Sliding Scale Fees: Meaning, Criticisms, and Examples

What Is a Sliding Scale Fee?

Sliding scale fees are a type of tax or cost that may change depending on an associated factor. Such fees are designed to capture value according to the movement of an underlying variable; most commonly income.

For example, in the case of healthcare, an individual with a low income would pay less for services than someone with a high income. This type of pricing spreads out the consumption of goods and services, though it may reduce consumption for the wealthy.

How a Sliding Scale Fee Works

The concept of sliding scale fees is to introduce fairness. For example, a hospital may not charge a poor or uninsured patient the market value of the medicine that they receive for an ailment because they cannot afford it, but the hospital may charge a wealthy or insured patient the market value.

Companies and organizations can make up revenue shortfalls by providing below-market price services to the less fortunate while taking advantage of grant funding or donations.

A business or organization adjusts product pricing using a sliding scale for many reasons. The company may want to be charitable to those less able to afford the product or service because they will receive a tax deduction for doing so. Alternatively, they might boost their reputation by offering lower-cost services, retaining longtime customers, or increasing referrals from their existing clients.

For medical care providers, sliding scale fees simplify billing and reduce the time and costs associated with dealing with insurance companies. Insurance companies can refuse to cover certain diagnoses and the associated treatments, and they can also require constant updates and authorization. The paperwork is often voluminous.

Criticism of Sliding Scale Fees

Some believe sliding scale fees are unnecessary, unwise, and problematic. The reason is that most sliding fee scales used by nonprofits and other entities base the fee on the financial condition of the billable party.

Critics of the practice contend that to implement such a policy properly, entities must ask for certain information and perhaps supporting documentation such as tax returns to verify the income of the billable party. Most private practitioners would rather not assume such practices.

Consequently, physicians and other practitioners establish a “usual and customary fee” and, typically, do not change their fees for different patients. If the patient cannot afford the fee, they are referred to another provider.

Financial Advisor Sliding Scale Fees

Financial advisors are paid in two ways: commissions or flat fees. If a financial advisor is paid in commissions, the more business they do, the more they will make. It is in their interest to sell as many financial products to clients as they can.

If an advisor earns their income via flat fees, they are paid the same regardless of how many financial products they sell. Some financial advisors charge a sliding scale; however, the sliding scale typically works in an opposite fashion than traditional sliding scale fees.

The higher the value of a client, the less of a fee they will be charged. So for example, a client worth $10 million may only be charged a fee of 0.05% whereas a client worth $5 million may be charged a fee of 1%. The smaller fees on the higher-valued clients still result in a significant number. This setup benefits those that are wealthiest.

Example of Sliding Scale Fees

Hospital ABC has a mental health clinic that seeks to treat as many patients as they can. Some of the specialty doctors in the hospital do not take insurance so clients have to pay out of pocket. The average cost of a patient visit is $500.

The hospital has implemented a sliding scale fee structure for treatment. Based on specific incomes, the cost per patient visit will vary, from $100 to $700, with the lowest income earners paying $100 and the highest paying $700.

The Bottom Line

Sliding scale fees are fees for services that are adjusted depending on an individual's income. They are set usually to allow for fairness and to address income inequality. The higher your income, the more you will pay, the lower your income, the less you will pay. This allows everyone to have access to the service as well as allowing the service provider to remain in business.