Understaffed and overwhelmed by managed-care collection hassles, hospitals and health systems are watching millions of dollars in potential profits slip away as they write off record amounts of revenue to bad debt.
The situation worsened last year, stunting the profits of investor-owned chains and private not-for-profit providers to the tune of $12.8 million per hospital, on average.
That figure reflects bad-debt write-offs tracked by Hospital Accounts Receivable Analysis, an industry benchmarking report produced by Aspen Publishers, Frederick, Md.
"It's a serious problem. In fact, it's getting more serious," said David Zimmerman, president of Zimmerman & Associates, a Hales Corners, Wis.-based healthcare receivables consulting company. Hospitals could write off a scorching $20 billion to bad debt in 2000, up from $16 billion to $17 billion in 1998, according to Zimmerman's estimates.
The numbers are shocking because hospitals are writing off almost as much as they are clearing. In 1997, aggregate profits rose 3% to $21.9 billion, according to the American Hospital Association's latest data (Jan. 11, p. 2). That year, hospitals spent $18.5 billion on uncompensated care, which includes charity care and bad debt.
Charity care is treatment provided with no expectation of payment. Bad debt represents the cost of care for which payment was expected but not received.
Financial analysts and experts on accounts receivable offer different reasons for escalating uncollectibles. For one, copayments and deductibles are rising, which means hospitals must work harder to collect the patient-pay portions of medical claims. The growth in outpatient services also has contributed to the growth of self-pay accounts.
But instead of focusing on collecting self-pay accounts, back-office workers are chasing managed-care payments.
Patient accounts managers are feeling the heat. Joanne Kimmons, director of patient financial services at 397-bed DeKalb Medical Center in Decatur, Ga., shared a recent blood-boiling exchange she had with a representative of a local Medicaid HMO, which is going out of business.
Kimmons had phoned the Atlanta-based plan, called Family Plus Health Plans of Georgia, and spent 25 minutes on hold before hanging up. Two days later, a plan representative called to complain that DeKalb, a member of Atlanta-based Promina Health System, had balanced-billed a patient.
Kimmons, who acknowledges the error, blew up. "They are sitting there with a half-million dollars of our money," she said.
The red tape created by managed care is hamstringing Kimmons' 37-member staff. DeKalb has precious little time to devote to self-pay accounts, but its bad debt has swelled by $7 million over the past two years. It now represents $28 million, based on annualized 1999 figures.
Elie Radinsky, a director at Standard & Poor's, said managed-care plans are denying more claims and taking more time to pay providers. If a plan delays payment-even by 20 days-to bolster cash flow, "you're talking about major dollars," he said.
Rising bad debt had a hand in Standard & Poor's decision last month to lower Quorum Health Group's corporate credit, bank loan and subordinated debt ratings. The downgrades forced the Brentwood, Tenn.-based system further into "junk" territory.
Radinsky said ballooning bad debt is affecting the numbers of publicly traded healthcare systems across the board.
Tenet Healthcare Corp., for one, recently reported an increase in bad debt expense, contributing to depressed earnings of 40 cents per share for the quarter ended Nov. 30, 1998. Bad debt sapped about 9 cents per share out of the Santa Barbara, Calif.-based healthcare chain's bottom line compared with the prior year, according to Paul Russell, the company's chief financial officer.
Russell said the hit was caused by factors including longer delays in receiving managed-care payments. The longer a claim goes unpaid, the more money Tenet reserves against that receivable, he said.
Furthermore, as employers pass more of the cost of care to workers, "the percentage owed by the patient is beginning to increase," said Dan Rode, a technical director with the Healthcare Financial Management Association in Washington.
With consumer debt piling ever higher, healthcare providers face stiff competition in collections, analysts said.
The main problem is hospitals are failing to do enough to collect payment upfront, said Allan DeKaye, president and chief executive officer of DeKaye Consulting, an Oceanside, N.Y.-based financial and operational consulting firm.
Nationally, bad debt swelled to an average of 4.3% of hospitals' gross revenues in 1998, up from 3.8% in 1997, according to Hospital Accounts Receivable Analysis.