Ask the Experts: The Future of Healthcare ARM

Question: More than a year after legislative reform efforts gained legitimate footing, what does the future hold for the healthcare ARM market?

Answer: (from Michael Klozotsky, Analyst, Kaulkin Ginsberg)

Since the debate over healthcare reform took its place at stage right (while the economy, out of necessity, occupied center stage) in the national conversation, much uncertainty has surrounded government intervention’s potential impact on healthcare collections.  Some of that trepidation was understandable and warranted, while other aspects were less so.  Although it is practically impossible to address every effect of a legislative overhaul of the U.S. healthcare system on medical collections, I would like to speak to what I know thus far.

The sky over healthcare collection agencies is not falling

Two days after the presidential election in 2008, I addressed a group of ARM industry executives at ACA’s Fall Forum.  The recurring premise of that lecture was that federal healthcare reform—in whatever form it ultimately came to pass—would not signal the death knell of medical collection agencies.  I maintain that assertion today, and will continue to affirm its validity in 2010.  Healthcare spending in the U.S. will soon equate to one in every five dollars spent in this country.  And since 2000, healthcare premiums have risen 95% while income has grown by less than 18 percent.  Whatever remedy federal healthcare reform brings to American citizens, people will still become sick, and the substantial delta between patient portion and third party payers versus healthcare costs will continue to produce uncompensated care that will need to be recovered.

Politics and the business of healthcare collections are not one in the same

Without delving into a lengthy discussion of the political fuss that has surrounded the current healthcare debate, owners and executives of healthcare ARM companies would do well to keep the distinction between socio-political and business concerns squarely in front of them.  Much of the delay in passing reform legislation has come as a result of partisan squabbles in Congress, arguments over federal funding for abortion, philosophical disagreements about the appropriate reach of government into the decisions of individuals and corporations, and fanatical rumors about the creation of “Death Panels” as a component of a revamped healthcare system.  These factors have undoubtedly encumbered the legislative process, but they bear little to no weight on the collection of past due medical bills.

It’s the economy, stupid

Apprehension about reform efforts among healthcare ARM professionals has been heightened by the very real consequences of the current economic recession on their collections businesses.  Amid lower liquidation performance, downward pricing on fees, increased client pressure to perform in spite of the economic crisis, compulsory staffing reductions and tightened credit markets, the possible implications of healthcare reform would seem on the surface of things to rub salt into an open wound.  But even if healthcare reform isn’t a panacea for the dysfunctional U.S. healthcare system, neither should it become a scapegoat for the ailing ARM industry.  The ongoing challenges in the healthcare market are analogous to those in other segments of the collection industry as a whole, and medical collection agencies, debt buyers, and technology vendors should instead leverage the opportunities created by the economic climate to grow their businesses. 

Business as usual is a losing proposition

One high level approach to emerging from the economic instability of the last 18 months for healthcare ARM companies is to adopt the metaphor of legislative reform as a call to action for remodeling their own business practices.  This is healthcare reform as a beacon rather than an anchor.  While admittedly not without significant obstacles, the following strategies encapsulate what I know thus far for success going forward.

• Sustained high levels of unemployment, though a detriment to liquidation rates, will virtually ensure the need for healthcare providers to outsource their delinquent receivables.

• As the concept of portfolio sales gains greater traction among providers and as access to patient and affordable capital increases (however slowly), the healthcare debt buying market will grow and mature.

• Notwithstanding difficult staffing reduction decisions in 2008 and 2009, the healthcare collections market is well disposed to employing innovative scoring and analytics systems to offset reductions in FTE.

• As providers seek to drive down fee rates, make time in your 2010 business planning to do a reverse assessment of the profitability of your customers and, when appropriate, make the tough decision to shake up your client mix to achieve bottom-line growth.

• As provider organizations look to reduce the administrative costs and time associated with managing their ARM industry partners, actively pursue original and diverse service offerings for your clients.  When internal diversification isn’t feasible, consider strategic partnerships with other ARM companies that provide complimentary services—not only to preserve existing client relationships, but to expand market share from new alliances.

• Get ahead of reform.  When—not if—reform legislation passes, one of the most valuable assets a healthcare collection agency can possess is a business model that champions professionalism, reinforces education and training, and mandates strict regulatory compliance.

Michael Klozotsky supports various types of M&A engagements and related advisory assignments, including sell-side and buy-side representations, for Kaulkin Ginsberg. Michael also provides expert analysis of the healthcare receivables market. Check out Michael’s page, or contact him by email or at 240-499-3836.