Hospitals Will Closely Examine Bad Debt in Post-Federal Bailout Environment

Recent surveys show that the faltering economy and rising out-of-pocket health care expenses have lead many Americans to scale back or postpone medical treatments.  However, that hasn’t stopped them from favoring hospitals that offer the best treatment and amenities available when they do seek medical care.

Hospitals looking to finance improvement and expansions to stay competitive after the $700 billion federal bailout of the financial markets should expect more intense scrutiny of their bad debt expenses, particularly small and independent providers with fewer resources, experts say.

“Bad debt is never a good thing and the current credit crunch doesn’t diminish the negative importance of that,” said Jeff Schaub, senior director of Fitch Ratings public finance health care group. “Any negative credit factor is going to be looked at more intensively by potential lenders in the markets.”

Industry experts say some hospitals will opt to sell some aging receivables to get them off their books (“Growing Market for Medical Debt Paper Likely to Follow Financial Bailout,” Sept. 24).  Schaub added that some hospitals may battle rising bad debt expense by lowering their threshold for charity care eligibility and shift resources into programs that will help patients qualify for financial assistance.

Lauren Coste, a Fitch Ratings director of corporate finance specializing in for-profit health care facilities, said most major for-profit hospitals won’t be looking for capital financing in the near term, because they already are highly leveraged.  She also doubts the major for-profit hospitals will sell much debt or outsource collections since they have made significant investments in their internal collections operations (“Hospitals Focus on Centralizing Billing,” Oct. 1, 2007).

"I don’t see them abandoning that,” Coste said.

Still, Coste is concerned that if the economy further deteriorates, bad debt expense -- which stabilized during the first half of the year -- could start to increase again.  Likewise hospital admissions volume, which saw decent growth for most hospitals during the first half of 2008, could suffer.

“The for-profits don’t have any near-term financing needs, so it’s not a big issue at this point,” Coste said. “But if something were to happen and if a company needed to refinance debt it could be more expensive and difficult.”