Bank loans can fill medical-insurance gaps — and everyone feels better

This article first appeared in the April BAI Executive Report. Gain more insights into the value of building banking relationships through lending and more in that issue, Executive Report: “Innovations in lending services”.

It sounds simple enough. Medical patients should spend their energy on feeling better, free from the extra stress of wondering if they can afford treatment. And healthcare systems should be in the business of healing, not debt collection.

Instead, there’s been an increased financial burden on many households when it comes to medical and dental care. That’s true even for the insured because of rising premiums, deductibles and co-pays. Also driving up costs? Pricier prescriptions and a decline in the scope of treatments that medical policies have historically covered as wholesale medical costs climb and, as some argue, because insurers keep shareholders happy.

As a result, hospitals and physician practices find themselves chasing down mounting unpaid bills and accumulated interest, a pursuit that regulators want to curb, selectively at the state level and federally, under the watch of the Consumer Financial Protection Bureau.

But what if banks and credit unions had a larger role in narrowing this financing gap?

They can offer transparent lending that proponents say is fairer to all parties when insurance comes up short, boosted by technology that speeds and smooths the loan-application process and offloads the debt-servicing burden from medical facilities.

It’s a potential relief to consumers who can settle billing concerns with pre-approval ahead of a planned medical procedure or when complications extend their treatment plans. Loan terms are clear and relative application ease is convenient just when anxious patients need it most. For the medical sector, this approach keeps cash balances healthier, a vital feature for smaller networks or independent hospitals and clinics challenged themselves by rising costs of care.

As for the financial services industry, healthcare lending is a chance to expand loan portfolios. Medical-loan relationships might blossom into auto or home loan applications or other cross-promotional deposit opportunities.

For community banks and credit unions, boosting the stability of a hospital system can make a measurable difference in a local economy. People from the two business sectors may cross paths in boardrooms or on ball fields.

It’s this multiple advantage that Dan Edgerton, chief lending officer of Idaho-based Clarity Credit Union, heralds.

“Our loan portfolio has skyrocketed, while our hospital partner has been able to improve cash flow and provide affordable patient payment options,” he says. “It has truly been a win-win-win for our credit union, the healthcare provider and patients they serve.”

Don’t underestimate the health financing shortfall

All told, the financial burden faced by patients often results in more than half of all medical bills going unpaid, according to the Kaiser Family Foundation Health Care Debt Survey.

Patients with budget constraints or without a rainy-day fund are often more likely to charge medical bills to high revolving-interest credit cards. And while individuals have the right to pay by whatever means they choose and get care essentially on demand, few financial advisors would recommend stringing out high-interest scenarios without a clearcut plan for repayment.

For Jeff Grobaski, CEO of Lending-as-a-Service platform Epic River, higher medical care costs and the increased chance that regulators toughen debt collection rules have created a market need for medical loans. From there, convincing all parties to modernize this loan variation has been key; the approach can’t risk becoming another layer of cumbersome debt servicing.

Notably, consumers expect faster, innovative payment solutions on all types of loans. It only makes sense, Grobaski says, that banks and hospitals step up with digital-first ease when it comes to medical bill and loan payment function. In that regard, partnering with a fintech vendor can add end-to-end features that allow banks to lend, hospitals to treat and patients to mend.

As Grobaski explained, the healthcare providers and banks that utilize LaaS set borrowing parameters on a case-by-case basis, but loan amounts that his platform has supported have typically ranged from a few hundred dollars up to around $10,000. Some loan offerings feature no-interest introductory periods.

Consumers toggle through a payment plan estimator to compare terms and loan duration. Approval processes are largely in real time. Post-approval, automatic account withdrawals are then created.

“By partnering with fintech vendors, financial institutions can access a wealth of knowledge and ensure the smooth adoption of new lending technologies that streamline back-office processes and improve operational efficiency,” says Grobaski, who acknowledged that banks might have been hesitant historically to maintain a portfolio of small loans that can carry high servicing costs.

Via what Grobaski described as a “shared-risk model,” repayment risk is spread across the lender, the billing medical facility, even the technology vendor in part, who assumes some servicing costs and benefits.

Don’t want to act like a bank

Hospitals especially, however, Grobaski argues are compelled to join in these relationships because the current system is creating an unsustainable rise in bad debt. New regulations are likely to mean more of that debt, and especially its interest accrual, will never be fully collected even as patients, or potentially later, their families, face adjudication.

A bonus for consumers—notable as banks educate and market to consumers—is payment on these loans is counted toward positive credit-score history at reporting bureaus, says Grobaski.

CommerceHealthcare, a division of Commerce Bank, has also identified and answered the growing healthcare financing need. It, too, says the need is multifaceted: care costs are up and patients want payment options to be flexible, efficient and digital-first.

“Such expansion challenges many [medical] organizations who lack the means or desire to ‘act like a bank.’

They are increasingly turning to outside help,” the lending division says in its report, Healthcare Finance Trends for 2024.

“As they entered 2023, 61% of surveyed leaders of hospitals and group practices anticipated greater use of third parties such as banks for patient financing options over the next two years,” the report found.

Holly King, director of customer service and collections at Raleigh, N.C.-based non-profit WakeMed Health & Hospitals, has partnered with CommerceHealthcare. Prior to that contract, WakeMed was self-managing approximately $14 million in outstanding balances through the payment plans it serviced that gave patients up to three years to pay balances that could reach $10,000, $20,000 or more.

Managing these accounts was an expensive and onerous task, King said in a case study shared by CommerceHealthcare.

“We put our patients and their families first and serve everyone, regardless of their ability to pay,” said King. “Even patients with insurance often struggle to pay their deductibles and out-of-pocket expenses.”

Key for King was setting up a loan program that didn’t stray too far from her hospital’s priorities.

In this case, that meant ease, such as including payment and loan functionality within the same communication system, MyChart, as treatment details, as well as privacy and flexible terms.

“Asking for financial help is hard, and our patients appreciate privacy,” King said in the case study. “If given a choice, many patients and their families would rather enroll in a payment plan online than set one up with a member of our customer service staff.”

King says patients are happy and applications are strong. As for her measure of success? Improved cash flow, reduced administrative costs and processing time, and a lower-than-average default rate.

Rachel Koning Beals is Senior Editor with BAI.