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Learn about the advantages (i.e., serving a larger range of people) and disadvantages (i.e., increased record-keeping responsibility) to pursuing third-party payment.


It's crunch time at the Healthy Community Center (HCC). Babies, accompanied by their parents, are waiting for their free vaccinations. Two older children are racing around the waiting room, playing "Star Wars" to kill time until they can go in to be tested -- without charge to their families -- for dyslexia as part of a CORE evaluation process. An older man watches as his wife gets her daily free blood pressure check; his turn comes next. In a back office, next door to the no-fee Parenting Skills class, several adolescents attend an Al-A-Teen meeting. Upstairs, free and sliding fee scale individual and group psychotherapy sessions fill every available space.

Very few community members who come to the Center pay full price for the care they get. How can the Center afford to serve all these people? Through third party payments, of course; HCC couldn't survive without them.

What are third party payments?

Chapter 46 of the Tool Box is all about finding ways to keep your organization or initiative going over the long term. One way to accomplish this is by becoming eligible to collect payment for your services from "third parties" -- someone other than either your own organization (through its grants, fundraising, etc.) or the person receiving services.

Under a third party payment arrangement, your organization provides services -- most often medical, rehabilitative, educational, or psychological -- to an individual, and is paid by an insurance company, an Health Maintenance Organization, Medicare or Medicaid, a school system, a state agency, or some other entity that needs or will pay for services for that individual. The rate for these services is often, though not always, pre-set by the payer (or at least negotiated by the payer beforehand), and is usually based on an estimate of a fair and average rate for a particular professional working the amount of time the service normally takes.

What are the advantages of pursuing third party payment?

There are a number of reasons why an organization might benefit from being able to collect payments from third parties for its services.

  • An improved ability to provide services: By paying for those who couldn't afford it themselves, third party payments make it possible for an organization to serve low-income people without having to either lose money by using a sliding fee scale and absorbing the difference between what the service costs and what they can pay, or charge them more than they can afford.
  • More likelihood that those in need will seek services: If people know their insurance or some other source will pay, they are more likely to seek what they need; so you're more likely to be able to work with those who need your services most. Third party payments give you access to the huge pool of potential participants who will only use services that their insurance will pay for.
  • An increase in the organization's control of its finances: If everything is in order beforehand (both your paperwork and whatever bureaucracy is necessary on the other end), you know exactly how much the organization will receive for each unit of service (an hour, a treatment, a test... whatever it is you provide), and you can be assured of receiving that payment. That improves your cash flow and gives you more control of your finances.
  • An opportunity to add staff and improve the facility: An opportunity to become an approved provider for third party payment may be an opportunity to improve your organization by adding new, credentialed staff people and by upgrading your facility and procedures.
  • Increased credibility: Being a third party provider can increase your credibility with the community and with funders and other organizations.

What are the disadvantages of pursuing third party payment?

Along with the considerable advantages of third party payment go some fairly hefty disadvantages. It's important to balance the two before you make a decision about third party payments for your organization. Is the money worth the extra hassle? Is there a chance that your organization will lose its compass and start doing things contrary to its mission and philosophy? Every organization must answer these kinds of questions and consider the following and other disadvantages as it makes the decision about whether to pursue third party payments.

  • Increased record-keeping time: The record-keeping and other requirements of third party funding may consume a huge amount of staff time. Can your organization afford that time, and is it worth the gain?
  • Increased bureaucracy: Especially when the third party is a public entity, it may have an enormous bureaucracy to deal with. In general, the larger the bureaucracy, the more complex and difficult the paperwork, the more time it takes to get anything done, and the greater the frustration for your organization.
  • An extra administrative layer: Third party payment can add an administrative layer and make life somewhat harder for everyone in the organization.
  • The danger of decisions being driven by money rather than mission: There is always the danger that pursuing third party payment will lead the organization to make decisions that are not driven by its philosophy and mission. It is important to remember that the pursuit of money should be driven by the philosophy and mission of the organization, and not the other way around.
  • Discrimination against those without coverage: In the same vein, third party payment may drive the organization to offer no services, or only minimal services, to those who can't pay and aren't covered by a third party.

Who is eligible for third party payments?

In order to become eligible to receive third party payments, you have to be a certain type of organization and fulfill certain conditions. These vary to some extent from funder to funder but, in general, they cover four areas: services, staff, facility (i.e., your physical space), and the administration of the organization. There are often other eligibility requirements as well.

Eligible services

Although it may seem obvious, the first step in becoming eligible for third party payment is to be sure you offer services that are covered by third parties.

Among the most common of these are:

  • Out-patient or in-patient psychiatry or psychotherapy, including emergency mental health services.
  • Medical treatment. Depending on the payer, this may include anything from major surgery to administering medication.
  • Preventive health maintenance, such as a weight-loss group or a child nutrition class, may also be funded as medical treatment.
  • Psychological, medical, or educational testing or evaluation.

Testing usually involves the use of a recognized test of some sort. A blood test for specific diseases or for other physical conditions (e.g., a lipid profile, which measures cholesterol levels and looks at other fat levels in the blood) is one example of medical testing. Psychological testing often involves either IQ (the Wechsler is probably the most common IQ test) or personality testing. Educational testing may look at reading readiness or at dyslexia or other learning disabilities.

A test in any of these areas, such as a school test, results in a score. Most tests require training to administer and to understand what the score means, but the nature of a test implies that the same score on the same test should always mean approximately the same thing. As a result, the information one gets from a test may be limited. Many medical tests are notorious for yielding false positives -- telling you you're infected with something when you aren't. A score on a psychological test may have a great deal to do with what happened to the person being tested on the way to the office. The results of an educational test may depend on whether a child had breakfast or not.

An evaluation or assessment may be more comprehensive than a single test and may involve more judgement on the part of the person conducting it. In addition to, or instead of, testing, an evaluation may involve interviews with not only the person in question, but also his family or those who work with him. The evaluator may examine his history, try to draw conclusions from his behavior, conduct several test, and eventually come up with a mutually-generated plan for dealing with his issues. Evaluation often demands a different and greater set of skills than testing; and, unlike administering and scoring a particular test, those skills can't always be in a systematic way. The background and experience of the evaluator may be as important as her credentials.

  • Substance use treatment.
  • Adult day care. This could mean anything from a recreation and socialization program for elders who have problems getting around to a comprehensive Clubhouse program for the adult mentally ill.
  • Elder services, such as home health care, housekeeping, Meals on Wheels, etc.
  • Day care for children.
  • Physical therapy.
  • Alternative medicine -- acupuncture, chiropractic, etc.
  • Alternative education, which may include services for children with learning or emotional disabilities or difficulties, or educational services for the developmentally disabled.
  • Independent living facilities and support for a number of groups, including the mentally ill, retarded adults, adolescents in foster care, etc.\
  • Job training and employment placement services.


An almost universal requirement among third party payers is that the people who actually provide the service -- those who are doing the actual counseling, administering medications, running groups -- be licensed or certified in their fields. The level of credential necessary may vary with the funder, but a credential (and a specific level of education to go with it) is almost always necessary.

Psychiatric or psychological services. Requirements in this area depend upon what services are being offered. In the past 20 or 30 years, for instance, it has become apparent that a great deal of mental illness is, in fact, chemical, and, like high blood pressure or diabetes, can be helped or controlled with drugs. If your organization needs to dispense medication, a funder will ask for a psychiatrist or other MD to write the prescriptions and to supervise the process, although not necessarily to provide psychological treatment.

Most third party payers will only pay for psychological services from a certified, doctoral level (MD, Ph.D., Ed.D., Psy.D.) psychiatrist or psychologist; an LICSW (a Licensed Clinical Social Worker with a Master's of Social Work, or MSW); or a therapist or counselor with lesser credentials, but at least a Master's degree (often an M.Ed.), who is supervised on an agreed-upon schedule by a licensed or certified person. Testing must usually be conducted by someone trained -- and sometimes certified -- in administering and scoring the particular test.

Medical services. Again, requirements depend on what services are being offered. For complex medical services -- all but the simplest surgical procedures, prescribing medication, diagnosis of conditions, and treatment recommendation -- most payers would demand an MD or OD (Doctor of Osteopathy, a degree which, like an MD, requires four years of graduate education and several years of internship and residency). At less complex levels of service, the requirement might be for an RN (Registered Nurse); a Nurse Practitioner or Nurse Midwife (RNs with additional training); a P.A. (Physician 's Assistant); a Licensed Physical Therapist; or an L.P.N. (Licensed Practical Nurse).

Alternative medicine, such as acupuncture or chiropractic, must usually be provided by practitioners licensed or certified in the appropriate fields. Laboratory tests, such as blood tests and the like, usually must be conducted by a Licensed Medical Technician LMT) or a licensed Radiologist or Radiology Technician (for x-rays, CAT Scans, and MRIs).

Educational services. In most cases, educational services require not only certified teachers, but teachers certified in an appropriate field. Third-party funded services for children with learning disabilities, for instance, usually must be provided by someone certified in Special Education. Educational testing must usually be done by either a licensed Psychologist or a by someone certified as a School Psychologist.

Other services. The possibility of third party payment for other services may also depend upon the licensing level of the program supervisor, the certification or licensing of those providing the direct service, and other factors as well. It is absolutely essential to find out beforehand what the staff requirements are for any program for which you are considering pursuing third party funding.


For many third-party payment situations, you may need to meet certain standards for your physical space. In addition to fulfilling the general legal requirements for whatever you do (having enough exits, working plumbing, etc.), you will probably have to demonstrate one or more of the following:

  • Handicapped accessibility and compliance with ADA (Americans with Disabilities Act) requirements. This includes: ways for people with various handicaps to get into (and out of) the building and the rooms where services are delivered, both under normal circumstances and in emergencies; handicapped accessible bathrooms; door pulls and latches that can be operated by people in wheelchairs or without a grip; places where wheelchairs can turn around; TTY or TTD devices for allowing the hearing impaired to use telephones; etc.
  • Other physical requirements, such as: the amount of space per person, the number of bathrooms, rooms that will accommodate at least a certain number of people, the location of the building, accessibility to public transportation, etc. Requirements could even extend to such things as air conditioning (offering services to seniors in Florida in July in a building without air conditioning would be an invitation to multiple cases of heat stroke).
  • Specific equipment, particularly in medical facilities.
  • The cleanliness, appropriateness, privacy, and security of both the building and individual offices and files. An organization receiving third party payments for psychotherapy, for instance, might have to demonstrate that therapy appointments take place in soundproofed offices; that all files are locked, and are only accessible to the therapist; that people can keep appointments without anyone else knowing what they are there for; that they are protected from intrusions (by abusive spouses, or others who threaten them with physical harm); and that there are procedures to protect therapists from violence as well.


To enter into a third party payment agreement, your organization will probably have to agree to some administrative conditions.

Among them might be:

  • Accepting the third party's standards of payment. You may normally charge more for services than the third party is willing to pay. Generally, if you want to be accepted as a provider, you'll have to be willing to work at their scale.
  • Keeping particular records in particular ways. This may mean all staff in the organization logging their time to the minute and/or participant attendance and activities being recorded in detail. It may also mean being extremely specific about the services that each participant received, about when and for how long she received them, and about what the results were.
  • Completion of specific paperwork in specific ways. Completing paperwork properly may involve using specific forms or writing reports in prescribed ways.
  • The uses of particular policies and procedures. A particular medical treatment may require a second opinion before it can be administered, for instance, or files may have to be stored in a certain place. The organization's fiscal procedures may also have to take a particular form, or the organization may have to demonstrate that it can adequately handle complex billing and receiving procedures.
  • Some sort of certification and regular re-certification for the organization. This kind of certification is often provided by a professional association or board, and usually involves meeting a list of standards for staff credentials, facility, and service provision, as well as undergoing a (probably annual) site visit and maintaining organizational membership in the certifying association.

Other possible eligibility requirements

  • 501(c)3 tax-exempt status. For some third party payment, usually from public funds, your organization may need to be a 501(c)3 tax-exempt corporation. In order to achieve this status, which allows you freedom from any regular income, property, or sales taxes, your organization must incorporate; must prove that it is a non -profit enterprise (this doesn't mean that it can't necessarily make money, but rather that the money goes back into the organization, rather than into someone's pocket, as it would in a for-profit business.); and must apply to the Internal Revenue Service with documentation of non-profit status and be approved, a procedure which takes four to six months.
  • Approved Provider status. You must become an "approved provider" with each third party payer. This may be a separate procedure for each different insurance company, HMO, etc. In some states, some agencies may grant eligibility to an organization that has already achieved eligibility with another state agency, but this is by no means universal. The eligibility requirements may be different for each payer, and many organizations choose among payers rather than trying to meet everyone's requirements.

Application procedures for approved provider status can vary greatly. With some payers, it may merely be a matter of making contact and arranging billing. Some may require an organization to serve a probationary period of several months or a year before being granted approved provider status. With others, particularly those which dispense public money, there may be a complex procedure involving applications, site visits, and large amounts of documentation. Often, in these cases, the application and documentation must be updated annually, even if nothing has changed.

  • It's up to the payers as to whether they take any new approved providers. Sometimes, a third party payer may simply stop taking new providers for a period, usually for financial reasons. In such circumstances, it makes no difference whether or not your organization can meet the payer's eligibility requirements: they're simply not interested in doing business with you.

How do you prepare your organization to become an approved provider?

If you decide that third party payment is a good option for you, there is a logical series of steps you can follow to prepare the organization to become an approved provider.

Find out exactly what requirements you need to fulfill. The best source of information here is obviously the third party payers themselves. Contact the insurance companies, school systems, state agencies, etc. that you expect to bill for services, and find out what they require and what their application procedures are. In some states, there are state agencies that set the basic rules for third party payments of some types; they may be able to provide you with information about a broad range of payers.

It may also be helpful here to talk to other, more experienced organizations which have gone through the process of becoming approved providers. They may have information about particular payers, advice on how to negotiate the application, etc. that could save you time and trouble or, more importantly, keep you from getting the organization into a difficult situation.

Assess what the organization needs to do that it hasn't already done in order to qualify for third party payment. There are some extremely important pieces to this assessment, in addition to simply taking an inventory of your services, staff, facility, and administration to see how you match up to the payers' criteria for an approved provider.

  • If you have to make major changes -- hiring new staff, building accessible bathrooms -- be sure that the increase in revenue and the other benefits you expect from third party payment are great enough to offset the expense of these changes.
  • If you have to hire more certified people, think carefully about how this can best be done without compromising what's important about your organization. You need to think about how the whole procedure will affect current staff members. Moreover, if you want to attract qualified people and want them to stay, the organization has to offer some incentive: good pay, excellent working conditions, unusual professional opportunities, or some combination. You must also be clear about how you want to offer services, and what kind of person is most likely to fit in with the organization and its needs. 

Many Ph.D. and MD-level practitioners split their working lives into several part-time consulting jobs. It may be cheaper and/or better for the organization to hire such a person for a few hours a week at a set rate per hour, than to pay a large salary and benefits for a full-time person. By the same token, you may have a greater choice of people under those circumstances than if you were looking for a full-time staff member.

Make sure record-keeping and bookkeeping systems are adequate to track your records, financial and otherwise, in the ways you'll be required to if you're receiving third party payment.

Develop a plan for making and maintaining the necessary changes. This may actually be a great opportunity to examine and improve your organization. Maybe it's actually time to consider looking for new space. Maybe your policies and procedures need to be revamped. Maybe it's even time to reexamine your mission. Seize the day!

In many cases, developing and embarking on a plan can get you provisional status as an approved provider, with an agreed-upon period in which to complete the plan. In this situation, as long as you fulfill certain minimum requirements, you can bill the third party while you work to get everything else in line.

The plan should include, in addition to a list of the actual changes you'll need to make in services, personnel, your physical space, and administrative procedures:

  • Regular communication with third party payers.
  • Communication with your target population, so that they know that you're working on offering third party billing for your services, and approximately when you hope that will start.
  • A scheme for evaluating the effects of the changes on the overall mission and health of the organization.

Carry out the plan. Some things on your list may take a while to accomplish. Start where you can, and start negotiating with potential third party payers right away. You may be able to get provisional approval and start sooner than you thought.

Continue to assess and evaluate the effect that third party payment is having on your organization. Don't be afraid to change direction if you think that the changes you've made are having negative effects on the organization that aren't outweighed by the increase in income and other advantages you've gained through third party payment. Make sure that the expense of tracking your finances and increased administration are not canceling out your gains. Most importantly, be extremely careful that your organization's new responsibilities and directions aren't causing you to forget your mission, the reason the organization started in the first place.

Communicating and maintaining relationships with third party payers

Once you have actually qualified as an approved provider, and have started being paid for services by insurance companies and other third parties, it is extremely important to maintain good communications with these payers. As explained above, third party payment can be a double-edged sword: there are disadvantages, many of them bureaucratic, as well as advantages to the system. The best way to keep problems at a minimum is to establish good channels of communication and keep them open.

Some particularly important points to consider:

  • As with any other situation involving human beings, a good part of how easily you and your payer can work together will depend upon personal relationships. It's important to establish good relationships with the people you need to deal with in the payer organization. Besides making everyone's life more pleasant, maintaining friendly relationships can mean that people at the other end won't hold up your checks, will hurry things along at their end of the line, and will bend a rule occasionally to make your work a little easier. All this will make it easier for your organization to respond to their requests as well, thus further improving relationships over time.
  • Depending upon the amount of third-party billing and the level of bureaucracy involved, it may make sense for you to hire or designate a specific person to handle relations with payer organizations. He would be the contact person for all your dealings with payers, would deal with problems and issues, and would keep things flowing smoothly. This is often not the job for a visionary leader, but rather for someone who functions well in a bureaucracy. Having such a person will make it easier for your organization to maintain real communication with your payers.
  • Things are constantly changing in the world of third-party payment. HMO's, for instance, essentially didn't exist until the 1970s; now they provide medical insurance for a large proportion of the population. The health and mental health care delivery systems are changing as this is being written: in ten years, they may be unrecognizable. It is necessary for any organization pursuing or collecting third party payments to stay on top of the situation. Keeping in close communication with payers is the best way to avoid surprises.

In Summary

There are distinct advantages and disadvantages to pursuing third party payment. Some obvious advantages are increasing the organization's income; stabilizing funding; serving a larger range of people, particularly the low-income population; and gaining credibility and respect for the organization. Many of the disadvantages of this course of action involve increased administrative and record-keeping responsibility, and the difficulties of dealing with a bureaucratic system. Perhaps the greatest danger here is that an organization can lose track of its mission, and begin to be guided by the necessities of billing, rather than by its original cause and by the needs of those it was founded to serve.

If you decide, after weighing the advantages and disadvantages, to pursue third party billing, you can prepare for it by making sure you have all the eligibility information you need; carefully assessing your organization to determine what changes you'll have to make to become an approved provider; and creating a feasible and comprehensive plan for making those changes and carrying it out. Once you gain approved provider status, you'll need to keep reassessing the effects of third party payment on your organization, and to maintain good communications and personal relations with people in the payer organizations.

If you have carefully considered its consequences and prepared well, third party payment can prove to be a great source of long-term financial stability and sustainability as well as overall improvement for your organization.

Online Resources

Most of the following resources are examples -- of client eligibility criteria, of administrative requirements, of certification requirements for various practitioners.

The Division of Special Services for Children at the University of Illinois, Chicago. In the Providers section, there are good examples of the kinds of criteria a payer might set. In addition, the descriptions of various programs give client eligibility criteria.