Hospital Bad Debt Expense Could Rise 17% in 2008

Bad debt and charity care expense for the for-profit hospital industry is predicted to grow 15 to 17 percent in 2008, according to an analyst with the investment firm Lehman Brothers.

In an analyst note released Monday, Adam Feinstein said the industry’s total bad debt will reach $14.6 billion in 2008, compared to $12.4 billion last year, which also grew at a rate of 15 to 17 percent.

“Increases in continued claims, decreases in the personal savings rate and slower growth in real disposable income … will decrease the ability of the uninsured to pay the hospitals,” Feinstein said in his report. He added that hospital prices will continue to increase, placing additional pressure on reimbursements from uninsured patients, who typically are billed hospitals’ highest rates.

The projections do not include improvements in collection models that hospitals may have implemented in recent years, said Feinstein. He covers Community Health Systems, HCA, Health Management Associates, LifePoint Hospitals, Tenet Healthcare and Universal Health Services.   

Still, Feinstein said Lehman Brothers has back-tested its model for bad debt projections and found the predictions are fairly consistent with the actual debt values reported by the industry.  

Feinstein said results indicate that there appears to be some seasonality in bad debt expense, with the industry typically recording lower numbers in the first half of the year. In 2008, Lehman Brothers is predicting the industry will record nearly $7 billion in bad debt expense in the first half of the year vs. nearly $7.6 billion in the second half. In 2007, the industry recorded nearly $6 billion in the first half of year, and $6.4 billion in the second half, according to the report.

Lehman Brothers began predicting bad debt expense for the hospital industry in January 2006. It found that bad debt expense is closely related to hospital prices, real disposable income, continued claims and personal savings.