As Recession Hits, Medical Bills are Likely to Go Unpaid

From housing to unemployment, the economic slowdown is pressuring hospital patients and that increases the likelihood that medical bills will go unpaid, says a recent Fitch Ratings quarterly report.

As a result, the ratings service expects the industry to continue to face high levels of bad debt and uncompensated care expense in 2008 as more people find themselves uninsured or have employer-sponsored plans that require higher co-pays and deductibles. According to Fitch’s “For-Profit Hospital Industry Quarterly Diagnosis,” the sector’s adjusted bad debt in 2007 totaled 18.3 percent of revenue, down from 19.4 percent in 2006.

“Although there have been some preliminary signs of improvement in bad debt expense over the past few quarters, Fitch does not expect this improvement to continue during 2008, particularly if the economy enters a recession,” according to the report from Health Care Facilities analysts Dire Lauren Coste and Robert Kirby.

Fitch also believes hospital operators will continue to be challenged by weak admissions growth and growing competition from not-for-profit hospitals that have benefited from investments and improving managerial practices.

“Although hospitals have increased their focus on outpatient business, Fitch believes that ambulatory surgery centers (ASCs) and entrepreneurial physicians have captured some of these patients,” the report says. “In addition, hospitals also face increased competition for inpatient business from specialty hospitals, which often focus on higher-margin services such as cardiac care or orthopedics.”

Despite the challenges, Fitch said it believes that performance in the overall for-profit hospital sector will remain stable and that operators are setting aside an appropriate amount for bad debt and other doubtful accounts. Fitch said several providers recorded special charges to bad debt expense that totaled more than $400 million in 2006 and 2007. The changes stemmed from methodology changes in reserving for bad debts. Still, Fitch said there is always the risk of unexpected reserves for bad debt if collection experiences deteriorate.