Hospitals Eye Tenet Portfolio Sale as They Mull Packaging Debt

When CarVal Investors teamed last year with West Asset Management and MEDCLR to purchase a large portfolio of medical debt from Tenet Healthcare, the deal may have been a sign of how large hospital groups - both for-profits and non-profits – could package and sell patient medical debt in the future, says an industry buyer.

CarVal and its partners paid Tenet $16 million for the portfolio that had a face value of about $1.2 billion and called the buy “the largest portfolio of healthcare receivables ever purchased in the healthcare industry.” ("Tenet Medical Accounts Sale Involved WAM, NCO, and CarVal," 3/1)

John Moroz, director of healthcare business development for CarVal, an asset management company based in Minnetonka, Minn., told insideARM.com today he expects more healthcare debt will be sold in bulk. “Many hospitals have been watching the Tenet deal to see how it goes. ... (W)hat kinds of problems it creates for Tenet and the industry in general,” Moroz said. “They really haven’t found any so I think that has given them a better feeling about going ahead and doing this for their own hospitals."

It was the first time Tenet had ever sold debt, Moroz said. But he estimates that deal, which closed in the fourth quarter of 2006, represents more than 25 percent of the $4 billion in face value of healthcare accounts receivables sold in the last twelve months. Moroz said the face value of some future deals could top the Tenet portfolio, but expects hospital groups new to selling debt to start out with smaller packages to test the waters.

“They want to walk before they run,” Moroz said. “Ultimately you’ll see them do these sell offs because it more economically advantageous for them to do that.”

Healthcare systems throughout the nation are under pressure from the rise in uncompensated expense debt primarily due to treating the uninsured. And although centralization efforts are helping hospitals do a better job of collecting revenue at the point of service, care associated with treating the uninsured continues to strain healthcare providers operating budgets.

Currently, for-profit hospitals looking for a large infusion of cash typically will borrow against their receivables, sometimes through a subsidiary that may also be responsible for collections. Older debt typically is written off.

But industry executives are looking for alternatives, said Lauren Coste, director of corporate finance for Fitch Ratings. Coste cited comments by Health Management Associates executives during the company’s second quarter earnings report that collections isn't their core competency. She said they expressed a desire to work with collections experts.

“I wouldn’t be surprised,” Coste said of seeing hospitals bundle and sell their debt. “I think especially if you’re looking at older accounts.”

Moroz agreed based in part on feedback that CarVal and its collections partner Equicare Capital received after a presentation at the Healthcare Financial Management Association’s Fall Revenue Cycle Summit in San Francisco this month.

“Equicare received six leads from hospitals interested in selling their bad debt,” Moroz said. “That was very encouraging for us.”