Financing Out-of-Pocket Medical Debt and Keeping Bill Collectors at Bay

Kendra is typical of many Americans covered by health insurance polices that come with high-deductibles, steep co-pays and less-than-complete coverage: she is deep in medical debt.

Less typical is the solution the 41-year-old Michigan mother found to start paying down her family’s hospital costs without involving bill collectors, damanging her credit rating or incurring costly interest fees.

Cash payments from patients are a growing part of the health care financing system even as more people are obtaining health insurance either through the Affordable Care Act, through their employers or on their own. But under many of the new policies, access to health care services means patients will incur hefty costs for deductibles, co-payments, and other fees that they often are not prepared to pay.

Even for middle-class families with regular income, medical debts from $5,000 to more than $15,000 can mean a downward slide of damaged credit, missed rent or mortgage payments and, often, bankruptcy. 

Kendra, who asked that her last name not be used, has supported her family of four on her social worker’s salary since her husband, a veteran, became disabled. To save money on health insurance premiums last year, she accepted a $5,000 deductible and $50 co-pays for each doctor’s visit on her family’s insurance plan, gambling the family would stay healthy.

That turned out to be a bad bet. Within months, Kendra suffered an ocular stroke. Her liver problems flared up. Her daughter developed thyroid troubles. Co-payments for neurologists, eye doctors and other specialists, along with MRIs and other tests, came out of her pocket. One ultrasound cost $1,400. Her hospital bills alone grew to more than $3,500. Kendra called Mercy Health’s Lakeshore Hospital in nearby Shelby, Michigan, to try keep the bills from going to a collection agency.

“I just can’t keep up with the bills at all,” she says. “It’s not something we ever thought we’d have to face, but we just can’t keep up. That’s just how it is. I can’t jeopardize our house for medical testing.”

Kendra was given an account with CarePayment, a health care financing company based in Lake Oswego, Oregon, near Portland. CarePayment has contracted with Mercy Health and other health care providers representing more than 400 hospital facilities and physician clinics to manage cash accounts receivable.

Through its website, CarePayment welcomed Kendra with a pre-approved, zero-percent APR revolving credit line, spreading her payments over 25 months. Now, Kendra pays $79 a month, a bit more when she is able. “I wanted the hospital to get paid,” she says. “I would never want to not pay.”

Debt Burden

Because most of the lowest-income patients qualify for Medicaid or charity care, out-of-pocket medical costs can be an even bigger burden for lower-middle- and middle-class families, even those with insurance. Out-of-pocket expenses on essential medical procedures climbed 38 percent from 2012 to 2013. Total out-of-pocket health care expenses are predicted to surpass $400 billion by 2016, according to the Kaiser Family Foundation.

Expanded insurance coverage under the Affordable Care Act may actually contribute to the problem of out-of-pocket medical debt. The lowest-premium “bronze” level plans available through the state and federal insurance exchanges generally cover about 60 percent of health care costs. Deductibles can run to $5,000 for an individual plan and more than $10,000 for a family plan.

One in three American families delayed medical treatment this year because of concerns about cost, according to a recent Gallup poll. That poll also showed that delays in seeking care were rising fastest among those with insurance. In a 2012 survey, more than 40 percent of adults reported some level of medical bill problems in the previous 12 months. That put them at risk for lost savings, foregone food, unpaid rent or utility payments, rising credit card debt and personal bankruptcy. Approximately 60 percent of all personal bankruptcies are related to medical debt, according to a 2007 national survey.

Unpaid bills represent a major problem for hospitals and other healthcare providers as well. Hospitals write off an estimated $50 billion in uncompensated care each year, or more than 6 percent of their total costs according to the American Hospital Association. The hospitals have traditionally had two choices: write the bills off as charity care, or pass them to bill collectors.

Traditional debt collection can trap patients in a downward spiral, and it generally doesn’t serve the hospital well, either. Patients suffer damage not only to their credit rating, but also to their health, as they forego continuing care to avoid running up even larger bills. Heavy-handed collection efforts treat patients as deadbeats rather than valued customers. Hospitals typically receive less than 20 cents on the dollar for the outstanding accounts.

CarePayment executives say a patient-friendly approach is simply better business, generating higher payments from patients and safeguarding hospitals’ community relations. CarePayment aims to give patients a way to manage their medical debt without interest or penalties and does not refer unpaid bills to collection agencies or report missed payments to credit-reporting agencies. The company says a recent customer survey found that customers reported a high level of satisfaction with CarePayment’s services and with their healthcare providers as well.

“The first thing we send you is a welcome kit, not a bill,” says Craig Froude, who served as CEO of CarePayment until moving up to a position with its parent company, Aequitas, the private equity firm that launched CarePayment in 2004. “We say, ‘Here’s a revolving line of credit, preapproved.’ That’s a very different message from, ‘Write us a $2,500 check.’”

CarePayment frames its function as an outsourced customer-service provider, not a bill collector. Many of the hospitals are nonprofits or religiously affiliated. CarePayment sought to offer them a way to focus on health care, not billing.

CarePayment purchases at a small discount the accounts receivable of patients it deems most likely to repay, based on a proprietary risk-scoring algorithm. CarePayment is non-discriminatory, offering all patients the same zero-interest, revolving-credit account and online account-management services, even for other patients whose accounts it does not directly purchase. As patients demonstrate a propensity to pay, CarePayment will purchase the remaining balance from the provider. CarePayment funds its program through the difference between the discounted price it pays for the accounts receivable and their stated balance.

CarePayment says its methods more than double collections at the point of service (net of the purchasing discount) and increase them by about 50 percent even after 60 days, enhancing hospitals’ financial performance, lowering bad debt, and providing upfront capital.

By boosting collections from below 20 percent to around 50 percent of the billed costs, CarePayment can provide hospitals with higher revenues at the same time patient accounts are subsidized with zero-percent financing. Unlike a bill collector, CarePayment does not report to credit-ratings agencies, although CarePayment does close and return unpaid patient accounts to the healthcare provider, who may later engage a collection agency.

CarePayment has signed up more than 400 facilities from single-hospital and multi-facility health systems along with specialty physician groups and other service providers, primarily in the Midwest, Southeast, and Northeast. It has processed more than $890 million in outstanding hospital bills from more than 1.5 million patient accounts.

In South Bend, Indiana, CarePayment has helped Beacon Health reduce the amount written off or sent to collection at each of its two hospitals by at least $1 million. “We just auto-enroll the patients in the program and spread the payment out over 25 months,” says Beacon’s Chief Financial Officer, Jeff Costello.

Key to CarePayment’s results is enrolling customers in an affordable payment plan as early as possible, when the medical services received are still top of mind and desire to pay is highest. “We found that people wanted to pay the bills, but when faced with something like a $3,000 bill from the hospital, it was so daunting that it was overwhelming for them. It could just get lost in the shuffle,” says Ellen Bristol, a spokeswoman for Metro Health in Grand Rapids, Michigan. “When we gave them the opportunity to pay over time, they really wanted to do that.”

But the company says it could be hurt by pending federal consumer-protection regulations that would prohibit hospitals from selling accounts receivable for at least 90 days. The company is working with a lobbyist in Washington, DC to emphasize the difference between CarePayment’s approach and that of debt collectors, and to seek an exemption from proposed rules directed at that industry.

Strategic Partners

Cash hospital billings is just the kind of neglected financing niche that fits Aequitas, CarePayment’s parent company. With more than $500 million under management, Aequitas is a creditor in subprime motorcycle loans, student loans, small business loans, and other areas commonly dismissed as “distressed debt.”

“We get involved in things the banking sector doesn’t fund,” says Brian Oliver, executive vice president of Aequitas. “These are niche, dislocated opportunities where the conventional banking industry won’t provide the funding because of the profile of the customer.”

Impact investors were attracted to CarePayment’s combination of social impact and steady payments. CarePayment financed its purchase of accounts receivable with private-placements from individual accredited investors and institutions such as the W.K. Kellogg Foundation, which placed $3 million in 2011 as a fixed-income part of its $100 million, mission-driven investing portfolio. Imprint Capital, an impact investment advisory firm that works closely with the Kellogg Foundation, also helped bring in a half-dozen or so other foundations and family offices.

Particularly appealing to the investors was CarePayment’s annual return. In CarePayment’s model, the payments were backed by the credit-worthiness of the contracted hospitals, not individual patients themselves, mitigating some of the risk of the new approach.

“From a risk-reward standpoint, that was attractive, and from a social impact standpoint, we thought it could scale,” says John Duong, a program and portfolio officer on the Kellogg Foundation’s investment team. “Patients get access to capital, hospitals get reimbursement, and we make a good return.”

Additionally attractive were CarePayment’s partnerships with hospitals in Michigan — the foundation’s home state and a strategic priority. Michigan represented as much as 25 percent of CarePayment’s revenues.

Nevertheless, there were some issues with the partnership between CarePayment and the Kellogg Foundation. For example, CarePayment’s services are not generally targeted to the poorest segment of the population that the Kellogg Foundation seeks to serve (families at or below 200 percent of the federal poverty line), but medical debt threatened to sink many middle-class families into poverty. CarePayment says that confidentiality requirements and other considerations have prevented it from collecting a full socioeconomic profile of its customer base. With CarePayment’s cooperation, the Kellogg Foundation has commissioned a survey to explore the issue for policy purposes.

“For those at 300 or 400 percent of the federal poverty level, and you owe $800 or $2,500 — that’s more than you can pay out in lump sum,” says Julie Solomon, one of the principal researchers conducting the study. “For certain amounts of debt in relation to people’s income, being able to pay it off a little bit at a time, with no interest, without it going to collection, that really helps people out.”

Inside the Kellogg Foundation, the investment spurred a debate about broader health care policy. CarePayment’s solution helped reduce many of the negative consequences of medical debt, but some members of the foundation’s investment committee became uncomfortable with a business model that depends on collecting additional revenues from individual patients. 

“What we were doing is helping a subset of folks who are working poor and have these expenses to repay them, and to get better medical outcomes in the process,” says Tony Berkley, who led the Foundation’s mission-driven investment initiative at the time of the CarePayment investment. “It was, ‘Here’s an inefficiency. Patients are better off. Hospitals are better off.’”

Still, some at the foundation were concerned about the perception of “making a profit off of debt,” says Berkley. “That position is difficult for some folks who come from a charitable mindset.”

By 2013, CarePayment had become able to expand its services without the need for “impact” investors. By leveraging its receivables with secondary financing from Goldman Sachs, it attracted lower-cost financing from more traditional lenders, including a $60 million line of credit from Bank of America. 

This access to institutional capital meant early investors would receive a lower return. That, coupled with a change in the way CarePayment financed the purchase of the accounts receivable to accommodate the requirements of these senior lenders, raised additional concerns for the Kellogg Foundation. Under the new structure, medical accounts receivables might be combined with college loans, which Kellogg had made a policy decision to avoid.

When Aequitas refinanced its line of credit last year, the Foundation elected not to participate in the new fund and redeemed its investment last year.

In the end, the early capital from the Kellogg Foundation and other impact investors played a catalytic role in launching an innovative approach to a growing social challenge. The early risk capital supported a new model to the point where its results enabled it to access more traditional forms of financing. CarePayment executives acknowledge the company might not be where it is today without support from institutions such as the Kellogg Foundation.

At the same time, CarePayment illustrated the distinction between impact investing and philanthropy. Through grants, a foundation might undertake policy efforts to reform health care more broadly to reduce the total financial burden on struggling families.

The impact investors who placed capital with CarePayment were making a different calculation. CarePayment had identified a market failure and a win-win solution to overcome it, helping moderate- and lower-income families straining to pay medical costs not covered by insurance. Impact investors had to weigh whether the investment provided an appropriate risk-adjusted return while making a positive impact on a growing social challenge.

For Kendra, the Michigan mother, CarePayment’s service is a step in the right direction. She makes extra payments when she can. But she remains anxious about her continuing exposure to medical debt. “The thing that’s scary is that we’re relatively healthy people,” she says. Her 11-year-old boy is active in football, basketball, and taekwondo. “I’m terrified we’re going to end up with a broken bone at some point. One emergency room visit, and we’re done.”

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Filed Under: The Economy, economy, poverty, health