Tuesday, February 17, 2004
In most businesses,
prices don't vary according to a customer's financial position. A hot dog at
the corner stand costs the same whether you're a billionaire or a homeless person.
But in the hospital
industry, fees vary dramatically depending on who's footing the bill.
If you're insured
and you check into a hospital for open heart surgery, your insurer would probably
pay $30,000. But if you're uninsured, the bill might be closer to $50,000. The
smaller your negotiating clout, the bigger the bill.
This practice can
lead to big variations in the way hospitals book revenue. It can also lead to
too much bad debt.
Companies pile up
bad debt when they book revenue for uninsured patients who can't pay.
Say an uninsured patient
has emergency surgery. The hospital performs the surgery, prepares a bill and
mails it out. The transaction is immediately booked as revenue on the income
statement and accounts receivable on the balance sheet — even though the hospital
hasn't received a penny, and it might never get paid in full.
If the payment doesn't
come, the transaction must be moved out of the accounts receivable column and
into bad debt.
"Proper accounting
says you can book revenue, but you must discount for the uncollectible portion,"
said Glenn Melnick, head of health care finance at the University of Southern
California and senior economist at Rand Corp.
Hospital chains run
into trouble when they don't discount the uncollectible portion.
How do they know what's
uncollectible? Simple: They look back on the prior year to get an idea of how
many uninsured patients and uncollectible bills to expect.
"If I'm a prudent
financial manager and I know that I have a lot of uninsured patients coming
in, I should be deducting it immediately from my accounts receivables,"
Melnick said. "This way it never becomes a fictitious asset."
Yet industry sources
say those fictitious assets are popping up in the form of high bad-debt rates.
Earlier this month
HCA Inc. (HCA) — the country's largest
hospital chain — reported a fourth-quarter bad debt figure of 11% of net operating
revenue.
That was up from the
company's earlier estimate of 9.5% to 10%, says analyst John Ransom of Raymond
James.
The industry average
is 10% of net operating revenue.
"(HCA) missed
its own target they gave just a while ago," Ransom said.
HCA officials wouldn't
comment. During the company's recent earnings Webcast, executives blamed its
bad debt on the high level of uninsured patients during the weak economy.
"Few if any (hospital
chains) anticipated that the soft economy, high unemployment levels and other
related factors would drive such an increase in the number of uninsured patients
entering America's hospitals," Chief Executive Jack Bovender said during
the Webcast.
Still, the firm's
bad debt hit 11% for all of 2003 — up from 9% the prior year, when the economy
was arguably worse.
HCA isn't the only
operator struggling with the problem. Both Tenet Healthcare Corp. (THC) and Triad Hospitals Inc. (TRI) said they expect to report fourth-quarter
bad-debt percentages of 11% and 10%, respectively.
"It's tricky
and it's a very difficult thing to analyze," said Susquehanna Financial
Group analyst John Souter.
He defends the industry
by saying that some hospitals are trying to correct the way they book the numbers.
Still, it might not
be a coincidence that HCA, Tenet and Triad each suffered bottom-line declines
last year. HCA's earnings for the year fell 2% to $2.63 a share.
First Call analysts
expect Triad to post a 4% profit decline when it reports earnings on Feb. 23.
As for Tenet: In addition
to reporting four straight quarters of double-digit earnings declines, it's
spent the past couple of years facing everything from Medicare fraud allegations
to an overhaul of its senior management team.
On the other end of
the spectrum are chains such as Universal Health Services (UHS) and Health Management Associates Inc. (HMA)
Universal operates
general and mental health hospitals in cities and suburbs. For the first nine
months of 2003 its bad debt ratio was a healthy 7% of net operating revenue,
down from 7.1% in 2002 and 8.5% in 2001.
HMA, which owns and
operates hospitals mainly in small towns, performed just as well.
It reported bad debt
of only 7.3% last fiscal year, which ended in September. That was down from
7.6% the previous year.
The company's fiscal
2003 earnings rose 16% to $1.13 a share, marking its fourth straight year of
double-digit profit gains.
If a patient is low-income,
doesn't have insurance or any means to pay his bill and doesn't qualify for
Medicaid, HMA doesn't book it as revenue, says John Merriwether, the firm's
vice president of financial relations.
"So 150 days
later, there's nothing to write off as bad debt," Merriwether said.
That's been HMA's
policy for more than a decade, he says.
"In some cases
folks have changed how they account for bad debt," Merriwether said. "I
think in some cases what may happen is that they might put revenue on the books
that they might know they won't collect. It makes revenue look good, but later
on down the road it rolls into a 'bad debt.' "