Bad Debt Plagues Hospital Industry

Uncompensated care and bad debt expense continued to plague the for-profit hospital industry in the second quarter ended June 30, and the problem will persist unless legislation to reduce the number of uninsured is adopted, according to an August report by Fitch Ratings Co.

“Bad debt and uncompensated care remain one of the most significant challenges for the industry,” according to the report by Fitch analysts Lauren Coste and Michael Weaver. “Rising bad debt expense, uncompensated care and/or self-pay admissions growth was reported by every provider in the industry.” 

The report notes that the industry’s average bad debt expense, as a percentage of net revenues, was 10.7 percent in the second quarter, compared to 9.2 percent in the second quarter of 2006. The industry’s total uncompensated care, excluding Tenet Healthcare Corp. and Triad Hospitals Inc., reached 19.3 percent of revenues. Community Health Systems purchased Triad for about $6.8 billion in July. 

Of the seven hospital chains Fitch analyzed, LifePoint Hospitals, Inc. and Health Management Associates had the worst track record for collecting bad debt. According to the report, LifePoint’s bad debt expense increased to 12.4 percent during the quarter, up 200 basis points when compared to the second quarter of 2006. Fitch attributes the higher debt expense to price increases, outpatient growth and deteriorating collections.  

Meanwhile, HMA had $39 million in bad debt expense in the second quarter because of deteriorating collections. Fitch said HMA expects to record bad debt expense at 12 percent of sales for future periods, when historically it has recorded bad debt expense between 7.5 percent and 9 percent of sales, excluding special charges. The increase to 12 percent is due to three changes that HMA has made to its accounting methodology in less than two years, which Fitch says will continue to pressure HMA’s earnings.  

Tenet and Universal Health Services were the industry’s best performers with bad debt as a percentage of sales coming in at 6.8 percent and 8.7 percent, respectively, during the quarter.  

Fitch credits UHS’ behavioral health business for its low debt expense ratio because it has fewer instances of unpaid care and better collections. Tenet’s performance, meanwhile, does not reflect discounts to the uninsured, which Tenet stopped reporting in the first quarter. 

The providers are at different stages of implementing centralized billing, point-of-service collections, and screening of emergency to non-emergency situations to improve their billing and collections activities, according to Fitch. But uncompensated care expenses are unpredictable because providers are required to treat patients in emergency situations.