The nature of uncompensated care is drastically changing. Historically the bulk of
bad debt and charity care stemmed from self-pay accounts, but evolving market dynamics
are impacting both the degree and the type of coverage in any given market. This places
covered patients on the hook for a growing portion of their health care expenditures.
These changes have dramatic implications for uncompensated care and hospitals’
approach to collections. To fully understand the impact of these dynamics, we developed a complex
financial model capable of projecting levels of bad debt, charity care, and net patient
revenue—among other financial metrics—under a variety of potential future scenarios.
In this white paper, you'll find a detailed explanation of the model along with observations on
the changing market, key insights from the research, and
strategies to positively inflect patient collections.
Currently, the uncompensated care strategy at most health systems focuses primarily on
the uninsured (or “pure self-pay”) population. This cohort of patients is largely managed
in one of two principal ways. First, for indigent patients, charity care presents an
opportunity to support the mission of the hospital and provide quantifiable justification for
tax-exempt status for not-for-profit providers. Second, patient bills eventually deemed
uncollectible are categorized as bad debt.
While collection efforts focus on large-dollar accounts, most health systems avoid
aggressive attempts, not only because in aggregate the amount owed is small relative
to net patient revenue, but also because such practices are resource-intensive and
politically fraught. As such, patient collections are not an area where most health
systems have historically excelled.
Two fundamental forces changing uncompensated care
Yet changes in the health insurance market hold the potential to drastically reshape the
nature of both bad debt and charity care. The increase in the degree of coverage under
the ACA via the Medicaid expansion and the advent of public health insurance
exchanges should reduce the number of uninsured patients, likely reducing both bad
debt and charity care, and introducing several implications for the margins and taxexempt
status of provider institutions in the future.
Along with an increase in the degree of coverage, there is also a shift occurring in the
type of health insurance coverage patients have. Both within traditional employer-sponsored
insurance and the exchanges, cost is shifting significantly, making patients
responsible for a substantial portion of their health care expenditures.
This transition places a huge burden on providers as well; in aggregate, patient
obligations will account for an ever-greater portion of net patient revenue, forcing
providers to focus on patient collections. Because hospitals have had little historical
success in this area, these obligations are likely to put upward pressure on total
Blog post: The evolution of patient obligations and bad debt
Given these changes, two questions for providers emerge:
- What are the cumulative effects of these forces on overall uncompensated care?
- How are these changes likely to impact hospital and health system profitability
Explanation of Financial Model and Methodology
Lumbert Medical Center
To assess the likely impact of both forces on a typical hospital, the Council developed a
financial model based on a hypothetical organization—"Lumbert Medical Center"—as a
means of testing the impact of the changing dynamics in insurance coverage. The model
examines a hospital with a typical payer mix and margins, and subjects it to the following shifts:
- Uninsured patients going to Medicaid coverage
- Uninsured patients signing up for high-deductible health plans on the exchanges
- Commercially insured PPO or indemnity patients moving to high-deductible health plans
- Increasing deductible levels among all types of patients
- Propensity to pay among patients of different means
- Discounting strategies among providers for all types of patient obligations
Net charity discounts
A note on our treatment of charity care: because we wanted to test how these forces
could affect both charity care and bad debt simultaneously, we needed a common metric
to assess their impact on hospital finances. Although charity care is traditionally reported
as a portion of gross patient revenue, that metric does not accurately reflect the true
financial impact to providers.
We therefore created a new metric—net charity
discounts—which quantifies the impact of care provided either free of charge or with
means-based discounts as forgone revenue reimbursed at Medicare levels. This
aggregate number, which is expressed, like bad debt, as a percentage of net patient
revenue, represents a truer value of charity care in terms of providers’ financial health.
Patient propensity to pay
To accurately project uncompensated care, the model has to predict how much of a
patient’s obligation will be met. Hospitals calculating a patient’s propensity to pay
consider a range of factors, including payment history, credit score, net worth, income,
and insurance plan status. However, using those factors to assess the propensity to pay
for an aggregate population is more complex, and projecting the likelihood of payment
from patients who have not yet enrolled in a particular plan is even more challenging.
To do so, we examined financial records of nearly 400,000 de-identified patient records
from the Advisory Board’s Self-Pay Compass, stratifying the cohort according to
potential obligation levels. Historical payment rates were then layered into the analysis
to determine how likely patients are to pay, and how much they were willing to pay at
different deductible levels.
These analyses, supported by additional research studying
patient behavior under HDHPs, lay the foundation for how patient behave within
The current state of uncompensated care at Lumbert
In 2013, bad debt reached 5.13% of net patient revenue (NPR), while net charity
discounts totaled 4% of NPR. However, this rate varies significantly by types of service.
Looking on a case-by-case basis, inpatient surgical procedures result in a greater
amount of bad debt and net charity discounts than inpatient medical or outpatient
procedures. This explains why historically hospitals have focused collection efforts on
these high-dollar inpatient procedures.
However, calculated as a percentage of net patient revenue from those services, bad
debt from outpatient imaging exceeds other areas, while net charity discounts comprise
a greater proportion of revenue from the unspecified “other” outpatient category, namely
When we include total volumes in the analysis, in aggregate, the greatest source of bad
debt is in the unspecified outpatient category. This is unsurprising given the fact that ED
visits are included here; traditionally many self-pay patients have utilized the ED for all of
their health care needs.
In total, bad debt and net charity discounts stemming from outpatient procedures
surpass those from inpatient services. Such data shows that while per case, inpatient
surgical procedures generate more bad debt per case, the greater opportunity in total
lies on the outpatient side.
Insights from the model
The remainder of this white paper projects levels of bad debt and net charity discounts
given a variety of scenarios that may occur under coverage expansion. Using Lumbert
as a baseline, the model allows us to adjust factors such as the Medicaid expansion, the
proliferation of HDHPs, and pricing discounts under the exchanges, among other levers,
to project the impact on uncollectible patient revenue.
Health Insurance Exchanges
Next, Check Out
The Future of Bad Debt: How Will Shifts in Coverage Impact Hospital Collections?