You may recall a story that received a lot of attention this past summer – Last Week Tonight with John Oliver skewered the debt-buying industry, and then dramatically closed the segment by “giving away” $15 million in medical debt. He forgave the debt by buying a portfolio of approximately 90,000 out-of-stat accounts, and giving it to RIP Medical Debt. RIP is a non-profit company established by two former collection industry executives with the mission of forgiving medical debt, with no tax consequences for the consumer.
We’ve wondered how the mechanics would work of forgiving debt without tax consequences. It turns out that David S. Miller, a partner in the tax department of the accounting firm Proskauer, has written an article on the topic, specifically about the John Oliver debt. The full article is worth reading but, in a nutshell, Miller says,
[Fortunately, Oliver] donated the debt to Medical Debt Resolution, Inc., which goes by the name, “RIP Medical Debt” (“RIP”). RIP is a Section 501(c)(3) charity whose purpose is to provide charitable aid by purchasing and forgiving the medical debt of poor people. RIP forgave the debt as a gift to the debtor out of “detached and disinterested generosity.” And that is why the debtors were not taxable. Section 102(a) provides that gross income does not include the value of property acquired by gift.
We have also had questions about the RIP organization generally. The following is a Q and A discussion I had with Jerry Ashton, one of the founders of the non-profit.
Q: How much debt have you already forgiven?
- 2014 - Our system, data and analytics and fulfillment system has forgiven and sent forgiveness letters to over 25,000 families owing over $35 million
- 2015 - $1 million from one independent physician
- 2016 - $15 million from John Oliver
- 2016 - Approximately $3 million from foundations in Wisconsin and California
- 2016 – Approximately $6 million for veterans and active duty military and first responders- in negotiation, to be forgiven in December of 2016
Q: Do you have a plan for how you will generate sources of funding?
A: Yes, we have generated a variety of funding sources, ranging from corporate partners and sponsors, individuals and foundations. Gratifyingly, many are from collections operations.
Q: I understand that most/many non-profit hospitals have an aggressive multi-step presumptive charity process in place to identify those that qualify... which, if working correctly, would make your services moot. Do you find that this is not the case?
A: Not even close. There is no organization in existence that does what we do; total abolishment and expecting nothing in return. We don’t “negotiate” the debt to get a lowered bill; we eliminate that bill in full.
The Deloitte Center for Health Solutions of Deloitte LLP estimates that bad debt for health care providers could reach $200 billion by 2019," and is expected to grow to over $500 billion by 2023. Not a pretty picture.
Our system identifies, values and purchases portfolios at the present value with 10-15% IRR and forgives debt for those making less than 2 times the poverty level.
Regarding those that make more than two times the poverty level (FPL), we do forgive debt for this group. If their medical out-of-pocket, or medical debt, is 5% of gross income, they qualify. If they are insolvent, they qualify. We have other algorithms that rank levels of hardship -- and we use those to determine fit as well. Experience shows that over 80% of the account guarantors (in dollars), with debt aged at least 18 months (from date of discharge or date of service) that are making higher than two times the FPL, qualify for our forgiveness.
Many larger hospitals are doing a better job of identifying charity care candidates at or close to registration. But, industry figures show that over one third of accounts placed for collection (and more if first party or early-out is included) should have been given free/charity care. Instead, these misidentified accounts inadvertently become the other side of uncompensated care - bad debt.
Q: How do you target your efforts to identify those entities most likely to have unidentified charity care cases?
A: We have more than enough work to keep us busy without having to solicit hospitals. We have over 3.2 million medical accounts in our inventory at face value of almost $4 billion. We are noticing, however, that a few hospitals and physician groups are interested in our services to simply forgive – not buy – their debt.
Q: How do you satisfy the HIPAA requirements related to hospitals sharing patient information with you?
A: We are HIPAA compliant; we have a chief compliance officer, we have a well-developed HIPAA policy, we vet potential partners, and we sign stringent business associate agreements with all vendors.
Q: Is it your preference to work with debt buyers, or directly with hospitals?
A: We have done and will continue to do business with reputable DBA certified debt buyers. On several occasions, it is they who have introduce us to hospitals and physician groups to discuss our services. We also get quite a few calls directly from hospitals.
Q: Is your plan to go directly to patients at all, or only work through batches of patients using technology to identify them?
A: Our model does not have us go directly to patients; we focus on bulk purchases.
Q: Who finances the notification of consumers that their debt has been cancelled? Who answers questions? Who can they call if a debt was supposed to be removed from their credit report but hasn't been?
A: Our donors finance the full debt forgiveness fulfillment process; not the creditor or debt owner. We answer the phone, and we respond to email and voicemail messages. When we purchase the debt, we require that the debt seller to notify all credit reporting agencies to which they have reported of this change in status.
In our experience, the more we are understood, the more we are being welcomed by our industry and not feared by it. Our job is to locate that debt that, by any measure, shouldn’t even be on a collector’s desk to begin with – and many in the industry are agreeing with us. Here’s what we both face here in the U.S.:
- Over 32% of the US population lives in households with gross income less than two times the federal poverty guidelines. (http://kff.org/other/state-indicator/distribution-by-fpl/?currentTimeframe=0)
- There are over 65 million people in the United States who are uninsured or underinsured – defined as one’s out-of-pocket health care costs exceeding 10 percent of income (5 percent when income is less than 200 percent of the federal poverty line), or one’s insurance deductible being more than 5 percent of income. (http://www.nytimes.com/2014/12/02/upshot/underinsurance-remains-big-problem-under-obama-health-law.html)
- Almost 50 percent of the US population could not come up with a $400 unexpected expense without selling an asset or taking out a loan. The most frightening finding in the Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2014 concerns a matter of $400. Just enough to crush half of all American households. (http://www.nytimes.com/2014/12/02/upshot/underinsurance-remains-big-problem-under-obama-health-law.html)
This is the population that together we can serve to help.
In summary, over 70 percent of our donations come from individuals, followed by foundations and corporate contributions or in-kind donations. Fundraising also comes from portfolio sales at below market rates. Considering that portfolio buying takes up most of our resources, this is an important line item. As for “keeping it in the family,” we will purchase or accept donations from collection agencies if they are the direct vendor of a provider, or broker, as long as the debt otherwise qualifies and has a verifiable chain of title.