The rising numbers of uninsured patients and higher insurance copayments and deductibles are beginning to show up in the financial statements of investor-owned hospitals.
Nashville-based HCA said last week that its provision for bad debts rose to 10.3% of revenue for the third quarter, compared with 8.3% of revenue in the year-ago quarter. HCA already had taken a $106 million charge to increase its bad-debt provisions in the second quarter (July 21, p. 19). Despite the jump in bad debt the chain's profits increased by nearly 50% in the most recent quarter.
Tenet Healthcare Corp., Santa Barbara, Calif., said last week that it would be taking a massive hit to its third-quarter earnings-a charge of $200 million to $225 million-to increase its bad-debt provisions. The company expects bad debt to account for 15% to 17% of revenue when it reports third-quarter earnings Nov. 11. As a result, Tenet said it would fail to reach the earnings targets it gave investors in June. Two bond-rating agencies, Standard & Poor's and Fitch Ratings, dropped their ratings on Tenet by a notch last week.
These announcements followed on the heels of Triad Hospitals, Plano, Texas, saying earlier this month that it would take a $50 million charge for bad debt in the third quarter (Oct. 20, p. 10). Triad plans to report third-quarter results this week.
Three other for-profit chains reported results last week-Community Health Systems, Health Management Associates and Universal Health Services-but all three managed to avoid the bad-debt bugaboo.
While the bad-debt problems of the investor-owned chains have become more visible, not-for-profit hospitals are struggling with the issue, too, analysts said. The increase in both uninsured patients and copayments and deductibles required by health plans seems to be affecting most hospitals, they said.
"I definitely think it's an issue," said Martin Arrick, managing director of the not-for-profit healthcare group at S&P. But Arrick said that for many not-for-profit hospitals, the effects of trends with self-pay patients are being masked by improvements in extracting payments from traditional third-party payers.
"When I'm just looking at the bad-debt number in a lot of cases, I'm not seeing a ton of movement one way or another," Arrick said. "Yet, by the same token, when I'm talking with people and asking them about the trends with bad debts and charity care and uninsured patients, they're identifying it as an emergent problem."
The problem will become even clearer when the gains from revenue cycle management level off, Arrick said. This balancing factor also may explain why the investor-owned chains are reporting more severe problems with bad debt, Arrick said, since for-profits have been quicker to improve their revenue cycle management.
Scott Johnston, an expert on revenue cycle management with the Healthcare Financial Management Association, said hospitals simply have a tougher time collecting from their patients than from insurers or the government. It's the difference, Johnston said, between collecting from perhaps as many as 200 third-party payers "to the thousands of patients that a hospital treats. It's smaller amounts on more people, which we just know is tougher to collect."
At the same time, critics are watching hospital collection processes very closely, Johnston said. The pressure placed on Tenet by a Latino advocacy group was a factor in Tenet's changing its policies on collections. The group, Consejo de Latinos Unidos, recently has focused on HCA's billing and collection practices and those of not-for-profit hospitals in markets such as Denver and Orlando, Fla. A congressional panel has conducted a hearing on the issue, and Connecticut passed a law that restricts the interest that hospitals can charge on overdue bills (Sept. 22, p. 32). The law is believed to be the first in the nation directed specifically at healthcare.
That scrutiny doesn't go away if a hospital outsources the collections process, Johnston said. "If they're doing it on behalf of the hospital, in the patient's mind, it's the hospital collecting, regardless if it's not," he said.
The keys to minimizing bad debt are asking patients to pay upfront, producing simple-to-understand bills and explaining the bill and the hospital's policies while the patient is still in the hospital, Johnston said.
The story goes beyond bad debt for both HCA and Tenet.
HCA said it is expecting slower growth in earnings because of the economy's effect in slowing patient volumes, a change in the Medicare outlier policy that went into effect Oct. 1, and the company's decision to change its collection policies for self-pay patients. HCA said it would cut its capital expenditures from $2 billion this year to $1.8 billion in 2004 and $1.6 billion in 2005, although no previously approved projects will be canceled.
Jack Bovender Jr., HCA's chairman and chief executive officer, said duting a conference call last week that the company will seek more growth in outpatient services, especially in free-standing facilities. HCA plans to organize a new outpatient services unit that will be led by a senior manager.
For Tenet, however, the problems go beyond bad debt and the economy. Tenet said that about 20% of its increase in bad debt is related to "disputes between certain managed-care companies in California and (Tenet hospitals) concerning substantial blocks of their past billings."
Since the furor over Tenet's strategy of increasing gross charges, or list prices, broke a year ago, insurers have sought concessions from Tenet, the company has acknowledged, with many observers believing that Tenet can't afford a messy, public fight over rates.