Bad Debt, Weak Growth Bedevil For-Profit Hospitals

Elevated levels of bad debt will continue to challenge for-profit hospitals and pressure margins, according to a special report released Saturday by Fitch Ratings.

Total uncompensated care for the six major for-profit hospitals was 18.3 percent of revenues in the third quarter, according to Fitch’s 2007 third quarter diagnosis of for-profit hospitals.

Report authors Lauren Coste and Robert Kirby said the key themes of 2007 for these hospitals have been rising bad debt and weak organic volume growth. “After turning negative for the first time in a year during the second quarter, volumes declined even further this quarter,” they wrote. 

The sector did have some relief from bad debt expense during the quarter. For example, reported bad debt expense averaged 10.7 percent of revenues, down from 10.9 percent during the year ago period. Meanwhile total uncompensated care, which includes bad debt, charity care and discounts to the uninsured) fell from 18.7 percent in the third quarter 2006 to 18.3 in the third quarter 2007. 

The results reflect, in part, decreases in uninsured admissions or decreases in the rate of growth of uninsured admissions during the quarter for several providers. But the downward trend in total uncompensated care also is distorted by special charges during the quarter and the fact that Tenet Healthcare earlier this year stopped reporting its discounts to the uninsured.

Coste, a director of corporate finance, notes that virtually every for-profit hospital operator has recorded a charge to bad debt expense or changed its accounting methodology at some point during the past few years.

“Part of the challenge is that the trends in uninsured patients and collection experiences are difficult to predict, resulting in the need to adjust the allowance for doubtful accounts to reflect new observations,” Coste wrote.

According to the report, Lifepoint Hospitals recorded the highest bad debt as a percentage of revenues during the quarter at 12 percent, followed by Community Health Systems with 11.9 percent and Health Management Associates at 11.8 percent. 

Tenet posted the lowest bad debt expense at 7.2 percent of revenues, but the results do not include the hospital operator’s discounts to the uninsured. Universal Health Services posted 9.4 percent in bad debt during the quarter, while HCA Inc. recorded 11.8 percent in bad debt expense.