IRS 990 Change Will Spur Hospitals to Sell Debt: Experts

A majority of hospitals are only one to two years away from beginning the practice of selling their bad debt following the implementation of tax rules that will soon require not-for-profit hospitals to break out bad debt expense and what they are providing in charity care, say some healthcare debt experts.

John Moroz, former director of healthcare business development for CarVal Investors, told insideARM that the new Internal Revenue Service mandate will “shine a spotlight” on the industry’s charity care and bad debt, prompting top executives to look for more options to address rising financial burdens.

The IRS implemented in December more rigorous bad-debt disclosure requirements on its Form 990 for not-for-profit hospitals seeking to qualify for tax-exempt status. Starting with the 2009 tax returns, these healthcare providers must detail their charity care and bad debt. Starting in 2010, the providers must give fuller disclosure of their bad debt collections and policies.

“My sense is that hospitals are much more aware of the charity care issue and how much they write off,” said Moroz. “With (the numbers) right there in front of them a lot will say, ‘That’s a lot of money and how will we get back some of this?’” A year or two after that a majority of hospitals will move to sell their debt, said Moroz, who becomes vice president of sales at Healthcare Analytics later this month.

Adam Holzhauer, owner of Master Ventures, a debt purchasing company in San Antonio, Texas, agreed that the new IRS mandates will create more transparency for both the industry and taxpayers. He added that turmoil in the bond markets will add to hospitals’ financial pressures.

“The higher cost to issue bonds is going to put pressure on them to seek capital alternatives which translates into selling self-pay accounts,” Holzhauer said.

Industry experts say less than 10 percent of the nation’s hospitals sell their bad debt. However, Moroz said he’s seeing some improvement on that front.

“Things move more slowly in healthcare. But it’s significantly more advanced today than 12 months ago,” he said. Hospitals that haven’t taken the plunge into selling their receivables most likely will approach the collection agencies they already work with to buy the debt or help them find a buyer, Moroz said. Agencies that can’t finance the deal will look for partners, he said.