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CR Software

Health care receivables/credit managers can sell old accounts receivables for cash that hadpreviously been written off as uncollectable.

Debt Selling and the Health Care Industry

The world of medical expenditures has been growing rapidly and is becoming more complex. According to Collections & Credit Risk magazine, a national health care expenditures report cites a roughly $1.77 trillion dollar paid out price tag for health care in 2004 alone. Additionally, by 2011, they project that health care costs will be up to $2.8 trillion. The September 2003 Modern Healthcare magazine reported uncompensated care for hospitals is running at an average of 5.6 percent of total expenses and valued at $21.5 billion. Consumer debt is also now at an all-time high in the United States, and is quickly becoming a $100+ billion industry.

The sale of medical debt is still relatively unknown to many health care organizations. Companies such as MEDCLR, which provide after-collections solutions for hospitals, have built their business models around the expectation of slower and low percentage returns. They take on the time value burden of your debt. For health care receivables managers, the intrinsic value of a debt-selling transaction is that the systems of the debt buyer enable you to walk away with short-term cash; the debt buyer assumes all associated cost, management, and administration of the distressed debt. From the perspective of insurance payer entities, the buying and selling of debt is a neutral transaction since the change of ownership does not impact their stake in paying claims. Buying another company’s zero-valued assets may not seem viable to the outsider’s eye, but providers of after-collections solutions for hospitals have flourished because of years of experience in this specialized function within the health care receivables industry.

Though new, the concept of debt selling is growing quickly. Medical providers are becoming aware that they can recover some of their zero-valued accounts, and that other organizations that are doing this are experiencing success. In fact, many health care receivables decision makers are jumping onto this “some cash for nothing” bandwagon.

Phase I – Assessment: Confirming Account Viability and Value

Scoring Technology

It is a daily struggle for health care providers to control costs and increase revenue, particularly with bad debt losses going directly against the bottom line. Assessing the collectability and value of delinquent accounts can be a challenge in the health care industry; however, there is a way for managers to assess risk, manage current delinquent accounts, and resolve final bill accounts to minimize losses and costs.

Scoring technology applied throughout the lifecycle of an account can reduce expenses associated with collecting. According to CR Software, a provider of receivables management software, scoring technology can be embedded into your IT and collections system. A collection resource center allows all accounts to be internally scored based upon user-defined parameters and builtin complex algorithms that incorporate everything from payment history, accuracy of data, geography and census data, the length of residence, if the customer owns or rents, prior bad debt account balance, size of the account due, and many other factors. This information can be compared and merged with the customer’s credit score to determine how much of a risk the customer poses. Any-thing below a certain score is a risk. Anything above your compiled score gives you confidence that this is historically collectable. Scoring technology is also helpful when the final bill has not been paid and is subject to charge-off. Accounts with a passing score can be retained and not sent to a collection agency, thereby saving collection agency fees.

Phase II – Mechanics of Selling Bad Debt

Benefits of Selling Bad Debt and Selecting a Debt Buyer

It is hard to run the collections operation for a medical services company. Every penny counts and every unpaid bill affects corporate cash flow. Worse, every uncollected dollar is evident in the bottom line. Until recently, when your collection agency finished doing what it could to recover debt, it was the end of the road to funds recovery.

Selling medical debt has changed the way leading health care providers manage bad debt recovery. Zero-valued assets are being transformed into instant cash – the windfall revenue associated with selling debt goes directly to the bottom line. As a financial decision maker, you increase your corporate cash without sacrificing quality of service and without spending a penny. Selling dormant bad debt can immediately provide your company with additional liquidity and positively impact the balance sheet. In addition to increasing your cash flow, you reduce the uncertainties associated with your bad debt and the debt buyer assumes all the administrative nightmares associated with noncollectible accounts.

• As a debt seller, your decision making and goal setting should revolve around a “total satisfaction” end result. The key factors that will determine success in the debt-selling relationship and transaction are:
• You must receive a fair price for your bad debt receivables;
• You must ensure that the purchaser of the debt, as the new owner, affects collections in such a manner as to minimize complaints;
• Your organization must recognize and support the debtselling process and the positive impact of selling your distressed debt; and
• Your debt purchaser must address client inquiries immediately with perspective and knowledge of the industry or it will negatively impact your organization.

The Process of Selling Medical Debt

The process of selling unrecoverable medical debt is relatively simple. Accounts are evaluated and priced for a small portion of their face value. You receive an expedited infusion of cash, you forward the specific portfolio to the provider of after-collections solutions and your collectors never have to see those accounts again. You receive a fair price for your bad debt receivables immediately instead of waiting months (and often years) hoping to be paid.

First you receive a proposal from a provider of after-collections solutions for a single purchase of all outstanding accounts receivables to a given time of aging. The result of this type of transaction is that accounts receivables within your organization now have a definitive life span and value (no more indefinite placements with unknown results, particularly when there has been prior collections activity). An analysis of your current collection agency’s rollover report or actuarial report is used to determine the optimal point of sale and appropriate pricing matrix to maximize the value.

Once your outstanding receivables have been brought to the proper aging, you then have the opportunity to sell your accounts on a monthly basis. These forward flow monthly sales are at a predetermined aging point and at a negotiated fixed price to enable you to have ongoing predictable revenue for your old debt.

The Debt Sales Process

A Step-By-Step Overview:

1. You review the status of the outstanding accounts that are at collection agencies. You then contact the current agency(s) and request that they produce a rollover report or an actuarial report showing placements for the last 12 months by month and by year. CR Software reports that all agencies should be able to do this on demand, daily, weekly, or monthly. Ideally this should be a set of reports that you automatically receive on a predetermined schedule from their system.

2. Collection agency(s) then produce separate files organized by billing entity (with the original billing company account numbers) to forward to you.

3. The files from the collection agency(s) need to exclude these types of accounts:

• Closed by request of client;
• Deceased;
• Bankrupt;
• Incarcerated;
• Disputed debts;
• Contractual write-offs; and
• Known Medicare/Medicaid accounts

4. If an outside billing company is used, the files would be forwarded to them and they would attach the patient medical data. Subsequently, they would return the files to you, the original receivables manager.

You submit your portfolio to the provider of after-collections solutions for pricing.

The provider of after-collections solutions supplies you with contract(s) for your legal department to approve. These documents cover the single purchase, the forward flow purchase agreements, the business associate agreements, and UCC filing statements. You will need to work with your legal network to ensure all the proper releases are in place in order to facilitate the sale.

The Forward Flow Process

Once accounts reach a certain age, they are closed and returned from your collection agencies on a monthly basis. This process commences at the agreed-upon end of month/day/year with all accounts that were placed in that specific window of time with the collection agency(s) and then it occurs on an ongoing basis each subsequent month thereafter. Funds from the purchaser are then wired to your account.

Case Studies

Many hospitals and health care credit managers are using debt selling as a “something for nothing” opportunity to salvage income for written-off accounts, and give the boardroom some good news from the credit department for a welcome change of pace.

When the nation’s largest provider of medical transportation needed a solution to its soaring bad debt problem, the obvious choice was to sell its bad debt to a provider of after-collections solutions.

The process involved consolidating more than 40 collection agencies and compiling all the accounts receivables and selecting the debt buyer. Selecting a viable debt purchaser is a crucial decision exacerbated by the increasing number of bad debt buyers. The challenges are that few specialize in the health care field, there are many with little or no experience or track record, many are undercapitalized, the inexperienced buyers generate complaints that tarnish your reputation, and many are understaffed and unable to service and administer the accounts they have purchased creating negative feedback for you and for the entire debt-selling process. Another huge challenge sellers face is that many debt-buying entities cannot handle the IT challenge of importing, exporting, consolidating, and standardizing the purchased accounts’ files and formats.

One privately owned ER physician group, based in the southern region of the U.S., was confident in their choice to turn their dormant bad debt into instant cash and do it responsibly while preserving the integrity of their good name.

“We were at the point where we not only needed to reach some revenue goals but we needed to finally operate profitably,” said the business manager at the privately owned ER physician group. “We knew that there needed to be some change made in the way receivables were handled in the past, it was just a matter of education.” While price was important, factoring in the experience and track record of the provider of after-collections solutions was key.

Unlike a collection agency, the debt buyer owns the accounts. They own the hassles, the work, and associated support costs as well. The goal is that your receivables department’s time and resources are freed up for more productive activities. Interestingly enough, experience shows that after a health care organization sells its bad debt, one of the byproducts is that it frees up your collection agencies to work your more current accounts more proficiently.

After you have sold your accounts, it must be a requirement that your debt-buying company pursue the accounts professionally and without aggressive tactics. A key success factor must be that your debt purchaser employs and trains individuals to provide intelligent and competent analysis and account service. This ensures a fully transparent financial arrangement with proper accountability. Since long-term customer relationships are so critical to the sustained viability of any health care organization, your credibility as the seller of the debt cannot be sacrificed as a result of a debt-selling transaction.

Summary: Immediate Liquidity for Receivables; Immediate Transfer of Accountability and Cost

There are many benefits to selling the distressed accounts receivables of your organization, including:

• The immediate impact to earnings and net income that affects the bottom line EBITA number. For organizations looking for earnings spikes, often at end of quarter or at fiscal year-end, this can be an untapped source of revenue not previously considered;
• No more waiting months or years without a guarantee of return (a true benefit when you factor in the time value of money);
• Predictable revenue ongoing from a debt sales program;
• Your billing centers can push calls related to old debt to the after-collections solutions provider’s call center and not deal with the lengthy non-paying inquiry (allowing resources to move on to paying current customers);
• You can reduce or reallocate staff resources;
• No more monitoring agencies and balancing multiple statements;
• Eliminate any liabilities of the Fair Debt Collections Practices Act violations by in-house staff or by secondary agencies on sold accounts;
• The entire analysis is done without cost or obligation to you; and
• All post-sale results are accomplished without complaints from the consumer or hospital administrator.

The health care industry is experiencing a need in the marketplace for a way to help recover monies from zero-valued assets. Providers of after-collections solutions for hospitals create a way to allow you to sell your bad debt profitably and bring instant cash.