Sale of unpaid accounts can pay off for hospitals

Every day, men and women across the country visit flea markets, auctions and garage sales to spend their hard-earned dollars on items other people consider junk. Why? For many, a little bit of savvy helps them discover value in some of these items and that they may not be worthless after all.

That same thinking has propelled a new concept in medical finance: the outright purchase of unpaid self-pay medical accounts. Private practices, clinics and hospitals could receive hundreds, thousands, or even hundreds of thousands in cash up front in exchange for their unpaid bills. There is no right of recourse, and all risk of collections is assumed.

While this practice has been in effect in other industries since the early 1990s (credit card, telecommunications, and utilities industries), it is very new to the medical community. It couldn't come at a better time.

Currently, bad debt for U.S. hospitals tops out at more than $30 billion, according to Collection and Credit Risk Magazine. By as early as 2007, industry analysts predict that number could hit $90 billion for the entire health care industry. Teaching hospitals and inner city facilities, already drowning in red ink, will likely be hardest hit.

Typically, the defaulted debt is second-placed. This means that the hospital or clinic has already tried to collect on the bill and failed, so it sent it to its collection agency. If, after several months, the collection agency still cannot collect on the bill, it is abandoned. The file either gathers dust at the collection agency or is returned to the provider for write off. The purchaser of defaulted debt steps to the plate.

"Those accounts just sit out there at the collection agency and are not being worked, but there is money in those accounts," says Earl Wolf, CEO of Performance Financial Corporation.

To start the process, the hospital or clinic is asked to provide a spreadsheet containing the following information: name, service address, dates of service, final bill amount, original balance, date of final bill, current balance, charge-off date, social security number, phone number, CPT codes, HCFA-UB forms, and date and amount of last payment.

The purchaser will examine the number of bills, their potential worth and their age, and present the facility with an estimate of the cash value. If the facility agrees with the figure and wants to proceed, the buyer goes further with more in-depth analysis of the unpaid bills to come up with a final dollar figure. If the facility accepts the offer, then the purchaser wires the funds into the hospital's bank account and the facility hands over the bills.

The purchaser now owns those accounts and the facility no longer has to worry about them.

The amount received by the provider is determined by several variables, such as the age of the receivables, the income level of the patients, and payment history. Often, the provider receives only pennies on the dollar, but it's gravy because it's from accounts that have been left for dead.

A major concern among providers is how patients are treated during the collection phase.

According to Wolf, "What sets (a purchaser of defaulted debt) apart by owning the accounts, as opposed to a collection agency working the accounts on a contingency fee basis, is that (the purchaser) can put more money into the collection of the accounts and ... can work with the patients to schedule payment arrangements much more equitably than a collection agency can."

A collection agency often will call the patient and present a payment plan where the patient must pay half the debt now and the remainder in three or four payments over a short period of time, an arrangement often unappealing to the patient. Because the agency works on a contingency fee basis, it will give up on accounts if it sees little progress made on a receivable after a few months. A purchaser will be more likely to allow patients to set payments that fit their own financial situation.

(Kent Harlan is a CPA and president of Ozarks Capital Funding.)