How Should Policymakers Respond to Growth in Cost Sharing That Often Goes Unpaid?

The last few decades have seen notable increases in out-of-pocket liability for many patients, particularly in the commercial market. However, patient cost sharing is frequently unpaid—reducing payments to providers who are on the hook for collecting it, and resulting in outstanding medical debt for patients. In this piece, we highlight what is currently known about the frequency with which patients pay their cost sharing and discuss how this phenomenon relates to other health policy topics, including insurance design.

Patient Liability Has Risen In Some Markets

Recent years have seen countervailing trends in insurance markets. On one hand, coverage expansions have meaningfully lowered the uninsured rate, and in turn, financial exposure of some patients. At the same time, cost pressures in the commercial insurance market have triggered an increase in patient cost sharing. For example, according to the Kaiser Family Foundation, the average deductible for single coverage in the employer market has increased by roughly 2.5 times in real terms from 2006 to 2022. Coupled with rising prices, this has increased potential patient financial liability among the insured population, both in percentage and in absolute terms.

Increasing cost sharing changes not only the incentives facing patients, but affects provider payment dynamics. Unlike the portion which is paid by the insurer, cost-sharing must be collected by the provider, directly from the patient. While some patient cost sharing is collected at the point of sale, the majority is billed to patients after care has been delivered. As we discuss below, payment of patient liability is far from guaranteed.

From the consumer perspective, unpaid cost sharing represents a form of medical debt and is at least partially reflected in the roughly $88 billion in medical collections held on consumer credit profiles. It is not clear what share of this debt stems from insured versus uninsured patients, but it is notable that the majority of individual collections are of a magnitude that could plausibly be incurred under even generous insurance plans (for a discussion see Batty, M., Gibbs, C., & Ippolito, B. (2022)). For providers, this represents foregone payment, since providers and not payers are on the hook for patient payment collections. Meanwhile, the extent to which patient payment collections reduce providers’ net revenue depends not just on the probability of payment, but also the administrative overhead associated with billing and collection activities.

Payment Patterns In The Current Market

To provide context for related policy discussions, we assembled data on payment patterns from publicly released reports from Crowe LLC. Crowe is a major accounting and consulting firm that works with over 1000 US hospitals nationwide, focusing specifically on compliance and revenue optimization support. Through this work, Crowe gets detailed transaction-level patient payment data from most of its hospital clients. It has publicly released some aggregated findings and statistics from these data, which provide unique visibility on patient payment patterns. 

Crowe’s data indicate that a very large share of cost-sharing goes unpaid. On average, they report that only 54 percent of commercially insured patients paid their cost-sharing, a figure that is broadly consistent with proprietary data we have worked with. Unsurprisingly, collection rates decrease with bill size. Other data suggest collection rates are higher for stand-alone physician offices than for hospitals in Crowe’s data, which may partly reflect smaller bill size. Still, only two-thirds of bills over $200 from physicians’ offices were paid within 12 months.

These data also implicitly reflect broader phenomena in coverage trends. In particular, while hospital bad debt was historically attributable primarily to the uninsured, roughly 58 percent of recently accumulated hospital bad debt originates from those with insurance. The fact that many patients only receive bills long after care has been delivered likely reduces collection rates and increases collection costs. At least in the hospital market, only about 20 percent of patient liability is currently collected at the point of service. The majority of these payments likely come in the form of copays, which are typically collected at time of visit, unlike coinsurance or deductibles.

Recent policy changes related to personal medical debt will reduce the costs of not paying medical bills and potentially amplify these trends. Notably, the current administration has eliminated medical debt as a factor in many federal credit programs. The major credit bureaus have also significantly reduced the influence of medical debts on consumer credit profiles. Medical debts under $500, for example, will no longer appear on credit reports. Independent of other merits to these changes, they will reduce the costs associated with not paying health care bills, and potentially push collection rates even lower than they are now.

Why This Matters For Health Care Markets

Relatively opaque pricing signals in provider markets and highly incomplete collection of patient cost-sharing impede general market functioning. Particularly when faced with coinsurance, patients have limited upfront transparency on how much they will owe for services. The fact that patient liability isn’t fully known until after services are delivered curtails patients’ ability to respond to (or avoid) out of pocket costs. Variation across health care providers in how they deal with unpaid balances complicates matters further for consumers.

From the providers’ perspective, greater patient cost sharing coupled with modest collections rates for those bills, makes their overall revenue for a given service unclear. This has the potential to muddy negotiations with insurers, which weigh volume against price and require a clear understanding of both. As insurers require patients to pay a larger share of health care bills, providers can reasonably expect that their total payments will fall, given the low patient collection rates discussed above. This means providers must negotiate for higher payment rates from insurers to hold expected payments costant.

Low collection rates also create notable incentives for providers. All else equal, lower collection rates increase the relative value of patients who have lower remaining liability after leaving the site of service, such as those with lower cost sharing (e.g., lower deductibles) or who pay a larger share of their liability at the point of sale (e.g., via copays instead of coinsurance). Should cost sharing continue to increase or collection rates fall, the incentives for providers to more explicitly select patients with higher likelihood of payment are heightened. Within the commercial market, for example, providers may have less desire to contract with plans that have particularly high cost sharing requirements. (Outside of the commercial market, low collection rates from patients further increase incentives for providers to sign up eligible patients for Medicaid coverage).

Challenges related to collections may also trigger changes to how providers conduct them. For instance, this phenomenon likely increases the appeal of medical credit cards to providers. These products are like other credit cards, except they are restricted to use for health care services and are often promoted by health care providers themselves (e.g., as an option for paying a bill at a hospital). In effect, these cards allow consumers to finance care and transfer liability for collection from the health care provider to the credit issuer. This makes payment more predictable for the provider, but means that patients must repay the loan, which may come with meaningful interest payments.

What Should Policymakers Do?

At a minimum, policymakers should recognize that low collection rates from patients have ramifications for providers, and policy changes that lower penalties for non-payment could reduce collections as well as further impact providers. For example, the benefits of policies that further lower the costs of not paying bills should be weighed against potential harm to providers, as well as providers’ expected response to such policies.

These repayment statistics from Crowe should also inform debates over insurance design. If patients are inconsistently paying current cost sharing, then further increases in cost sharing may not be desirable, particularly given findings from related research. For example, past studies have shown that cost sharing is effective in reducing costs, but may not do a good job of targeting low-value care. Together, these data may argue in favor of refining and simplifying cost-sharing and other incentives imposed on consumers, rather than increasing cost sharing in general.

One possible mechanism to simplify price signals for consumers and alleviate some burden on providers is through the use of co-payments in place of coinsurance. Research suggests copayments have particularly high salience for patients. This suggests that insurance plans based primarily around co-pays may produce clearer cost signals and lower spending relative to actuarially equivalent coinsurance-based design. The advantages to providers are obvious–they not only secure upfront payment, but lower their costs of collection. From the perspective of patients, prices would be more transparent ahead of time than under co-insurance, meaning less sticker shock or unexpected bills post-service and greater responsiveness to price signals pre-service.