Bad debt rising: when to sell your accounts receivable

Healthcare Financial Management, August, 2004

They merged their identities, their facilities, and their mission statements. And then they attempted to merge their bad debt. In the case of two large Midwest hospitals that merged in 1997, determining what to do with a combined bad debt of more than $100 million was one of the most difficult decisions hospital administrators had to make. Faced with the challenge of how to address the hospital's unpaid accounts receivable was a team of financial executives from the two hospitals--the CFOs, patient accounts directors, and controllers.

Debbe Winkle, former interim director of patient accounts for one of the hospitals, was on the team. She recalls that, following the merger, leadership was focused on such things as combining the two hospitals' computer systems and determining which accounts were at which collection agencies. "The last thing we wanted to be dealing with was bad debt," she says.

One option the team explored was moving the accounts from a primary, agency to a secondary agency. "Not all of us wanted to pursue that option," says Winkle, who owns Outsource Receivable Services in Indianapolis. "Once you've written your A/R off to bad debt and sent it somewhere else, it can be very cumbersome transferring all that data from one agency to another."

The hospital's other option was to sell its bad debt. In the 1990s, however, it was rare for hospitals to sell their accounts receivable to a debt buyer, and Winkle and the rest of the team wanted to ensure that the hospital maintained a positive image in the community. "Our number one concern was that once we sold the accounts, we would lose all control," Winkle says. "We didn't want a bunch of bad public relations in the community, especially right after a merger."

Winkle is not alone in her fear. In fact, the major concerns expressed by CFOs and other hospital leaders who are considering selling their bad debt are, Will I lose control over my patient accounts? And will this result in bad public relations for my hospital? As Winkle found, choosing a debt buyer carefully can help hospital leaders remain in control throughout the process.

"I was skeptical at first," admits Winkle. "All of us in patient financial services deal with angry patients, and the last thing we wanted was to make them more angry. But when we sold our debt, we maintained control through the entire process. I don't remember hearing any patient complaints during or after the sale."

An Industry Perspective

According to Dennis Hammond, executive director of the Debt Buyers' Association, the sale of bad debt is on the rise. Hammond estimates that approximately $50 billion worth of bad debt is sold each year.

Most bad debt sales comprise credit cards (70 percent), followed by auto loans, telecommunications, and the retail business. According to Hammond, healthcare debt currently makes up only a small percentage of sales. Some believe this is a growth area, particularly in light of the rising bad debt in hospitals and the compression of their operating margins.

To those without an extensive background in health care, the prospect of purchasing bad debt is daunting. However, although these issues are complicated, they can be and have been resolved by specialists who buy healthcare bad debt. At the same time, the public relations concerns of healthcare providers are significantly different from those of lenders and credit card companies.

Although the concept of selling bad debt is attracting the attention of hospital CFOs and financial managers, the recent negative publicity surrounding billing and collection practices has forced closer scrutiny, and compels hospitals to be cautious in choosing a partner for A/R placement. The Wall Street Journal has recently published numerous articles highlighting hospitals' use of extreme collection practices. (1) As a result, hospitals throughout the country are reevaluating their billing and collection processes.

Concerns about aggressive collection practices and charges paid by the uninsured have led to a formal probe by the U.S. House of Representatives House Energy and Commerce Subcommittee on Oversight and Investigations. Also, in June 2003, the American Hospital Association sent an advisory to its members urging them to review their billing and collection policies and practices, consider revisions, and assess how their policies are actually carried out by staff who work with patients. HFMA's PATIENT FRIENDLY BILLING[R] project also provides tools and guidelines to help improve the situation.

Many hospital administrators argue that they are struggling to make ends meet because of the increasing number of self-pay accounts and uninsured patients (more than 40 million nationwide). According to Zimmerman & Associates, self-pay accounts result in the highest number of gross days revenue outstanding in hospitals--208 days, compared to a national average for overall gross days revenue outstanding of 64 days. (2)

Therefore, more hospitals are looking for new ways to manage their bad debt. If you are a CFO or director of patient financial services and you want to realize some value from all the bad debt you have charged off over the past few years but don't want to create patient complaints or PR problems, what should you do? How do you reconcile these seemingly inconsistent goals?