Growing Market for Medical Debt Paper Likely to Follow Financial Bailout

The pending U.S. bailout of Wall Street is likely to mean less buying power for consumers looking to handle everyday expenses and higher interest rates for businesses looking to finance operations and expansions.  As a result, hospitals burdened with rising uncompensated care expense may be increasingly eager to sell medical bad debt to get it off their books, said Kaulkin Ginsberg Healthcare Analyst Michael Klozotsky.

“Bad debt is just not sustainable anymore. Hospitals are concerned that given the economic crisis, they’re not ever going to collect on non-performing accounts,” Klozotsky said. He added that a greater number of hospitals will come to realize they’ll be losing money by trying to work some segment of their accounts themselves or only via a contingency strategy.

“Why not turn a bad situation into at least a mediocre one by selling some paper?” he said.

Klozotsky said he anticipates a marked increase in the volume of medical paper to hit the market over the next six months, creating good buying opportunities for experienced medical debt buyers who have been waiting on the sidelines for the market to settle after a run up in prices by newcomers. 

“There will be a supply-side boost,” he said. “When more paper enters the market, prices will have to come down. If you’re having a fire sale at the local furniture warehouse, you’re having it because you literally have to get a hold of cash.  Hospitals are not yet in fire sale mode, but they are certainly staring down some really dismal self-pay bad debt numbers and a picture of the economy in the toilet.”

Still, buyers need to be cautious, Klozotsky said. He said it would be a mistake for inexperienced medical debt buyers to jump into the market, regardless of their past experience with other types of consumer debt.

“That’s a recipe for disaster,” he said.  “Debt buyers in this market have to have a relationship with hospitals to understand how to buy appropriately in order to be profitable.” And he said it’s essential for medical debt buyers to have an arrangement with a skilled collection agency, whether the collector is owned by the debt buyer or under contract to collect on the paper.

“When the economic horizon is uncertain or, as is the case now, downright gloomy, debt buyers and their financial backers tend to be more careful,” Klozotsky noted. “Risk speculation tends to get reigned in when the economy is weak.”