How Do Slow Payments From Insurance Companies Affect Hospitals?

As controversial as the issue of health care is, the relationship between the hospitals and the insurance companies often draws the greatest criticism and causes the most confusion. There are frequently disputes between insurance companies and hospitals regarding bill payments and questioning who is responsible for paying what. Hospitals and insurance companies are both businesses and, like any business, their main goal is making money and turning profit. Because the two are so intertwined with each other, issues like late payments from the insurance companies can really affect hospitals' bottom line.

How Hospitals Get Paid

• Late payments affect hospitals because insurance companies generally pay them on a per-diem or fee-for-service schedule. A certain procedure has a predetermined price tag on it that the insurance company pays the hospital. Normally, the fee is actually higher than the actual cost of the procedure for the hospital. Because hospitals lose money on Medicare and Medicaid patients, they pad the expenses that go to insurance companies to make up for these losses. If those payments are not made, hospitals operate at negative profit because they rely on the insurance companies for the bulk of their income. Insurance companies can afford to pay the higher amounts because most of their paying customers are healthy and not currently using health care. These fees are renegotiated annually between each hospital and each insurance carrier. Therefore, a procedure can cost significantly more at one hospital compared to another.

Late Payments

• Late payments affect hospitals in a myriad of ways. First of all, hospitals have to operate on budgets just like any other business. If expected cash flow is suddenly not there, it can have a dramatic effect on the hospital's operations and ability to continue running at full capacity. One late payment is not likely to cause much of a ripple in the overall structure, but if there is a dispute between the hospital and a particular insurance company and the company is withholding payments, the hospital may struggle to pay its bills. The first thing the hospital will do is try to get their missing payment another way, such as from the patient. The hospital looks at the patient as being the one responsible for the payment of a bill, and if the insurance company is late or is not paying it, the patient will be responsible for the balance. Some hospitals even have law firms on retainer for large bills that are outstanding. The firms file suits against the patients, who either did not have insurance or have insurance through a company that is not paying. If a hospital is burdened by a large amount of late or unpaid bills by the insurance companies, it may require loans or credit until those costs are recouped. In the meantime, salaries cannot be paid, equipment cannot be replaced and the overall quality of the care the hospital is able to provide goes down. If the shortages continue, the hospital has to downsize their staff, which increases wait times for patients and limits options for care. If the trend continues, the hospital may have to close.