U.S. hospitals see overall rise in bad debt, but regional differences are striking

Healthcare Financial Management, March, 2005

Managing bad-debt expense is a time consuming challenge to the financial performance of hospitals. Although improved processes and locus on management of the revenue cycle can greatly mitigate its impact, the realities of uncompensated care require constant attention to minimize bad debt.

Current trends in bad debt are reflected in quarterly information from fourth quarter 2002 to third quarter 2004 obtained from 450 hospitals across the nation. For analytical purposes, the hospitals were divided into comparative groups, including an all-hospitals group, a teaching group, a non--teaching group, and nine regional groups. A review of the median and average bad debt percentages for selected national and regional comparative groups during the third quarter 2004 discloses a dramatic variance between regions. The Middle Atlantic region had the lowest median and average bad -debt percentage while the West South Central region had the highest--about three times higher than the Middle Atlantic.

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Looking at the all-hospital group, during the third quarter 2004, average bad-debt expense climbed to 3.58 percent. After five quarters of consistent performance, average bad debt returned to levels last seen in the fourth quarter 2002 (3,66 percent).

A comparison of the 50th percentiles and averages for all hospitals of four key financial statistics--gross patients accounts receivable, allowance for doubtful accounts, net operating revenue, and bad debt expense--provides a snapshot of the hospitals' current circumstances. These trends and observations underscore the importance of monitoring and managing the impact of bad debt on a hospital's financial performance.

MEDIAN AND AVERAGE BAD-DEBT
PERCENTAGES FOR SELECTED REGIONAL
COMPARATIVE GROUPS, Q3 2004

                                  Compare
                        50th       Group
Census Region        Percentile   Average

East North Central      2.44       2.80
East South Central      3.86       4.09
Middle Atlantic         1.54       1.66
Mountain                3.66       5.07
New England             1.83       2.22
Pacific                 1.77       3.50
South Atlantic          4.49       5.04
West North Central      1.90       2.23
West South Central      5.33       5.47

KEY FINANCIAL INDICATORS, ALL HOSPITALS, Q3 2004

                                                       Compare Group
All-Hospitals Comparative Group      50th Percentile      Average

Gross Patients Accounts Receivable     $52,459,903      $87,979,212
Allowance for Doubtful Accounts         $7,279,992      $15,265,968
Net Operating Revenue                  $43,442,258      $62,875,179
Bad-Debt Expense                        $2,705,317       $4,316,697

This month's Data Trends was developed by Solucient LLC. For more information, please contact Phil Gaughan at pgaughan@solucient. com.