With the rollout of high-deductible, low-premium insurance plans, health care invoices are increasingly being owed by consumers rather than by insurance companies. What has followed are increased financial strains on those who cannot afford it and higher default rates on medical debt — problems a select group of technologically focused start-ups are trying to solve.
A health care deductible is the amount you pay for covered health care services before your insurance plan starts to pay. The cost of premiums for employer-sponsored health plans has increased 100%+ since 2000, creating a rapidly growing expense for employers. In reaction to the rising costs, insurance companies have rolled-out high-deductible plans, which charge lower premiums for both the employer and the employee.
A high-deductible healthcare plan is one in which the deductible for an individual is $1,350 or greater and for a family is $2,700 or greater. For example, if you have a covered procedure that costs $800 and you have not yet paid your $1,350 deductible for the year, you would owe $800 to the healthcare provider. To put that number in context, a 2016 Federal Reserve study revealed that 46% of Americans could not afford a $400 emergency expense.
Not only do you owe that $800 out of pocket, but you’ll also need to spend that next $550 of health care services before the benefits of your insurance plan can take effect.
In summary, high-deductible plans lead to more payments made out of pocket. On the care providers end, their collection system has been set up to focus on reimbursements from insurance companies, and is thus ill equipped to follow up on the flood of smaller charges being made to numerous consumers. The result has led to increasing defaults on medical debt and lower collections for hospitals and other healthcare providers.
The movement to high-deductible plans creates two problems:
1) the healthcare providers are not well-equipped to collect on charged payments and
2) consumers cannot afford their out of pocket expenses.
So what can be done about this problem? The first step is to provide consumers access to credit. But, as might reasonably be expected, those who cannot afford a $800 medical payment likely do not have access to cheap debt. A lack of personal resources often turn consumers to either trusting abusive lenders (i.e. payday) or to default.
So the puzzle of healthcare payments becomes how to get credit to consumers affordably without bankrupting the lender in the process.
A few companies are finding innovative ways to provide consumers credit at an affordable rate. One such company, MedPut, partners with employers to provide their employees an interest-free credit line. MedPut then negotiates the medical bill down with the healthcare provider and splits the savings with the borrower.
The remaining outstanding debt is repaid by the employee via payroll deduction (withheld from the employees’ paycheck, similar to insurance premiums and taxes), vastly lowering the likelihood of default. The lowered likelihood of default leads to lower costs for the lenders, thereby allowing lenders to lower rates to the consumer.
See here for an illustrative cash flow demonstration of the payroll deduction.
MedPut creates a win-win-win situation. Employees can pay for their healthcare expenses without falling victim to the payday lending trap, healthcare providers collect on a higher percentage of their receivables, and employers get credit for the benefits package they are providing. Often, when no deductible financing option is provided, employees may feel that the benefits are useless, as they are paying thousands of dollars in healthcare expenses before ever reaping their benefits.
We need more businesses to find creative solutions to the problem of health care credit. Financing a non-planned expense such as health care is ever more relevant considering the study findings released by the United Way ALICE Project last week. The study revealed that 43% of households in the US cannot afford a basic monthly budget for housing, food, transportation, child care, health care and a monthly smartphone bill.
Payday lending is not sustainable and, through technological innovation, may no longer be competitive. As more and more financial technology businesses find novel ways to approach these budding problems, payday lenders will no longer be the only option, which will vastly deteriorate their market position. Thus, competition and innovation, rather than the defanged Consumer Financial Protection Bureau may be the best path forward to solving the financial inclusion and wellness epidemic in the United States.
MedPut and MedZero are two companies that are taking action to solve this problem. We hope many more emerge to provide a vital service to the hundreds of millions of Americans who cannot afford to wait any longer.