Over the last decade, mainstream debt buyers had formed a consensus that the medical receivables market represented one of the foremost avenues for growth in the U.S. debt purchasing industry. The key driver of this position is grounded in the sheer size of the healthcare industry.
Tens of billions of dollars of new healthcare debt is generated annually, combined with vast backlogs of warehoused medical paper. Healthcare providers’ uninsured and underinsured patient populations continue to balloon and many hospitals are reporting that even when self-pay patients are able to meet their financial obligations, recessionary pressure has been detrimental to the timeliness of those payments.
The economic downturn has decreased overall inpatient admissions to hospitals while simultaneously funneling patients to emergency departments, which has led to a marked reduction in the number of elective and diagnostic procedures performed that typically bolster revenue, has made institutional borrowing more challenging if not impossible for many provider organizations amid tight credit markets, and has resulted in a diminishing pool of charitable donations to fund operating costs, much less facility expansion or technological innovation. These factors underscore the healthcare industry’s persistent need for efficient and practicable receivables management solutions that will continue to produce growth opportunities for the debt purchasing industry.
The charitable missions of many healthcare providers have long had broad implications for how delinquent patient accounts are treated by hospitals, how medical debt is acquired by primary purchasers, and how that debt is serviced by the debt buyer after it has been acquired. Even in the for-profit sector of the healthcare industry it is widely held that hospitals operate in communities and, as such, view their outsourcing and portfolio sales decisions with a measure of caution, even skepticism, atypical of other credit-granting industries. This industry-specific approach to receivables management has historically slowed the maturation of the medical debt purchasing market generally, and in many instances precluded the development of a viable secondary market for purchased portfolios. But over time, changing dynamics in the healthcare industry and more recently in the larger U.S. economy have set the stage for a rapidly growing and sustainable secondary market for medical receivables.
In 2006 Kaulkin Ginsberg Company published a detailed analysis of the relationship between healthcare providers and the ARM industry in the Healthcare ARM Report, 2006. One of the report’s key findings — based in part on primary research interviews with prominent medical debt buyers, healthcare providers, and ARM industry experts — concluded that unlike other asset classes, no secondary market existed for medical receivables. At the time, the majority of healthcare ARM professionals cited common explanations for the absence of resale opportunities: provider concerns over ongoing patient relationships, hospitals’ low tolerance for perceived headline risk in their local communities, atypically low priority placed on price by healthcare industry executives, and above all contractual prohibitions against resales.
While some of these attitudes still persist, the market has experienced a virtual sea change. Successful secondary transactions have taken place and, more importantly, watershed events in the spring of 2010 (Federal healthcare reform), the fall of 2009 (sluggish demand for medical portfolios), and September 2008 (the “official” beginning of the recent financial crisis) have aligned to produce the fundamental elements necessary for the full development of a vibrant secondary market for medical receivables.
While hospitals’ sensitivity to patient relations and community reputation are understandable, the motto “no margin, no mission” is traced to its logical end: “no money, no mission, no hospital,” the philosophical obstacles to pursuing primary portfolio sales and endorsing resales on the secondary market seem negligible.
Although healthcare providers will continue to employ caution with selling their receivables, they are fighting the inevitable, for the following reasons:
- The Affordable Care Act fails to address existing bad debt
- Insurance mandates will increase healthcare utilization and trigger new out-of-pocket expenses for millions of patients
- Providers’ continual, critical need to access capital will increase the supply of medical debt, however, various trends indicate that demand for purchased portfolios will quickly exceed supply
- Mainstream, pure-play debt buyers have largely withdrawn from the healthcare receivables market, creating a source of purchased paper, a precedent for effective resales, and market share opportunities for specialized debt buyers or new market entrants
- Private Equity and other strategic investors are eager to deploy capital in the medical receivables arena
- Former purchasers of medical debt who temporarily suspended active purchasing are reevaluating their participation in the market and some view secondary purchases as a means of returning to it