Secondary Demand for Medical Receivables Portfolios: A Growing Market

Over the last decade, mainstream debt buyers had formed a general consensus that the medical receivables market represented one of the foremost avenues for growth in the U.S. debt purchasing industry.  The key driver of this position is grounded in the sheer size of the healthcare industry.  Take for example healthcare spending (and projections) in the decade between 2009 and 2019.

In 2009, despite the protracted effects of the recent economic recession, U.S. healthcare spending rose approximately 5.7 percent to $2.5 trillion.  As a percentage of GDP, healthcare spending in that year surged to 17.3 percent from 16.2 percent in 2008—the largest single-year increase in almost 40 years.  Assuming the current rate of growth is sustained, medical expenditures are projected to reach $4.5 trillion by 2019 when they will account for almost one in every five dollars spent in the United States.

But what is perhaps more salient for medical debt buyers than the size of the healthcare industry is its endemic bad debt crisis.  Tens of billions of dollars of new healthcare debt is generated annually, combined with vast backlogs of warehoused medical paper.  Healthcare providers’ uninsured and underinsured patient populations continue to balloon and many hospitals are reporting that even when self-pay patients are able to meet their financial obligations, recessionary pressure has been detrimental to the timeliness of those payments.

The economic downturn has decreased overall inpatient admissions to hospitals while simultaneously funneling patients to emergency departments, has led to a marked reduction in the number of elective and diagnostic procedures performed that typically bolster revenue, has made institutional borrowing more challenging if not impossible for many provider organizations amid tight credit markets, and has resulted in a diminishing pool of charitable donations to fund operating costs, much less facility expansion or technological innovation.  These factors underscore the healthcare industry’s persistent need for efficient and practicable receivables management solutions that will continue to produce growth opportunities for the debt purchasing industry.

To that end, a relatively recent example of “what might have been” particularly germane to medical debt buyers came from the announcement that Saint Vincent’s Hospital Manhattan would close its doors under the weight of $700 million in debt.  Elective surgeries were suspended at the hospital the same day that it filed for bankruptcy protection for the second time in five years.  While multiple reasons, some self-induced, led to the hospital’s ultimate demise, it is appropriate to note that a primary catalyst for Saint Vincent’s 2005 bankruptcy filing was an estimated $60 million accounts receivable deficit that went undetected in a previous audit.  More recent financial trouble for the hospital stemmed from cuts to Medicare and Medicaid, failure to secure tenable contracts with insurers, and the disproportionate number of uninsured and poor patients it served, admittedly as a part of its mission.  In fact, the hospital’s mission-based model could arguably be said to have contributed to its collapse.  “No money, no mission” is an oft-cited adage in the not-for-profit sector of the healthcare industry.  And while there is no certainty that selling off portfolios of its delinquent receivables would have saved the hospital, alternative outcomes of deploying that strategy as a part of a broader, proactive effort to better manage A/R remains in question.

The charitable missions of many healthcare providers have long had broad implications for how delinquent patient accounts are treated by hospitals, how medical debt is acquired by primary purchasers, and how that debt is serviced by the debt buyer after it has been acquired.  Even in the for-profit sector of the healthcare industry it is widely held that hospitals operate in communities and, as such, view their outsourcing and portfolio sales decisions with a measure of caution, even skepticism, atypical of other credit-granting industries.  This industry-specific approach to receivables management has historically slowed the maturation of the medical debt purchasing market generally, and in many instances precluded the development of a viable secondary market for purchased portfolios.  But over time, changing dynamics in the healthcare industry and more recently in the larger U.S. economy have set the stage for a rapidly growing and sustainable secondary market for medical receivables.

In 2006 Kaulkin Ginsberg published a detailed analysis of the relationship between healthcare providers and the ARM industry in Healthcare ARM Report, 2006.  One of the report’s key findings—based in part on primary research interviews with prominent medical debt buyers, healthcare providers, and ARM industry experts—concluded that unlike other asset classes, no secondary market existed for medical receivables.  At the time, the majority of healthcare ARM professionals cited common explanations for the absence of resale opportunities: provider concerns over ongoing patient relationships, hospitals’ low tolerance for perceived headline risk in their local communities, atypically low priority placed on price by healthcare industry executives, and above all contractual prohibitions against resales.

Five years on, while some of these attitudes still persist, the market has experienced a virtual sea change (“Health Care Receivables Pose More Challenges than Opportunities for Big Debt Collectors,” March 7). Successful secondary transactions have taken place and, more importantly, watershed events in the spring of 2010 (Federal healthcare reform), the fall of 2009 (sluggish demand for medical portfolios), and September 2008 (the “official” beginning of the recent financial crisis) have aligned to produce the fundamental elements necessary for the full development of a vibrant secondary market for medical receivables.

If further rationale to support these claims were necessary, one need only look to Saint Vincent’s Hospital Manhattan and others that share its fate for a sobering lesson: while hospitals’ sensitivity to patient relations and community reputation are understandable, when the motto “no money, no mission” is traced to its logical end: “no money, no mission, no hospital,” the philosophical obstacles to pursuing primary portfolio sales and endorsing resales on the secondary market seem negligible.

The following list is a high-level summary of key factors that support emergent growth opportunities in the secondary market for medical receivables:

• Greater flexibility among healthcare providers to allow secondary portfolio sales
• Federal reform legislation fails to address existing bad debt
• Insurance mandates will increase healthcare utilization and trigger new out-of-pocket expenses for millions of patients
• Providers’ continual, critical need to access capital will increase the supply of medical paper, however, various trends indicate that demand for purchased portfolios will quickly exceed supply
• Mainstream debt buyers have withdrawn from the healthcare receivables market, creating a source of purchased paper, a precedent for effective resales, and market share opportunities for specialized debt buyers or new market entrants
• Private Equity and other strategic investors are eager to deploy capital in the medical receivables arena
• Former purchasers of medical debt who temporarily suspended active purchasing are reevaluating their participation in the market and view secondary purchases as a means of returning to it
• In the wake of Federal reform, healthcare contingency agencies and other ARM industry service providers may explore debt buying through aggregators in the near term as a part of their 3-5 year business plans