Historically, credit card use for health care purchases other than drugs and vision care has been relatively low. By many estimates, credit cards account for only about 5% of all consumer health care out-of-pocket expenditures ($156 billion in 1992), compared with about 20% in retail, for example.

But card use in health care is growing dramatically, and the industry represents an attractive opportunity for even further credit card penetration, at least for the near term.

Slow Evolution

Credit card use in health care did not evolve as rapidly as in some other industries because, in part, health care providers were typically lenient on their patients.

Providers were willing to forgo patient payment at the time of service, agreeing to wait for the insurer to pay first. Many hospitals and practices did not even produce an exact bill at the end of the stay or visit.

What's more, providers were reluctant to pursue delinquent patients, even while experiencing extremely long collection cycles.

As a result, most consumers viewed their medical debts as their lowest payment priority and had no incentive to pay by credit card.

Furthermore, both physicians and dentists viewed card acceptance as unprofessional - "we are not merchants" - and as a result, only about 30% of medical practices and 70% of dental practices accept credit cards today. Even practices that accepted cards often did not display signs or otherwise make the customer aware of this payment option.

In an effort to understand what might be needed to increase card acceptance and usage in the health care sector, Raab & Co. recently completed a study of the health care payments process on behalf of MasterCard International.

The study included interviews with over 125 health care providers, credit card issuers and acquirers, claims processors, hospital and practice management software vendors, and others. It included six consumer focus groups in Los Angeles, St. Louis, and Washington, D.C., and an analysis of industry trends and directions.

We found that. on the provider side, historical barriers to card acceptance are falling. As providers are more pressed to cut costs - by Medicare/Medicaid payment schedules, the increasing impact of managed care, and the prospects of health care reform - they are becoming more financially astute and more aware of the benefits of card acceptance on their cash flow.

They are increasingly asking for payment at the time of service, as they recognize that they have been extending interest-free credit to their patients and spending large sums to collect. And they see credit cards as a convenience for the patient.

Group practices are becoming the primary venue for medical practice, and they, are more apt than solo practitioners to accept cards since they, are more inclined to adopt sophisticated practice management techniques.

Consumers, too, are increasingly seeing the benefits of paying by credit card.

For instance. many. consumers now realize that the card offers them float until the insurer reimburses them. Also, the rewards programs offered by certain issuers are inducing many cardholders to use the card wherever they can, and they are now asking to use the card at their health care provider.

Indeed, card usage in health care is already starting to grow dramatically. For example, MasterCard has witnessed an increase in health care spending on its products of 25% for the first half of 1993 compared with the first half of 1992 and 29% for August versus August 1992, growth far outpacing that of other sectors. MasterCard is projecting growth of at least 20% in health care use for 1994.

Education Is Key

Given these attitude and behavioral changes in the market Raab & Co. believes that credit card acceptance and use in health care can be spurred primarily through increased promotion to and education of providers and consumers.

Many providers still do not understand or fully appreciate the economies of card acceptance. Many consumers are still not accustomed to pulling out their card to pay for health care.

Because more modest efforts will apparently suffice, Raab & Co. believes that a card product that integrates claim processing is not needed to stimulate usage in health care.

Furthermore, contrary to our initial expectations, consumers in our focus groups balked when presented with integrated product concepts such as: the doctor submits the claim electronically, the insurer pays its portion, and the balance is automatically put onto the patient's credit card.

Consumers felt that the adjudication process is fraught with errors and they feared that they would lose control - by the time the charge hits the card, it is too late to argue with either the insurer or the doctor.

They were also troubled by the fact that they would not know when the charge would hit their statement or how large it would be. And they had serious concerns over the privacy of their health care information.

Jury Still Out

Additionally, the less-than-successful attempts by American Express and others to develop such integrated products indicate the extreme difficulty - if not impossibility - of designing a product that provides sufficient value to all of the participants involved.

While certain issuers might work with individual insurers or groups of insurers to develop an integrated, perhaps cobranded product, such a product would likely succeed only in markets where the insurer or insurers have sufficient share to entice the providers in the area to participate.

Two major cardless, health credit-line pilots that integrate claim submission are under way, but the jury is still out on market acceptance and profitability. Perhaps the market will prove us wrong, but we do not expect there to he a national market for such a product.

On the proy ider side, we are clearly moving to greater automation at the point of service and more offices are gearing up to submit claims electronically. Thus. there are opportunities for acquirers to team up with claims clearing houses or practice management system software vendors to process and transport both electronic health care and credit card transactions form the point of service.

Health Care Reform

Although President Clinton's proposal for health care reform has recently been issued, its net impact on credit card use for health care in the long term is difficult to gauge.

Any inducement to move people to co-pay arrangements will clearly reduce out-of-pocket payments and the need for credit cards (though there may be, an increased opportunity for debit cards). Conversely, the proposed claim standardization and magstripe ID cards could yield an improved information infrastructure in the provider office which could make card acceptance more attractive.

One conclusion we can draw now is that health care reform will not be fully implemented for a number of years. Until then, at least, the health care industry clearly remains an attractive segment for increased card use.

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