For-profit hospitals find ways to cut the bad debt they carry

A study finds hospitals are doing better in collecting debt but also have changed accounting systems to better report bills that might never be paid.

By Karen Caffarini — Posted July 7, 2008

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Bad debt levels fell among for-profit hospitals in the first quarter of 2008, says a report by the international credit-rating agency Fitch Ratings.

Still, these hospitals continue to have a higher percentage of unpaid medical bills than physicians and nonprofit hospitals.

For-profit hospitals saw bad debt levels as a percentage of revenues fall from 18.4% in the fourth quarter of 2007 to 17.7% in the following quarter, said Fitch Ratings' recently released "For-Profit Hospital Industry Quarterly Diagnosis" report.

Past surveys by the Medical Group Management Assn. estimated physician practices' bad debt level in the 5% to 10% range. For nonprofit hospitals, Fitch said the percentage in 2006, the latest data available, was 5.5%. Bad debt is generally defined as payments that are written off as uncollectable.

Fitch analyst Lauren Coste attributes the decline in bad debt among for-profit hospitals in part to decreases in the number of uninsured patients at those facilities.

In addition, hospitals have been more aggressive in collecting co-payments up front and have improved efforts externally and internally to collect debt, she said.

This has balanced a change in for-profit hospitals' accounting techniques, Coste said. They have become more conservative in their assumptions concerning how many of their patients would pay for their services, which results in more debt being written off as uncollectable. Before, their accounting figures reflected a more hopeful collection amount.

Among for-profit chains, Tenet had the lowest bad debt expense in the first quarter of 2008, at 12.1% of revenues. But Coste pointed out that Tenet was one of the first to give discounts to the uninsured. "If you don't seek as much in revenue, you aren't exposed to as much bad debt," she said.

Coste said for-profit hospitals have a greater percentage of unpaid bills than nonprofit hospitals because they are concentrated in Texas and Florida, two states with large numbers of uninsured residents and also because they tend to be in urban areas. She said the bad debt levels in Texas and Florida are about 25%.

Physicians also are fighting to reduce their uncollectable debt, especially in the face of a sluggish economy and an increasing share of patient's responsibility.

"I'm seeing co-pays of $25 to $30, where before they were $5 to $10. For patients not doing that well financially, this hurts," said Andrew Merritt, MD, a family physician in Marcellus, N.Y.

Dr. Merritt has instituted several steps that have reduced his bad debt level substantially. He verifies patients' insurance information before they are seen, reminds patients that co-pays are due at time of service, calls about all open balances at 60 days rather than 90 and sends bills four times a month instead of once a month. For patients who do not bring money to their visit, he provides a stamped envelope and asks them to send a check that night, and lets them know he also takes credit cards.

If a patient is truly having financial difficulties, he has accepted as little as $1 a month at his rural practice in payment or dropped the bill altogether. "But if they come in drinking bottled water and driving a newer car than mine, then I expect to be paid."

While Fitch has not issued a report on nonprofit hospitals' bad debt expenses since last summer, analyst Jeff Schaub said their numbers are stable, "not migrating one way or the other." Schaub cited three reasons for nonprofit hospitals' stability: an expansion of charity care eligibility criteria so fewer of these patients wind up as bad debt, increased efforts to prequalify patients for Medicaid and up-front collection of co-pays.

On the other side, the increasing uninsured population is expected to continue to rise with the worsening economy, the costs of benefits will rise, and employers will continue to cut back on the amount they pay for insurance, Schaub said. "These factors even each other out."

Schaub said percentages of bad debt for the two hospital groups are not as far apart as they appear. He said the 17% figure among for-profits includes amounts for charity care and discounts from charges, items not explicitly reported for nonprofits. He said taking this into account, the true bad debt expense for for-profits is 10% to 12%.

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