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.

Key Takeaways

  • Sliding scale fees change depending on an associated factor, such as income.
  • The fees are designed to introduce fairness to the market, particularly for low-income earners.
  • In the case of healthcare, a low-income earner would pay less for services compared to a high-income earner.
  • Companies and organizations can make up revenue shortfalls by providing below-market prices to the less fortunate while taking advantage of grant funding or donations.
  • To determine a sliding scale as a provider, a variety of factors have to be taken into consideration, such as costs, average fees in the area, desired salaries, and the number of clients.

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.

Many practitioners and businesses prefer not to introduce sliding scale fees because they must contend with the paperwork required to verify a client's financial situation.

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.

Some companies, such as Juniper Health, base their sliding scale fees on the Poverty Guidelines issued by the U.S. Department of Health and Human Services.

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.

How Do You Set Up a Sliding Scale?

To set a sliding scale, it is best to first determine the fee of the service you provide in the area. You can take a look at the lowest and highest fees and arrive at an average. You should also take into consideration all of the costs of your business as well as the salary you would like to make. Determine how many clients you will have and when taking into consideration all these factors, create a sliding scale that will allow you to achieve your desired monetary value.

How Do You Calculate Sliding Scale Fees?

Sliding scale fees can be calculated in a variety of ways as well as depending on the service being provided. The best method is to find out the average fee charged for a service in your area. You will have to take into consideration all costs associated with the service you provide and adjust the scale from there.

How Does a Sliding Scale Work for Therapy?

A sliding scale works for therapy in that the cost of therapy will depend on a person's income. If insurance doesn't cover therapy, it will need to be paid out of pocket. If a person's income is lower, the cost of therapy will be lower.

Conversely, if a person's income is higher, the cost of therapy will be higher. This method is employed by both private practices and non-profit organizations. This is done so that a practice can stay in business by charging regular rates to high-income earners yet still being able to provide access to mental health to those that can't afford it.

What Is the Sliding Scale for Inheritance Taxes?

There is a federal tax on inheritance income and in addition, some states tax inheritance income as well. As of 2021, there are 17 states that either have an inheritance tax, an estate tax, or both. In each state, the tax is on a sliding scale. The percentage that is taxed depends on the value of the estate. The higher the value, the higher the tax.

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.

Article Sources
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  1. AARP. "17 States With Estate or Inheritance Taxes." Accessed Dec. 10, 2021.

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