Bad Debt Expense Up at For-Profit Hospitals

After three quarters of declining or stabilizing bad debt expense, for-profit hospitals saw their bad debt expense rise sharply during the third quarter, a trend that’s not likely to abate for several more quarters, says a Fitch Ratings report. 

According to Fitch’s For-Profit Hospital Industry Quarterly Diagnosis, the sector’s adjusted bad debt expense as a percentage of revenues increased from 19.4 percent a year ago to 21.2 percent during the quarter ended September 30, 2009.  Adjusted bad debt expense is comprised of bad debt, charity care and uninsured discounts. In the second quarter of 2009, the sector’s bad debt averaged 20.4 percent, Fitch said.

Fitch Corporate Finance Director Lauren Coste blamed the recession and high unemployment rates for the bulk of the increases.

“Fitch believes this trend is directly related to the recession and the resultant increase in the uninsured population,” she said.

Coste said she expects pressure on for-profit hospitals’ bad debt expense and uncompensated care to continue for several more quarters because improvements in unemployment rates tend to lag the overall economy.

“I don’t know if it will increase more, but it’s going to stay high and potentially increase a little more into the fourth quarter and into next year,” Coste said. “I’d say the earliest we can expect improvement would be in the second half of next year.”

Although hospitals have made significant operational gains, particularly in the areas of labor costs and their credit profits, Fitch said industry revenues could be pressured by weaker pricing from declining managed care claims.

Kaulkin Ginsberg Analyst Michael Klozotsky said the report confirms that health care remains a growth market for the account receivables management industry.

"The advantage to ARM professionals is that we’ve anticipated this all along," he said.

Klozotsky expects hospitals will need professional ARM services more than ever. But he warned that the news isn’t all good.  Klozotsky said given the economy and budgetary issues that hospitals face, many administrators will do everything they can to drive down fee rates for collection services.

"Expect hospitals to drive harder bargains," Klozotsky said. "They will be trying to get the most dollars recovered for the cheapest rate."

Collection agencies may have to accept lower fees to get the work, but performance and diversification of service offerings may help mitigate those sacrifices, Klozotsky said.

"Healthcare collection agencies and revenue cycle management companies may have to bite the bullet on fee rates, at least initially, but if their performance is solid or they can service multiple lines of business, even conceding that some lines might be loss leaders for others, they may be able to achieve greater market share with a hospital client," he said.

According to the report, of those companies reporting uninsured discounts and charity care, LifePoint Hospitals Inc., recorded the lowest adjusted bad debt as a percentage of revenues at 15.1 percent, followed by Community Health Systems with adjusted bad debt expense at 19.3 percent as a percentage of revenue.

Health Management Associates, Inc. recorded the highest bad debt expense at 25.7 percent during the period.