Medical ARM Market to Grow, Even Under Universal Healthcare: Analyst

“With the election and the economy as bookends, the current state of the healthcare industry — plagued by regulatory changes, insurance quandaries, and bad debt — has become a kind of war zone,” Michael Klozotsky, analyst for Kaulkin Ginsberg, told those attending the ACA International’s annual Fall Forum in Chicago Thursday. “Indicators now suggest that the economic trends impacting the healthcare segment of the ARM industry will not be short-lived, and will continue to impact recoveries well into 2009.”

Klotzotsky pointed to the continued weak economic reports and their historical impact on health care payments. A one percent rise in the nation’s unemployment rate is projected to increase the number of uninsured by 1.1 million and result in an additional 1 million (600,000 children and 400,000 adults) enrolling in Medicaid. Unemployment has been steadily climbing in 2008, with the Labor Department Friday reporting an additional 240,000 jobs lost in October and an unemployment rate of 6.5 percent, up from 4.9 percent in January.

Bad debt expense in the for-profit hospital sector is expected to grow 15 percent to 17 percent in 2008, reaching more than $14.5 billion.

Meanwhile, healthcare collection reforms enacted in Illinois, California, North Dakota, and Nevada will further regulate how hospitals and service providers collect delinquent medical debt. Many states’ healthcare reforms are “on hold” due to current economic conditions, Klotzosky added.

“The two main parties — patients and providers — involved in “conflicts” over medical receivables view themselves as having been conscripted into a war not of their own making, and that fact is both a challenge and a weapon for ARM companies in the healthcare market,” Klotzosky said. “The simple truth is that changes promised and/or implemented by new administrations, in this and every election cycle, come to fruition very slowly, if ever.”

The recently approved bank bailout plan means that the newly elected administration is unlikey to make any quick changes to the health care system, Klotzosky added. Just after TARP was approved, the Office of Management and Budget and the U.S. Department of Treasury announced that the fiscal year 2008 federal budget deficit was $454.8 billion; some analysts predict that the fiscal year 2009 deficit might exceed $700 billion.

With those deficits, there’s no additional money for health care reforms. In short, healthcare collection agencies and medical debt buyers troubled by how “The Spectre of Universal Coverage” or “The Era of Big Insurance Vampires” (depending on one’s perspective) might impact their ability to profit from healthcare collections post-election should simply take it easy, loosen up, and relax, Klotzosky said.

He cited several reasons for the health care collections market to continue to thrive for the next several years.

– Outside of the estimated 45 million Americans who lack health insurance, a 2008 report by the Commonwealth Fund indicates that 25 million Americans are underinsured; rates of underinsurance among families earning more than $40,000 a year nearly tripled from 2003 to 2007.

– The current cash market for uncompensated care expenses is made up of medical bills not covered by private or public insurance, excluding the cost of catastrophic care; this figure represented $265 billion in out of pocket consumer payments in 2006.

– Half of uninsured households had $600 or less in total assets (not including their house and cars) in 2004, compared to median assets of $5,500 for insured households.  Moreover, after households’ debts are subtracted from assets, the median net worth of uninsured households drops to zero — leaving many of the uninsured with no financial reserves to pay unexpected medical bills.

– Since 2001, premiums for family coverage have increased 78 percent, while inflation has increased by 17 percent and wages have gone up only by 19 percent, according to the Kaiser Survey of employer health benefits.

– In 2009, the combined average premium and out of pocket healthcare costs for U.S. workers are expected to increase by 9 percent; annual wage gains for American workers average less than half that (between 3 and 3.5 percent in 2008).

Even in overly simple terms, the myth of “nothing to collect” under a universal health care system becomes a paradox if un- and underinsured patients have “no remainder” in the face of rising healthcare costs, including insurance premiums and prescription drugs, Klotzosky noted.

“According to ARM industry executives, the down economy will stimulate new approaches to the collection of delinquent healthcare paper,” Klotzosky said. “Broad ARM service offerings and a ‘partnership presence’ with healthcare creditors in a given community — as well as promoting job creation, etc. — are likely to provide positive social capital.”

Klotzosky conceded that the economy is in a recession, and that the healthcare market in ARM, like the larger industry, is recession-resistant, not recession-proof. But the good news is that the ARM industry ordinarily follows a LIFO accounting structure. So the current economic climate will mean increased placement levels and declining liquidation rates, though placements may start to level off as well.

Hospitals, burdened by rising uncompensated care expenses and facing restricted access to credit, may be more eager to sell portfolios of delinquent accounts; investment cash flow being deployed as capital source vs. supplement, Klotzosky added. Empirical evidence suggests that many healthcare agencies’ 2008 revenues will at best be flat, with some reports of 10-12 percent declines compared to 2007.

“The broad healthcare crisis is deepening and will increase the need for diverse healthcare receivables management solutions,” Klotzosky said. “Political change and economic uncertainty can be catalysts for growth and reinvention in the emerging healthcare collections market.”

Editor’s Note: Kaulkin Ginsberg is the parent company of insideARM.com