Bad Debt Rising: When to Sell Your Accounts Receivable 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 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 Benefits 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 4 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. 5 “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.” 6 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. 7 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 www.hfma.org. 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 www.senexco.com or call toll free 888-577-7056, ext 210.