What Does Direct Billing Mean?
Direct billing is an insurance industry term that refers to a service provider directly billing the customer. However, the meaning varies slightly depending on whether the term is used in a health insurance context or a property and casualty (general) insurance context.
In a health insurance context, direct billing is the process of a healthcare provider billing an insurance company directly for services rendered to a policyholder. It saves the patient from having to do all the paperwork on their own. In other words, it makes the process of filing health insurance claims easier and less time-consuming.
There are two main benefits to direct billing for health insurance claims:
The healthcare provider generally receives payment for services rendered sooner rather than later because they do not need to wait for the policyholder to complete the paperwork. They can simply bill the insurance company directly and receive payment by the invoice payable date.
It also benefits the policyholder in that they would not need to file any paperwork or pay for the costs upfront and wait for the insurance company to reimburse them.
In a property and casualty insurance context, direct billing refers to the process of a policyholder paying premiums to the insurance company directly instead of paying the brokerage or agency. There are pros and cons to agency billing.
Insuranceopedia Explains Direct Billing
In the health insurance context, direct billing is an alternative to individuals having to file claims themselves. In other types of insurance, this is how it is done. However, health insurance claims are often filed more frequently than in other areas of insurance. For example, for a five-year period, a person may have cause to file one auto insurance claim, but dozens of health insurance claims.
Due to the higher frequency of health insurance claims, it is beneficial to the health insurance industry to use direct billing, which speeds up the process. All parties benefit: the insurer settles the claim faster, the health care provider gets paid faster, the patient doesn't have to do the paperwork, and most importantly, the patient doesn’t have to front the cost of the healthcare services and wait for reimbursement from the insurer.
For most people, having to pay for healthcare services - especially in an expensive market like the United States where a broken arm could cost thousands of dollars - would make claims and therefore medical care cost prohibitive. There are clear benefits to direct billing for claims on health insurance policies.
In a property and casualty insurance context, direct billing is when a policyholder pays the insurance company directly for premiums owed instead of paying premiums to the brokerage, agency, or some other intermediary. This is opposed to agency billing where the intermediary who sold the policy collects premiums on behalf of the insurance company.
Most brokerages will use agency billing but there are some pros and cons to consider:
With direct billing, the brokerage gets to save on administrative costs. To collect payment, a brokerage needs to issue an invoice, process payments, send receipts, pay credit card processing fees, and follow up on accounts receivables. These costs are significant and may not be worth it for smaller policies where the brokerage is not earning that much in commissions in the first place.
However, with agency billing, the brokerage gets another touch point with the client, and gets the opportunity to earn interest in unremitted premiums. Sending an invoice to a client or follow up for payment can be viewed as an opportunity to interact with the client, strengthen the relationship, and get upsells.
Invoices can be sent along with marketing materials and when following up for payment, your sales team can use this as an opportunity to identify upsell or cross sell opportunities and get to know your client better. At the end of the day, these clients belong to the brokerage and not the insurance company so this additional effort could pay dividends down the line.
With policies that are agency billed, the brokerage collects premiums on behalf of the insurance company and remits the net premium (minus commissions) to the insurer according to an agreed schedule. During this time, the money sits in an interest earning account which, if large enough, can generate some additional revenue for the brokerage.
With all that being said, the decision to use agency billing or direct billing on property and casualty policies generally depend on the size of the premiums involved. Policies with large premiums or from important clients should be done under agency billing whereas smaller policies like condo owners’ or tenants’ policies should be direct billed to save on administrative costs.