Charity Care is up 30%—How Hospitals can Stay Financially Resilient Amid Rising Bad Debt

As hospital charity care (i.e., free or discounted medical services that hospitals provide to patients who meet hospital financial assistance policy criteria) continues to soar in the wake of the COVID-19 pandemic, hospital revenue cycles face unprecedented financial and operational challenges. While increased hospital charity care helps vulnerable patients, it simultaneously reduces hospital revenue, strains already-limited staff resources, complicates compliance, and creates sustainability risks. The inherent tension between wanting to serve the community while also running a profitable business puts hospitals in a precarious position. In this article, we’ll provide several strategies to help healthcare finance and revenue cycle leaders navigate this complex landscape effectively to promote financial sustainability and improve the patient financial experience. 

 

Understanding the Rise in Charity Care and Bad Debt 

It’s understandable why hospitals would provide more hospital charity care during times of inflation, unemployment, and rising healthcare costs. As patients increasingly qualify for financial assistance, well-intentioned hospitals do their best to provide it. But costs are not always easy to absorb. Another challenge? High-deductible health plans and increased patient financial responsibility contribute to healthcare bad debt (i.e., money the hospital anticipates receiving from the patient and/or their insurance company but doesn’t).  

 

When combined, healthcare bad debt and hospital charity care equal total uncompensated care, a number that continues to evolve in the wake of Medicaid redeterminations. More than 25 million people lost Medicaid coverage as redeterminations resumed at the end of the public health emergency, and nearly one in four adults are now uninsured. 

 

Hospital-specific factors also influence the hospital charity care and healthcare bad debt that drive total uncompensated care. For example, there is significant variation in hospital charity care rates at each hospital based on its mission and business practices as well as the need for hospital charity care among patients in the community. Some hospitals provide little or no hospital charity care (0.1% or less of operating expenses at 8% of hospitals), while others provide far more hospital charity care (at least 7% of operating expenses at 9% of hospitals). In addition, hospital expansion or restriction of hospital charity care criteria also affects overall hospital charity care rates. Similarly, healthcare bad debt is highly influenced by economic and community factors (e.g., regional unemployment or cost of living), patient-related factors (e.g., patient socioeconomic status and patient financial literacy), hospital operations (e.g., pricing transparency and collection practices), and more. 

 

Financial Implications of Rising Charity Care and Bad Debt 

As hospitals face higher rates of hospital charity care and healthcare bad debt, revenue cycle pressures cause hospitals to experience the following: 

 

• Cashflow pressures. Accounts tied up in collections reduce immediate liquidity. 

• Higher collection costs. Hospitals spend money on billing staff, call centers, and external collection agencies and may never recover more than a fraction of balances owed. 

• Increased administrative overhead. Screening for hospital charity care, verifying income, and documenting eligibility require staff time and compliance systems. In addition, more administrative resources are needed to manage self-pay accounts.  

• Revenue leakage. With hospital charity care, hospitals ultimately absorb the uncompensated cost, offset only partially by tax exemptions, subsidies, or cross-subsidization from paying patients. Similarly, when patients don’t pay co-pays, deductibles, or coinsurance, these unpaid balances directly translate into revenue leakage. 

 

Hospital charity care shrinks the top line while healthcare bad debt clogs the revenue cycle, increases cost-to-collect, and delays accurate financial reporting. The combined effect on the revenue cycle? Reduced amount of collectible revenue that directly shrinks operating margins. That’s why resilience planning is so critical for hospitals finance teams. Resilience planning prepares hospitals to stay financially and operationally stable in the face of unexpected hardship whether that’s rising healthcare bad debt, payer delays, cyberattacks, or pandemics. 

 

Strategies to Maintain Financial Resilience Amid Rising Bad Debt 

Resilience planning is critical because it helps hospital finance teams navigate constant volatility. Here are five strategies to consider: 

 

1. Engage patients proactively. Leverage early financial counseling, patient portals, automated reminders, and omni-channel communication strategies to reduce unpaid balances and improve the patient financial experience.  
2. Leverage third-party partnerships. Partner with external agencies to address revenue cycle vulnerabilities and maintain a patient-centered approach.  
3. Offer flexible payment options. Provide patients with personalized payment plans and online payment solutions. Also integrate hospital charity care policies into digital workflows for faster approvals. An added bonus? All of these steps also improve the patient financial experience.  
4. Optimize revenue cycle processes. Streamline billing, coding, and collections workflows to reduce administrative costs. Also implement predictive analytics to identify at-risk accounts before they become healthcare bad debt. 
5. Promote data-driven decision making. Use revenue cycle dashboards to monitor key metrics (e.g., accounts receivable days, collection rates, healthcare bad debt ratio, and hospital charity care utilization). Then adjust strategies, as needed, based on trends and historical patterns. 

 

Leveraging these and other resilience strategies helps hospitals gain the flexibility, liquidity, and foresight to sustain operations, improve the patient financial experience, and invest in the future. 

 

Best Practices for Hospitals Managing Charity Care 

Effective hospital charity care management requires a balance between compliance, community service, and revenue cycle efficiency. Here are six revenue cycle best practices that can help: 

 

1. Communicate clearly. Provide easy-to-understand financial assistance options to patients to prevent delayed payments or self-pay accounts receivable escalation. 
2. Emphasize hospital charity care and revenue cycle integration. Embed hospital charity care into each stage of the revenue cycle. For example, use real-time tools to flag patients who may qualify for financial assistance, create a dedicated transaction type so charges are written off properly, and require that all self-pay accounts are screened for financial assistance before sending those accounts to healthcare bad debt or collections agencies. 
3. Ensure revenue cycle staff training to promote eligibility verification and patient engagement. Ensure staff can help patients access financial assistance for which they qualify, thereby promoting a smooth revenue cycle without unnecessary healthcare bad debt. 
4. Maintain compliance with federal and state hospital charity care regulations. Embed compliance into daily revenue cycle operations. 
5. Monitor key metrics to support strategic decision making and financial resilience. Identify and address early warning signs of financial distress by monitoring the following: 
   • Collection rate. Monitor overall recovery of self-pay balances and write-offs.  
   • Days in accounts receivable. Track how quickly self-pay balances are collected. 
   • Healthcare bad debt ratio. Monitor trends in write-offs as a percentage of revenue. 
   • Hospital charity care utilization. Measure uptake and impact on revenue. 
   • Payment plan success rate. Track patient adherence to scheduled payments. 
6. Simplify hospital charity care applications. Avoid excessive documentation requirements (e.g., tax returns, multiple pay stubs, and notarized forms) that deter patients from applying. In addition, avoid complex applications that require back-and-forth, manual reviews and resubmissions that increase administrative burden. The goal is to enroll all qualified patients in hospital charity care. Ultimately, chasing balances that the hospital should have written off under hospital charity wastes staff time, increases billing expenses, and damages patient relationships. 

As hospital finance leaders look ahead, rising hospital charity care and healthcare bad debt are persistent revenue cycle challenges they must address. Fortunately, strategic revenue cycle management that includes proactive patient engagement, technology, and data-driven insights can mitigate many of these challenges. Adopting best practices helps maintain resilience amid ongoing financial pressure. Contact Revenue Enterprises to learn more about tailored strategies to optimize accounts receivable management, reduce healthcare bad debt, and improve patient satisfaction.