Buy now, pay later in healthcare

After reading a recent article by Jacob Effron analogizing the health-tech revolution to the ongoing fintech revolution, I started thinking about the viability of fintech use cases in the context of healthcare. As a result, I’ve decided to use this piece to explore healthcare buy now, pay later (BNPL) products.

What is BNPL is and why is it relevant to healthcare?

BNPL is a type of installment loan that divides purchases into payments paid out over a period of time. Remaining payments are billed to a debit or credit card and may be subject to interest and/or late fees. Said more colloquially, BNPL helps people pay for things, so they don’t have to go into debt (at the expense of their credit rating) and/or pay interest (at the expense of their cash flow). BNPL providers typically run a ‘soft’ credit check (sometimes in real-time) to approve or deny users, and BNPL can be used for a variety of products or services. For example, Affirm, one of the largest BNPL players, has partnerships with Amazon, Spotify, and American Airlines[1].

For a variety of reasons, Americans continue to struggle to afford healthcare and often go into debt as a result. For example, CNBC reported that 55% of Americans (including those with insurance) have medical debt of some kind[2]. In addition, the Cancer Action Network also reported 51% of cancer patients and survivors go into debt to cover the cost of their cancer care[3]. Recent headlines highlighted how medical debt was coming off credit reports, but this change really only applies to medical debt that was eventually paid and medical debt that remains unpaid for over 1 year (rather than just 6 months)[4]. Thus, medical debt and the incentives to avoid medical debt are here to stay.

Nevertheless, since the goal of BNPL is to allow consumers to afford products/services AND avoid debt, healthcare seems like a logical market for these BNPL products to make a transformative impact. With this in mind, I wanted to explore whether BNPL in healthcare could generate the adoption, scale, etc. that we’ve seen in other more ‘straight-forward’ industries.

Potential drivers of success

Patient demand: Simply put, the data indicates that patients want access to payment plans. A recent study by the Healthcare Payment Experience showed 63% of consumers had an ‘extraordinary’ interest in healthcare payment plans, but less than half of patients were offered plans. Combining the interest in payment plans, the lack of access, and the volume of patients with medical debt, there seems to be legitimate demand for a BNPL product and it is unlikely to go away anytime soon[5].

Provider incentives: Ultimately, from a provider perspective, BNPL helps providers of all sizes generate more consistent cash flows and do so more efficiently[6]. Selling any type of solutions to providers is challenging, but I am optimistic about the approach, Walnut, a healthcare specific BNPL solution, is taking and think it creates a strong incentive for providers to adopt[7]. In a purely illustrative example, say a patient has a $1,000 outstanding bill. If a providers’ average collection rate is 50%, Walnut will take on-risk, offering to pay the provider 40% upfront (i.e., $400) and pocketing whatever portion of the $1,000, it winds up collecting over the subsequent series of installment. In an ideal scenario, Walnut collects $1,000 and pays the provider the $400, profiting $600 overall. 18% of Americans hold medical debt that is in collections while collection rates are around 15–20%, so I see the upfront guarantee being very valuable for providers[8],[9].

Potential challenges

Underwriting risk: In the retail setting, the average transaction value is about $150–200 for a BNPL purchase[10]. On the other hand, 46% of those in medical debt (i.e., the patients most likely to use BNPL) are in debt because of emergency room medical bills2, and one emergency room visit can cost around $2,000[11] (the exact number ultimately depends on level of insurance, geography, severity, etc.). Nevertheless, I acknowledge there are other use cases for BNPL (e.g., elective procedures), but my main point here is that healthcare BNPL transaction sizes can be an order of magnitude larger than those of other industries. Thus, managing underwriting risk in healthcare BNPL seems like a bit of a different beast — potentially requiring even more capital and limitations to access (i.e., denying users) as demand grows than in other industries.

Scaling supply: Partnerships with major product/service products like Amazon has helped companies like Affirm scale the supply side of its platform. Analogizing back to healthcare, this would be the equivalent to partnering with a major health system such as HCA or CommonSpirit. On the surface, these types of systems seem like great customers as they have substantial patient volumes and likely face the same collection-related challenges. However, using a large health system to help scale would add to the underwriting risk management challenges laid out above. For that reason, to be successful, I’d think BNPL solutions would have to start small and scale gradually, an approach that can be more resource-intensive and less appealing to investors.

Distribution: It seems like most patients are not likely to find their way to a BNPL solution on their own and before a hospital visit or procedure. This hypothesis is driven by the lack of upfront transparency in healthcare overall (i.e., you can’t pay without knowing the price!) as well as the fact that unpredictable emergency rooms visits account for such a large portion of medical debt. Nevertheless, if this hypothesis is true, then for a patient to get approved for BNPL, the provider would have to engage with the patient (after the visit/procedure) and steer them to the BNPL or the patient would have to reach out to the provider after receiving the care and the provider would have to steer them to BNPL. In short, the distribution seems a bit choppy and is another challenge to address.

Some closing thoughts

I do believe there is a strong use case for smaller provider practices to effectively use BNPL for specific procedures. However, it remains to be seen if this market is large and sustaining enough, if the money ultimately resides with massive providers and large, unexpected bills, or if there is a middle ground.

Regardless, I am excited that new, innovative financing solutions are coming to healthcare, and I believe they can benefit multiple stakeholders. I do not think any of the challenges I laid out are insurmountable, and I look forward to seeing how the space evolves in the coming years.

#CBSDigitalLiteracy

[1] https://www.fool.com/investing/2022/01/19/affirm-stock-bear-vs-bull/

[2] https://www.cnbc.com/2022/03/11/why-55percent-of-americans-have-medical-debt-even-with-health-insurance.html

[3] https://www.fightcancer.org/survivor-views?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosvitals&stream=top

[4] https://www.cnbc.com/2022/03/28/most-medical-debt-to-come-off-credit-reports-what-to-do-if-it-doesnt.html

[5] https://www.pymnts.com/healthcare/2021/care-now-pay-later-doctors-bnpl/

[6] https://certegy.com/buy-now-pay-later-healthcare-payment-solutions/

[7] https://techcrunch.com/2021/04/07/walnut-affirm-for-healthcare-seed/?guccounter=1

[8] https://www.nytimes.com/2021/07/20/upshot/medical-debt-americans-medicaid.html#:~:text=Using%2010%20percent%20of%20all,that%20Americans%20owe%20collections%20agencies.

[9] https://www.iwantmymoney.com/news/why-collection-are-rates-so-low-for-medical-collections-1446410619894.html

[10] https://securecdn.pymnts.com/wp-content/uploads/2020/02/Buy-Now-Pay-Later-February-2020-Tracker.pdf

[11] https://www.uhc.com/member-resources/where-to-go-for-medical-care/urgent-care-vs-er