Estimated payment ability an approach to allocating charitable assistance: healthcare providers can save time, expense, and reputation by properly—and fairly—classifying certain payment balances as charitable assistance

Healthcare Financial Management, March, 2006 by Robert Hammer

A basic fact of U.S. health care is that the likelihood of having healthcare insurance is firmly linked to income. In fact, the uninsured rate for households with annual incomes below $25,000 is twice that of households earning more than $50,000, and three times those earning over $75,000. (a) Obviously, a similar link exists with respect to a patient's ability to pay for uncovered medical charges. Healthcare providers struggling to address these troubling trends with limited charity resources are therefore wise to base their financial assistance decisions on a realistic assessment of each patient's ability to pay.

Perhaps the most common approach to attempting to fairly allocate charitable assistance involves the use of a tiered table based on the federal government's annual poverty guidelines. These tables assign graduated discount percentages to stepped categorizations of household income and total charges for services rendered. Although such tables provide a basis for case-to-case consistency, and therefore some manner of fairness, they are not without serious shortcomings.

Tiered Tables: Riddled with Bad-Debt Holes

Consider the following hypothetical cases: Patients A, B, and C each accumulate charges totaling $10,000. Patient A's annual income is verified at just below 100 percent of the 2005 federal poverty threshold, at $9,569. Patient B's income comes in just above 100 percent of the threshold, at $9,571 per year. Patient C earns $16,730 annually, or 175 percent of the threshold. Using the tiered charity discount table, Patient A qualifies for 100 percent charitable assistance, while Patient B is asked to commit his extra $2 per year toward $3,500 in remaining charges. Patient C, meanwhile, ends up owing the same amount as B, but enjoys $6,259 more per year in additional income. A quick glance at the table above reveals quantum leaps like this at every defined income threshold.

Patient B's responsibility seems destined to run through the collections cycle and end up as bad debt. Moreover, were we to reconsider this scenario with charges totaling $50,000, the discounted amount asked of Patient C would almost certainly follow the same course.

These examples illustrate three glaring holes in most tiered-table approaches to allocating charitable assistance. First, the total of charges matters little, as the low-income patient's ability to pay can very quickly be outstripped. Second, even seemingly small percentage jumps at specific thresholds leave patients who are in essentially identical financial situations owing substantially different amounts. Third, the relatively broad ranges between income tiers leaves those at the higher end of each tier significantly better off than those near the lower end.

Simply put, any balance in excess of the patient's ability to pay will simply result in uncollected charges, whether classified as charitable assistance up front or bad debt in the end. Healthcare providers can spare their patients the stress of receiving bills they have no hope of paying and save themselves significant costs in time, money, and public reputation by recognizing these balances up front and properly classifying them as charitable assistance.

To help providers make a fair and reasoned estimation of how much patients are able to pay, the estimated payment ability model uses a simple formula that can easily be incorporated into a spreadsheet, database form, or web-based calculator.

The First Criterion: Who Warrants 100 Percent Assistance?

Many providers who base their charity decisions, at least in part, on the annual federal poverty guidelines decide that patients below 100 percent of the threshold will receive 100 percent assistance, and those above will receive incrementally less. Although this may seem sensible, how reliable are the guidelines as an indicator of the economic situation within a specific service community?

One relatively simple method of determining how federal poverty guidelines relate to a particular service community involves a standard-of-living guideline used by most lenders, leasing managers, and government housing agencies. Commonly known as the "30 percent rule," this approach assumes that no more than 30 percent of household income should be devoted to basic housing expenses, defined as rent or mortgage plus standard utilities.

This rule of thumb thus requires a single individual earning 100 percent of the threshold to find housing under $240 per month--leaving less than $500 per month to cover all other necessities, including food, clothing, transportation, and healthcare costs.

Calculating your service community's baseline housing costs. Each year, the Department of Housing and Urban Development publishes median fair-market rent levels for each county and metropolitan statistical area throughout the nation. Using these data, it is possible to determine a reasonable minimum or baseline for housing costs within any particular service community.

Take the Cleveland-Lorain-Elyria, Ohio, MSA as an example. According to HUD's 2005 FMR values, the median FMR for efficiency (zero bedroom) rental housing in this MSA is $472 per month. This value approximates the 40th percentile of rental housing costs in the community surveyed; 40 percent of housing costs will fall at or below the value listed. Given that our target demographic is lower-income residents, an estimate at the 25th percentile would give us an average cost for the lower half of the rental housing market. According to HUD's documentation, a deviation of 15 percent from the median percentile equates to approximately a 10 percent shift in rental cost. To estimate the median cost at the 25th percentile, we would therefore subtract 10 percent from HUD's listed value of $472, resulting in an estimated lower-cost average FMR of approximately $425. This is the value we will use as our housing cost baseline.