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Understanding the Difference Between Patient Financial Management and Revenue Cycle Management

December 31, 2019

Every healthcare executive is familiar with the term revenue cycle management (RCM), but surprisingly few know what patient financial management (PFM) is. That is truly unfortunate because patient financial management is a system of revenue planning grounded in transparency and preparation that has been proven to convert nearly all unrecoverable patient financial responsibility. PFM companies like FinPay have demonstrated time and time again that their innovative pre-care patient engagement strategies work. 

It is difficult for most healthcare administrators to imagine that there is a form of patient financial responsibility that can reach reimbursements of up to 80%, but PFM has proven to be that effective. FinPay leverages a simple concept into a revenue powerhouse—patients respond positively to pre-care transparency of their financial responsibility. Preemptive action to secure payments from patients before they walk into a doctor’s office produces enormous dividends in terms of dollars, as well as long-term patient loyalty.

The Current Effectiveness of Revenue Cycle Management

Most healthcare organizations are financial sieves, capturing only a fraction of the total amount patients owe.. It is estimated that the healthcare industry only recovers about 19% of patient financial responsibility. It is frustrating for most providers that rely on a post-care payment collection model to leave so much potential revenue on the table, even when they use aggressive collection techniques and consequently lose patients.

It is critical, however, to understand why patients often forego payment. The most important reason for non-payment is often the size of the amount owed. The number of Americans enrolled in high-deductible health plans (HDHPs) is skyrocketing, which has also increased confusion and frustration among consumers. HDHP enrollment is currently at 28% among U.S. workers, and the average annual deductible for individuals is $1,350. 

With almost one-third of American employees on HDHPs, there is an enormous risk of sticker shock when patients finally receive a medical bill. The surprise factor is why so many patients become angry about medical debt and opt-out of repayment. This is also why so many providers are unable to obtain cooperation from patients following care; patients are too upset to hear out providers about potential solutions. 

Why patients often forego payment

To make matters worse, most households are financially unprepared to pay off medical bills. A report from the Federal Reserve in 2018 found that almost 40% of U.S. households would have difficulty paying off an unexpected bill of $400. This lack of resources is partially why so many patients are apprehensive about medical bills and are unwilling to take any action when a bill finally arrives.

A final reason why so many providers lose money on delinquent patients is that they typically obtain the majority of repayment from insurers and ignore the patient repayment, especially on smaller bills. Many smaller organizations lack the resources to follow up on patient payments and end up recouping far less than they should. In many circumstances, RCM departments are so focused on insurer payments that they don’t realize how much money is lost to unpaid patient responsibility. 


Why Revenue Cycle Management Fails

Given the current economic environment in the U.S., it is readily apparent why so many healthcare organizations are unsuccessful at collecting more from patients. Most billing departments rely on an outdated RCM model that ignores the basic realities of most households. 

Percentage of patients who failed to fully pay off their medical bills

Modern RCM practices typically involve billing insurers and government payers first and ignoring patients for the most part. This is, of course, due to the fact that most revenue comes from third-parties, but it is also a reflection of how little the patient is likely to contribute. In 2014, nearly 49% of patients failed to fully pay off their medical bills, and in 2015, this rose to 53%. By 2016, 68% of patients did not pay off their bills. This figure is projected to climb to 95% by 2020.

This patient delinquency is also compounded by an expensive collection system. The Association of Credit and Collection Professionals reports that collecting from patients is four times more expensive than collecting from insurers. This is related to collecting from so many patients as opposed to a single, known insurer as well as the slow pace at which patient payments trickle in. 

Collecting from patients is four times more expensive than collecting from insurers

Even when providers are aware of the problems in their billing departments, they often try to optimize an inefficient and unsuccessful system. While this may produce a minute improvement in patient revenue, it often fails to address the fundamental problem: patients aren’t informed about their financial responsibility and their payment options soon enough in the billing cycle. 

Price transparency is a critical prerequisite for patient opt-in. Almost half of all patients say that knowing what out-of-pocket expenses they will be responsible for impacts their provider decision. Nine out of 10 patients believed it was “very important” to know what their payment responsibility was before seeing a doctor. Most importantly, 75% of Americans say that knowing their financial responsibility makes it easier to make payments.


How Patient Financial Management Boosts Revenue

Patient financial management dramatically reduces the liabilities inherent in traditional revenue cycle management, which primarily relies on post-care patient engagement. In most organizations, RCM only really interacts with the patient after other payers have been billed, making the patient an afterthought. 

When a billing department finally does produce a financial statement for the patient, it rarely provides payment options that can make the PFR more understandable and affordable. Instead, most billing departments blindside patients with bills that can overwhelm their finances. Inevitably this leads to confusion and recriminations on the part of the patient, forcing providers to take a conciliatory or combative position that can make repayment more problematic.

Patient financial management obviates much of this patient noncooperation by approaching them prior to care. This early engagement — expense estimates, billing education, an explanation of benefits, and simplified payment options — can convince patients that the provider is eager to be transparent and help them make payments. This invites patients to commit to a payment plan and positions providers as partners rather than adversaries.

Patients aren't informed about their financial responsibility and their payment options soon enough in the billing cycle

Furthermore, leading PFM companies like FinPay have made repayment even easier by implementing automated, online payment portals. Currently, 86% of patients receive medical bills in paper form, but 68% prefer electronic payment options and 80% prefer online payments. Not only do automated, online payments cut costs for providers, but it also makes it more likely that patients will not only make their payments but also that they will be made on time. 

Finally, perhaps the greatest benefit that patient financial management offers is how it strengthens the provider-patient relationship. Patients greatly appreciate how PFM providers offer upfront costs that they can prepare for, as well as financing options that signal strong patient advocacy. Not only does this pre-care financing help relieve stress, but it also establishes a strong foundation for a continuing relationship. 

PFM is a relatively new discipline, but as its success becomes more apparent, you can expect the entire healthcare industry to adopt it as an operational standard. Companies that remain mired in the antiquated RCM model will soon see their competitors reaping superior earnings and stealing their market share.

Download our Quick-Start Guide to PFM

If you would like to give your organization the right tools for revenue optimization and patient retention, please download a free copy of “A Quick Start Guide to Patient Financial Management (PFM).”

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