Ensuring a steady stream of revenue for healthcare providers while fostering a positive patient lending experience is no easy feat, even in the best of times. Now, as hospitals face unprecedented financial uncertainty, selecting the right patient financing vendor partner is critical for financial recoupment. Leaning on the following five vendor attributes sheds light on the available programs, lending insight into the right partner for your organization.
The application process is the most visible part of patient finance programs. Many vendors require applications and credit checks to determine if the patient is eligible for the program, whereas others simply have an enrollment process for the patients. The three main types of patient qualification are:
- Credit-based qualification: Patients are approved or denied for the program based on an application and credit check.
- Tiered credit-based qualification: Approved patients qualify for credit score-based tiers with varying interest rates and terms (some applicants may still be denied altogether.)
- All patients qualify: No credit check or application is required from the patient.
Credit-based qualification programs usually offer attractive terms and incentives for those with good credit, most often 0% interest periods. Though these programs offer great benefits to a subset of patients, the unfortunate reality is that a large portion of patients do not qualify. This results in providers finding themselves in the same situation in which they started, a high volume of patients with unaffordable self-pay balances.
Programs that accept all patients are, obviously, preferred because they aid the entirety of the patient population. They also improve the client experience by avoiding an uncomfortable situation for all parties when patients are declined.
Recourse or Non-Recourse
Closely related to patient qualification is the distinction between recourse and non-recourse programs.
- The hospital either receives money upfront or receives money as the patient makes their monthly payments. *For the purpose of this article, we’re focusing on non-recourse programs that pay upfront, otherwise, they’re simply an outsourced payment plan administrator.
- The vendor takes on the risk of nonpayment which has some benefits but also some challenges as follows:
- The hospital never has to pay back the money it received upfront. This is the biggest allure of non-recourse programs, but typically carries a cost in the form of a discounted amount that the vendor pays, as a percentage of the patient bill, e.g., 80% paid = $0.80 for each $1.00.
- The vendor mitigates risk by performing a credit check on patients prior to qualifying them for prefunding. This negatively affects patients' credit and limits participation in the program to top credit bands, e.g., only 20% of applicants qualify. Some vendors offer to simply outsource payment plans and won’t pay upfront for patients with poor credit. Others just exclude poor credits from the offering.
- It is counterintuitive to pay a discount for patients in top credit bands as they are, statistically, the most likely to pay their bill.
- Recourse programs almost always pay upfront, but the hospital takes on the risk of having to pay back the uncollected portion of the money that’s been paid upfront, in the event of patient default. Arguably, all the risk was taken when the patient received service without paying and no new risk was introduced, as compared to internal payment plans.
- Because the vendor is not taking on risk, often no credit check is required of the patient in order to qualify for the program.
- Despite all patients qualifying, recourse programs tend to be self-regulating because patients with no intent to pay are unlikely to sign up for a payment plan, especially when a signature is required on a bank promissory note.
Vendor Cost of Capital
It is important to understand a vendor’s cost of capital because this is key to the kind of returns that are required and their fee structure. The more expensive the vendor’s capital, the higher the discount expected on any money paid upfront and/or the higher the patient interest will be for the vendor to make a profit. Typical sources of capital follow:
- Private Equity (PE): Typically requires the most significant return on investment because the money would otherwise be invested in securities or ventures.
- Bank Credit Facility: Rates vary quite a bit depending on the financial health of the vendor as well as the time in business and a number of other factors.
- Direct Lending from a Bank: Banks tend to have the lowest cost of capital and expectation of returns. This expectation is monitored by the Wall Street Journal Prime Rate. Currently, this rate is 3.25%
It is a safe bet that the lower a vendor’s cost of capital, the lower the discount they’ll charge on the money paid upfront; the lower the patient interest rate; and the fewer fees embedded.
Vendor Source of Capital
Possibly as important as the vendor’s cost of capital is the vendor’s source of capital. The cost of capital sheds light on required returns, whereas the source of capital reveals the volume available to lend. If a particular program is PE-backed, there may be limitations regarding the availability of funds. Credit facilities from banks are invariably capped, and bank direct lending relationships are limited, by a particular bank’s legal lending limit which is determined as a percentage of the bank’s assets. With direct lending from a bank, even if a legal lending limit is reached, other banks typically step in. The risk of working with a vendor with limited capital is that they may, literally, run out from excessive growth and begin to impose limits.
Additionally, the fast-changing regulatory environment increases the importance of a vendor's source of capital. California and a handful of other states have either passed or are moving towards passing, laws that prohibit non-bank financial institutions from being involved in medical lending. This is a quickly changing area but one to keep a close eye on if considering a non-bank-backed program.
Servicing and Collecting
It is important for a hospital to understand who is communicating with its patients and how effectively they’ll work with internal staff, and other vendors, involved in the patient pay workflow. Healthcare providers should not view patient financing vendors as simply a destination for financial liabilities, they should consider how the vendor impacts the patient experience.
To this end, providers should educate themselves about the customer service operations of potential vendors. Will the servicing and collecting of accounts be done through a call center in another country or an automated platform? If the patient has a negative customer service experience with the financing vendor, it will reflect negatively on the healthcare provider.
Epic River provides the assistance that borrowers need, a new revenue stream for banks and credit unions, and makes a real difference in provider compensation.
For more information or to schedule a demo, contact us today.
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