Bad debt rising: when to sell your accounts receivable

Healthcare Financial Management, August, 2004

Obtaining a Proposal from a Debt Buyer

Most debt buyers will conduct a comprehensive evaluation of a hospital before they provide the hospital with proposal. Pricing depends on a number of factors, including account type, age of accounts, payer mix, geographic re, on and demographics, average account balance, previous agency liquidation, and resale provisions.

A typical contract contains provisions including a description of the accounts (age, balances, etc.), whether the sale will be limited to archived accounts or will include forward flow accounts, and how the buyer will respond to questions from patients regarding the accounts. The quality of a purchaser's underwriting process and its contract is an early indicator of its level of professionalism.

Before entering into an agreement, hospital leaders would be wise to consider the following collection parameters (to be agreed upon in writing):

* Collectors will receive thorough training in the FDCPA and in any collection guidelines or ethical practices stipulated by the provider.

* Collectors will handle accounts with courtesy and professionalism, minimizing patient complaints.

* Collectors will be adequately monitored to ensure compliance.

* Collectors will be restricted or prohibited from using body attachments and liens on residences.

* Provision will be made for the hospital to recall accounts that may subsequently be identified as sensitive or requiring higher levels of attention.

* Collectors will be trained in and adhere to HIPAA privacy rules.

* Compliance will be confirmed from time to time.

After the Sale

Both the seller and the buyer have certain responsibilities following a sale of bad debt. The seller is responsible for providing the buyer with access to patients' a account records so the buyer can address any patient questions. Generally, this is handled in the same manner a hospital provides access to its primary agency. The seller is also responsible for forwarding any payments that are sent to the hospital on accounts that were sold to the buyer. The buyer's primary responsibility is to collect the accounts as agreed, using collection practices as discussed with the hospital and upholding the hospital's mission by positively managing its patient relationships.

At the end of the day, however, selling accounts is an individual decision. "At some point all the hassles and the headaches make it tempting to sell, but hospitals need to determine on a ease-by-case basis if selling their accounts is the best option for them," Winkle adds.

Traditional Healthcare Account Flow Strategy

        In-House             EBO/               Primary           Ware-
                            Agency              Agency            house
                           Follow
                            -up

 Dis-   Initial   Retain/   Insu-     Charge-  Collect-   Retire-  ?
charge  Billing    Out-     rance      Off     ion/Liti-  ment
 Day       &      source   Follow-up   Day     gation     Day
  0     Recovery    Day     Appeal     90-120  of Charge  270-360
        Process    45-60     Re-                -off
                            billing            Accounts

"Archive" Portfolio Estimation

Sample Memorial Hospital

Annual Gross Revenue                   $250,000,000
Average % Bad Debt (4.0%)              $ 10,000,000
Agency Liquidation (20.0%)             $  2,000,000
Other closures (20.00                  $  2,000,000

Annual Net Bad Debt                    $  6,000,000
Total Archive Portfolio (5.0 yrs)      $ 30,000,000

Annual "Forward Flow" Estimate

Sample Memorial Hospital

Annual Gross Revenue                   $250,000,000
Average % Bad Debt (4.0%)              $ 10,000,000
Agency Liquidation (20.0%)             $  2,000,000
Other closures (20.00                  $  2,000,000

Total Annual Forward Flow              $  6,000,000