP of revenue cycle intelligence at Kodiak Solutions.

"It's not uncommon for organizations to have denials open for more than a year, which creates a lot of additional administrative burden," Szaflarski said.

Notably, for-profit hospitals have reported better accounts receivable balances than nonprofit hospitals. Compared to nonprofit providers, for-profit providers often have more rigorous billing and collection strategies.

Looming funding cuts and changes to health insurance coverage as a result of the One Big Beautiful Bill Act (OBBBA) are also likely to further strain health systems' finances over the next few years.

"OBBBA transports us back to a decade where health systems will experience a higher percentage of uninsured patients. In response, health systems will likely further leverage payer 'cross-subsidization' in an attempt to offset the negative impact of uncompensated care through commercial rate negotiations," said TJ Burdine, principal at Optum Advisory*.

Additionally, when it comes to commercial insurance plans, "health costs are up, health spending is up, and therefore, cost of insurance premiums are up — and employers will likely further shift financial burden to employees in the form of higher deductibles and maximum out-of-pocket requirements to maintain more stable premiums," Burdine added.

How providers can buffer their finances

Currently, hospitals and health systems are adding technology and staff to help streamline their billing and collection processes. They are also hiring third-party companies to help manage their revenue cycle functions. Years of healthy returns on investments have also provided large health systems with some buffer for any operational headwinds. 

As hospitals and health systems struggle with growing self-pay accounts receivable, Burdine recommends organizations:

1.       Review and bolster current self-pay collection policies for elective vs. medically necessary care to ensure clarity before service.

2.       Create flexible and easy short- to mid-term payment plans (12-24 months) and monitor them over time.

3.       Establish long-term loan options with a credible partner.

4.       Use automation and data to create a simpler process for providing fast and appropriate charity care for medically necessary services.

Ultimately, "healthcare operates within a finite pool of dollars," said Stephen Teitelbaum, SVP and chief medical finance officer at a major NYC health system. "That limited pool is being stretched thinner every day as costs rise dramatically. We have an aging population that requires more complex and chronic care, skyrocketing drug prices, rapid adoption of expensive technologies, and an unchecked demand for services. These pressures create a perfect storm where every stakeholder is competing for a share of resources, and payers use cost containment strategies to manage this imbalance."

*Advisory Board is a subsidiary of Optum. All Advisory Board research, expert perspectives, and recommendations remain independent.