Changes in the Healthcare Industry that will Impact ARM Companies

Like the accounts receivable management industry (ARM), the healthcare market is often incorrectly characterized as being recession proof.  In reality, economic developments and regulatory trends are converging to pose significant challenges to healthcare organizations and thus to the ARM companies they employ. If your firm services hospital or medical accounts, there are a number of possible scenarios to keep in mind as you look at your strategic business initiatives.

Economic Recession Strains Healthcare
Healthcare is a relatively robust industry, but it is not immune to the effects of the economy at large.  Due to frozen credit markets, many hospitals are unable to secure funding for capital expenditures, and are scaling back or eliminating growth projects.  At the same time, recent regulatory mandates including the FTC’s “red flag” requirements and changes to IRS Form 990 put healthcare providers in a catch-22 because compliance will in many cases demand Cap Ex outlays.  Providers’ cash flow is also impacted by patients’ ability to pay medical bills, and this has been stressed by current recessionary pressures, soaring healthcare costs, and rising self-pay populations. In addition, many healthcare organizations are reporting significant cuts in Medicaid reimbursements. All of these factors are converging to force healthcare providers to make do with less.

These pressures ultimately create opportunities – and challenges – for ARM companies that service the industry. Hospitals with weaker balance sheets may seek to consolidate with larger organizations. This has the potential to trickle down to their network of service providers, as we’ve seen previously among healthcare providers and, in more recent years, in other industries such as in the financial services sector.  When consolidation occurs among hospitals, ARM companies client bases are likely to shift as well.  ARM service providers should be aware of this consolidation, as it may represent the loss or gain of clients.

With healthcare organizations facing reduced cash flow and increasing bad debt loads, it is no leap to project that placement volumes will remain high for the foreseeable future. We think that liquidation rates will improve, but part of this has to do with healthcare spending. By the middle of this decade, healthcare spending as a percentage of GDP is expected to be roughly 20%. Short-term, we see stagnation in spending, as patients forego elective procedures or cut back on their willingness or ability to make medical bill payments, but the long-term growth trend represents a real boon to healthcare ARM companies.

Why? Short-term stagnation in cash flow means that hospitals will have to do more with less. If your company can provide integrated services among diverse product lines, there are opportunities to deliver sustainable value to your clients in the face of their cash shortages. You will have an excellent “foot in the door,” once the economy recovers and as patient spending increases.

Regulatory Impacts on Healthcare
Despite the pressing financial issues on federal and state government agendas, healthcare appears to be a renewed priority. In April alone, Senate Democratic leaders Baucus (D-Mont.) and Kennedy (D-Mass.) announced plans to submit separate drafts of healthcare overhaul bills to the President by June.

We’ve already seen legislation enacted on the federal level for the State Children’s Health Insurance Program (SCHIP), for COBRA expansion – which now is paying 65% of premiums for those who are unemployed for up to nine months – and required healthcare Information Technology expenditures.  In addition, the FTC’s “red flag” rules are now in full effect for healthcare providers and their ARM industry partners after a 6-month enforcement deferral.   I think you’re going to see legislators address some form of comprehensive insurance coverage in 2009, and a public plan will probably be well in the works by the beginning of 2010.

I have two takeaways for ARM companies about federal healthcare reform. One: public plan coverage is coming, in one form or another. However, you shouldn’t fear it. It’s not in fact going to make collection opportunities go away. It’s simply going to shift them to different kinds of collections in different areas.

Two, charity care reporting and the IRS rules for Form 990 Schedule H on what providers are doing for community benefit is going to come under increased scrutiny. Hospitals will need to carefully detail how they report charity care buckets, tax-exempt bonds, and lobbying activities, etc.  If you as a broad-based service provider for a hospital client can assist in scoring and segmentation analytics of patient populations or provide other services beyond traditional collection activities, significant advantages will accrue for you from a growth perspective.

Michael Klozotsky presented the healthcare market overview during Kaulkin Ginsberg’s Executive Conference Call “ARM Industry Update: M&A Activity, Q109 Sector Performance, and Strategies for Growth” held April 22, 2009. For more information on the Call and the CD/transcript available, please visit: www.insidearm.com/go/executive-conference-calls/arm-industry-update.

Michael Klozotsky provides advisory services and conducts market analysis on the accounts receivable management industry, with a focus in the healthcare market. Contact Michael by email or at 240-499-3836.