account receivable selling by tvault


									                                    Bad Debt Rising:
                                    When to Sell
                                    Your Accounts
                                    This project is a collaborative effort by
                                    Senex Services Corp. and the
                                    Healthcare Financial Management Association.

They merged their identities, their facilities, and their        One option the team explored was moving the
mission statements. And then they attempted to merge             accounts from a primary agency to a secondary agency.
their bad debt. In the case of two large Midwest hospi-          “Not all of us wanted to pursue that option,” says
tals that merged in 1997, determining what to do with            Winkle, who owns Outsource Receivable Services in
a combined bad debt of more than $100 million was                Indianapolis. “Once you’ve written your A/R off to bad
one of the most difficult decisions hospital administra-         debt and sent it somewhere else, it can be very cum-
tors had to make. Faced with the challenge of how to             bersome transferring all that data from one agency to
address the hospital’s unpaid accounts receivable was            another.”
a team of financial executives from the two hospitals—
the CFOs, patient accounts directors, and controllers.           The hospital’s other option was to sell its bad debt. In
                                                                 the 1990s, however, it was rare for hospitals to sell
Debbe Winkle, former interim director of patient                 their accounts receivable to a debt buyer, and Winkle
accounts for one of the hospitals, was on the team. She          and the rest of the team wanted to ensure that the
recalls that, following the merger, leadership was               hospital maintained a positive image in the commu-
focused on such things as combining the two hospitals’           nity. “Our number one concern was that once we sold
computer systems and determining which accounts                  the accounts, we would lose all control,” Winkle says.
were at which collection agencies. “The last thing we            “We didn’t want a bunch of bad public relations in the
wanted to be dealing with was bad debt,” she says.               community, especially right after a merger.”

                                                                                                            J U LY 2 0 0 4
                                                  Traditional Healthcare Account Flow Strategy

                                                          EBO/Agency                                Primary
                     In-House                                                                                                      Warehouse
                                                           Follow-up                                Agency

                       Initial                             Insurance                             Collection/

   Discharge                              Retain/                                Charge-                                 Retire-
      Day            Billing &              Out-           Follow-up              Off            Litigation of            ment
       0             Recovery              source           Appeal                Day             Charge-off              Day
                                            Day                                  90-120                                 270-360
                      Process              45-60           Re-billing                              Accounts

Winkle is not alone in her fear. In fact, the major con-                             To those without an extensive background in health
cerns expressed by CFOs and other hospital leaders                                   care, the prospect of purchasing bad debt is daunting.
who are considering selling their bad debt are, Will I                               However, although these issues are complicated,
lose control over my patient accounts? And will this                                 they can be and have been resolved by specialists
result in bad public relations for my hospital? As Winkle                            who buy healthcare bad debt. At the same time, the
found, choosing a debt buyer carefully can help hospi-                               public relations concerns of healthcare providers
tal leaders remain in control throughout the process.                                are significantly different from those of lenders and
                                                                                     credit card companies.
“I was skeptical at first,” admits Winkle. “All of us in
patient financial services deal with angry patients, and                             Although the concept of selling bad debt is attracting
the last thing we wanted was to make them more angry.                                the attention of hospital CFOs and financial managers,
But when we sold our debt, we maintained control                                     the recent negative publicity surrounding billing and
through the entire process. I don’t remember hearing                                 collection practices has forced closer scrutiny, and
any patient complaints during or after the sale.”                                    compels hospitals to be cautious in choosing a partner
                                                                                     for A/R placement. The Wall Street Journal has recently
                                                                                     published numerous articles highlighting hospitals’
An Industry Perspective                                                              use of extreme collection practices.1 As a result, hos-
                                                                                     pitals throughout the country are reevaluating their
According to Dennis Hammond, executive director of
                                                                                     billing and collection processes.
the Debt Buyers’ Association, the sale of bad debt is
on the rise. Hammond estimates that approximately
                                                                                     Concerns about aggressive collection practices and
$50 billion worth of bad debt is sold each year.
                                                                                     charges paid by the uninsured have led to a formal
                                                                                     probe by the U.S. House of Representatives House
Most bad debt sales comprise credit cards (70 percent),
                                                                                     Energy and Commerce Subcommittee on Oversight
followed by auto loans, telecommunications, and the
                                                                                     and Investigations. Also, in June 2003, the American
retail business. According to Hammond, healthcare
                                                                                     Hospital Association sent an advisory to its members
debt currently makes up only a small percentage of
                                                                                     urging them to review their billing and collection
sales. Some believe this is a growth area, particularly
                                                                                     policies and practices, consider revisions, and assess
in light of the rising bad debt in hospitals and the
                                                                                     how their policies are actually carried out by staff who
compression of their operating margins.
                                                                                     work with patients. HFMA’s PATIENT FRIENDLY
                                                                                     BILLING® project also provides tools and guidelines
                                                                                     to help improve the situation.

  2      1   “Hospitals Try Extreme Measures to Collect Their Overdue Debt,” The Wall Street Journal, Oct. 30, 2003, p. A1.
Many hospital administrators argue that they are                                     patient complaints or PR problems, what should
struggling to make ends meet because of the                                          you do? How do you reconcile these seemingly
increasing number of self-pay accounts and unin-                                     inconsistent goals?
sured patients (more than 40 million nationwide).
According to Zimmerman & Associates, self-pay
accounts result in the highest number of gross days                                  Reasons to Sell Your A/R
revenue outstanding in hospitals—208 days, com-
                                                                                     Most hospitals manage their unpaid self-pay receivables
pared to a national average for overall gross days
                                                                                     internally for approximately 90–120 days, during which
revenue outstanding of 64 days.2
                                                                                     all third-party payment options are resolved and the
                                                                                     remaining balance is determined. At around 120 days,
Therefore, more hospitals are looking for new ways
                                                                                     many hospitals charge off their self-pay receivables and
to manage their bad debt. If you are a CFO or director
                                                                                     refer them to a collection agency. Recovery rates vary
of patient financial services and you want to realize
                                                                                     greatly, but have been as high as 18 to 20 percent, with
some value from all the bad debt you have charged
                                                                                     an average commission in the same range.
off over the past few years but don’t want to create

                                                   Key Terms and Definitions
     Archived accounts. A large pool of self-pay                                     Resale: The process by which a debt buyer resells a
     patient accounts receivable that has accumulated,                               hospital’s accounts to smaller, individual debt buyers
     unpaid, over a period of up to six years or more,                               who may have a better chance collecting them. For
     typically at a primary collection agency.                                       example, some states (e.g., Florida, Massachusetts,
                                                                                     Texas), are considered to be more “debtor friendly” than
     Buy-back: A provision in which hospitals can,
                                                                                     others. Debt buyers will sometimes resell accounts that
     under certain conditions, buy back accounts that
                                                                                     originate in these states because they know it will be
     may subsequently be identified as sensitive or
                                                                                     difficult to collect these accounts. Although this prac-
     requiring higher levels of attention.
                                                                                     tice is common with accounts originated in the financial
     Forward flow: A type of purchase in which the                                   services industry, in general, hospitals should avoid
     hospital agrees to sell accounts on a periodic sched-                           debt buyers who resell accounts. Hospitals should make
     ule at an agreed price, as they reach an agreed age.                            it clear to the buyer that the accounts are not to be
     For example, each month, the hospital may place                                 resold, and should require the contract to so stipulate.
     uncollected accounts that its primary agency has
                                                                                     Statute of limitations: State laws that set the time
     worked for six months.
                                                                                     after which a party is effectively precluded from
     Recourse/nonrecourse: When accounts are sold                                    filing suit. The amount of time varies depending on
     on a recourse basis, the debt buyer has the opportu-                            the basis for the suit. In the case of hospital bad
     nity to return accounts to the hospital—usually                                 debt, the basis is breach of contract, and the statutes
     because it fails to collect the account. A nonrecourse                          of limitation vary from two to 20 years. Although
     arrangement, on the other hand, prevents the buyer                              accounts may generally be collected after the appli-
     from returning any accounts for a refund.                                       cable statutes of limitation have expired, collection
                                                                                     is much more difficult, and hospitals and their agents
                                                                                     and debt buyers typically abandon collection efforts
                                                                                     at this point.

2   Revenue Cycle Management: Industry Key Performance Indicators 2004, Zimmerman and Associates, 2004.                                    3
In most cases, the hospital does not recall accounts        What Type of Accounts to Sell—
from the primary agent, and unpaid accounts simply          And Not to Sell
remain with the agency until they lapse under the state’s
                                                            A hospital can sell its accumulated archived accounts
statute of limitations; these statutes vary between two
                                                            going back several years from the date of sale. Hospitals
and 20 years.
                                                            may also agree to sell accounts to a buyer in the future
                                                            on an ongoing basis by entering a forward-flow agree-
“Healthcare providers usually fully reserve patient
                                                            ment, in which the hospital sells certain accounts to the
accounts after 180 days from billing. Patient accounts
                                                            buyer at an agreed-upon price after an agreed-upon
that are fully reserved are left unworked by in-house
                                                            period. Typical triggers might be accounts 15 months
staff or placed with a collection agency,” says Doug
                                                            following the date of service, or nine months after
Womer, a consultant for Matrix Dynamics, Inc., and a
                                                            referral to the primary agency. Newer accounts tend to
former CFO and regional health system vice president.
                                                            have more value, but accounts with dates of service up
“This process results in zero recoveries or time-induced
                                                            to six years or more can be sold.
recovery to capture dollars for which the provider could
benefit immediately under a purchase agreement. CFOs
                                                            For different reasons, some accounts are not salable,
are constantly weighing the value of staffing to account
                                                            and in other cases, the hospital may choose not to
type collectibility against costs expended to collect.
                                                            sell. For instance, the buyer will want to exclude
In-house staff will most likely focus on recently billed
                                                            accounts in which:
accounts for maximum reimbursement versus pursuit
                                                            • The patient has declared bankruptcy
of older accounts that require more time and effort to
                                                            • The patient is deceased or incarcerated
collect lower percentages of billed charges.”
                                                            • The account meets a hospital’s charity guidelines
                                                            • The account has been otherwise closed or recalled
Selling accounts can be an effective way for hospitals
                                                              by the hospital
to accelerate cash flow and optimize revenue. When
hospitals place their bad debt with a nonrecourse
                                                            It is in the best interest of the hospital to retain
purchaser, they book an immediate gain on accounts
that they had otherwise written off to bad debt, and
                                                            • When the hospital or its agency has filed a
the proceeds drop directly to the bottom line. Selling
                                                              complaint on an account in a court of law
accounts also produces a steady, predictable cash flow
                                                            • When an account is currently on a payment plan
stream versus the uncertainty of cash flow and timing
                                                              at the hospital or agency
from a traditional contingency placement.

                                                            The provider should sell only those accounts that are
From a liquidity standpoint, selling bad debt can
                                                            not otherwise paying, excluding those that are impossi-
increase a hospital’s cash on hand. When hospitals
                                                            ble or inappropriate to collect.
refer their bad debt to a primary or secondary
collection agency, it can take from 18 to 24 months
to recover any money. On the other hand, when
hospitals sell their delinquent accounts to a debt
buyer, they receive payment immediately.                    Selling its accounts receivable can accelerate a
                                                            hospital’s cash flow and optimize revenue because
However, these benefits are realized only by carefully      the hospital can immediately recover accounts that it
managing the process of selling bad debt.                   had written off as bad debt. This allows the hospital
                                                            to increase its liquidation rate on bad debt. In addition

to the cash from the sale, most hospitals report an        Healthcare financial managers can avoid potential
increase in recovery from their primary agency after       pitfalls by checking a debt buyer’s references and
they begin to recall accounts to sell.                     understanding what collection tools the buyer will
                                                           use. It’s important to make sure the buyer’s practices
The administrative burden is reduced after the             are consistent with the hospital’s ethics, mission, and
accounts are sold, because the hospital no longer          values. It’s also important to make sure the buyer is
needs to update account information or manage an           licensed to practice business in the state, and that
agency relationship. Also, a hospital that sells its bad   the buyer will comply with all federal and state guide-
debt often learns something valuable about its own         lines. Under HIPAA, all buyers must sign a business
A/R management (e.g., weaknesses in control, audit,        associate agreement.
data management, etc.) and the procedures of its
collection agencies during the process.                    Selling bad debt could have a negative effect on bond
                                                           covenants, because some covenants restrict the sale
When accounts have been referred to a collection           of a hospital’s A/R. Therefore, financial managers may
agency, the collector is the agent of the hospital; the    want to consult the hospital’s legal department before
hospital then has a duty to supervise the agent. Cases     considering a sale to determine whether there are bond
have held, however, that if the agent is too closely       covenants that would restrict the sale. The fact that
supervised, the principal (hospital) may become liable     the bad debt has been zeroed out on the balance sheet
for the acts of the agent. Recent case law indicates       usually resolves any concerns about such covenants.
that hospitals may actually reduce collection risk by
selling the accounts. In the case of Neff v. Capital
Acquisitions & Management Co., a creditor sold its             Avoiding Potential Pitfalls
bad debt to an unrelated third party. The debtor             Two of the most common concerns among healthcare
alleged that the balance was incorrect, and that the         financial managers who are considering selling
creditor was responsible for the error under the Fair        their bad debt are loss of control and the potential
Debt Collections Practices Act (FDCPA). The Seventh          harm to patients through harsh collection practices,
Circuit Court of Appeals held that once the account          which can also result in bad public relations.
was sold and the creditor retained no residual owner-        Here are some ways to avoid potential pitfalls:
ship interest, the original creditor was no longer a         • Check the references of a potential buyer.
“debt collector” under the FDCPA and could not be            • Choose a buyer with experience in the health-
held liable for the acts of the third-party purchaser.         care industry (e.g., find out what portion of
                                                               their business is medical versus nonmedical).
                                                             • Make sure the buyer handles accounts sensi-
                                                               tively, minimizing patient complaints.
Potential Pitfalls
                                                             • Make sure the buyer is licensed to practice in
Despite the potential benefits, many financial man-            your state (if a license is required), and that it
agers fear losing control after they sell their accounts       will comply with all federal and state laws and
to a buyer. However, in most instances, selling one’s          regulations.
accounts to a buyer generates only a fraction of the         • Ask how the buyer is financed.
calls from patients compared with referring them to          • Make sure the contract grants the hospital the
a primary agency. Sellers maintain control by contrac-         right to recall a certain number of accounts
tually prohibiting the resale of accounts, and debt            that may subsequently be identified as sensitive
purchasers generally allow sellers to recall accounts          or requiring higher levels of attention.
under identified circumstances.                              • Make sure the contract prohibits the resale
                                                               of accounts.

              “Archive” Portfolio Estimation                              Annual “Forward Flow” Estimate

                Sample Memorial Hospital                                    Sample Memorial Hospital
  Annual Gross Revenue                  $ 250,000,000          Annual Gross Revenue                  $ 250,000,000
  Average % Bad Debt (4.0%)             $ 10,000,000           Average % Bad Debt (4.0%)             $ 10,000,000
  Agency Liquidation (20.0%)            $      2,000,000       Agency Liquidation (20.0%)            $   2,000,000
  Other closures (20.0%)                $      2,000,000       Other closures (20.0%)                $   2,000,000

  Annual Net Bad Debt                   $      6,000,000       Total Annual Forward Flow             $   6,000,000
  Total Archive Portfolio (5.0 yrs)     $ 30,000,000

Types of Arrangements                                        Choosing a Debt Buyer
The two types of debt buying arrangements are the            Hospitals depend on their reputations as caring insti-
one-time sale of archived accounts and a forward-flow        tutions, and choosing a debt buyer should reflect a
arrangement. With the former, the hospital provides          hospital’s mission, vision, and strategies. It’s important
the buyer all the charged-off and uncollected accounts       to sell to a third-party purchaser who will handle the
going back a number of years—typically back to the           hospital’s bad debt professionally and compassionately,
statute of limitations—and receives a lump sum for           and without generating patient complaints.
those accounts. Under a forward-flow arrangement,
the hospital agrees to sell accounts to the buyer on a       Finding the right purchaser should involve checking
prospective basis at an agreed price, as those accounts      references with other healthcare providers who have
reach an agreed age (typically monthly). Some hospitals      used the buyer. You should also ask a purchaser the
enter into an agreement to sell both the archived and        following questions:
forward flow accounts; others choose to do only one or       • Does the purchaser handle accounts sensitively,
the other, for various reasons.                                minimizing patient complaints?
                                                             • Are the purchaser’s employees well trained and
Another key consideration is whether the buyer offers          professional?
a recourse or nonrecourse sale. With a recourse sale,        • Does the purchaser specialize in healthcare
the buyer is allowed to return accounts to the hospital        receivables?
for a refund of the purchase price (typically, this hap-     • Does the purchaser itself service the accounts, or
pens when the buyer is unable to collect the account).         does it resell or outsource accounts to third parties?
On the other hand, a nonrecourse sale is “as is” (other      • Will the provider be able to recall accounts that
than accounts that were not meant to be sold, such as          prove particularly problematic?
the account of a deceased person). This is important
in ensuring that the sale qualifies as “nonrecourse,”        “It’s important to make sure that the people you sell
permitting the booking of an immediate recovery, and         your accounts to are the same people who are going to
assuring the seller that all risk of collection has passed   be working your accounts, and not some middleman,”
to the buyer at the time of sale.                            cautions Womer. “This could result in bad public
                                                             relations. Meet the people who are going to be buying
                                                             and working your accounts, not just buying them.”

Finally, it’s important that the debt buyer maintain         • Collectors will handle accounts with courtesy and
a good working relationship with the agency that               professionalism, minimizing patient complaints.
has previously handled the hospital’s accounts. Many         • Collectors will be adequately monitored to ensure
hospitals stop updating their records when the account         compliance.
is written off. If so, the purchaser will need to receive    • Collectors will be restricted or prohibited from
the data file of the accounts to be sold from the agency.      using body attachments and liens on residences.
“When you sell to a debt buyer,” says Winkle, “the           • Provision will be made for the hospital to recall
agency needs to prepare all the files for the debt buyer.      accounts that may subsequently be identified as
Therefore, the hospital needs to maintain a good rela-         sensitive or requiring higher levels of attention.
tionship with the agency, and so does the debt buyer.”       • Collectors will be trained in and adhere to HIPAA
Many debt buyers are not in the business of acting as          privacy rules.
primary collection agents. Therefore they view their         • Compliance will be confirmed from time to time.
services as a logical add-on to the A/R management
cycle after the agency has attempted to collect the debt.
                                                             After the Sale
                                                             Both the seller and the buyer have certain responsibil-
Obtaining a Proposal from a Debt Buyer                       ities following a sale of bad debt. The seller is respon-
Most debt buyers will conduct a comprehensive evalua-        sible for providing the buyer with access to patients’
tion of a hospital before they provide the hospital with a   account records so the buyer can address any patient
proposal. Pricing depends on a number of factors, includ-    questions. Generally, this is handled in the same
ing account type, age of accounts, payer mix, geographic     manner a hospital provides access to its primary
region and demographics, average account balance,            agency. The seller is also responsible for forwarding
previous agency liquidation, and resale provisions.          any payments that are sent to the hospital on accounts
                                                             that were sold to the buyer. The buyer’s primary
A typical contract contains provisions including             responsibility is to collect the accounts as agreed,
a description of the accounts (age, balances, etc.),         using collection practices as discussed with the hospi-
whether the sale will be limited to archived accounts        tal and upholding the hospital’s mission by positively
or will include forward flow accounts, and how the           managing its patient relationships.
buyer will respond to questions from patients regard-
ing the accounts. The quality of a purchaser’s under-        At the end of the day, however, selling accounts is an
writing process and its contract is an early indicator       individual decision. “At some point all the hassles and
of its level of professionalism.                             the headaches make it tempting to sell, but hospitals
                                                             need to determine on a case-by-case basis if selling their
Before entering into an agreement, hospital leaders          accounts is the best option for them,” Winkle adds.
would be wise to consider the following collection
parameters (to be agreed upon in writing):
• Collectors will receive thorough training in the
  FDCPA and in any collection guidelines or ethical
  practices stipulated by the provider.

                                                                                           This educational supplement sponsored by

About HFMA
HFMA is the nation’s leading membership organization for more than 33,000 healthcare financial management
professionals employed by hospitals, integrated delivery systems, managed care organizations, ambulatory and
long-term care facilities, physician practices, accounting and consulting firms, and insurance companies.
Members’ positions include chief executive officer, chief financial officer, controller, patient accounts manager,
accountant, and consultant. HFMA offers educational and professional development opportunities, information on
key issues, technical data, and networking opportunities with the ultimate goal being to create a more supportive
environment in which members do their business. For more information, visit HFMA’s web site at

Senex Services Corp.
Senex was founded in 1998 to assist healthcare providers in maximizing the value of their self-pay receivables.
Healthcare providers are mission-driven organizations facing increasing fiscal pressure. Senex provides cash, up
front, on a non-recourse basis for accounts, while supporting each provider’s mission. Senex’s hospital clients will
attest to our professional and compassionate approach, and to the economic benefits of selling accounts. Contact
us to discuss how Senex can be your self-pay solution. For more information, visit us at or call
toll free 888-577-7056, ext 210.

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