Hospitals Administer Antidote for Bad Debt
Lower Bills for Uninsured Patients Mean Less Revenue Is Uncollected, but Effect Is
Cosmetic
By RHONDA L. RUNDLE and PAUL DAVIES
Staff Reporters of THE WALL STREET JOURNAL
May 4, 2004; Page C4
As bad debt from uncollected patient bills piles up at the nation's hospitals, some of them are
defending themselves with an ancient but perfectly legal accounting tool: the eraser. The
maneuver could shrink reported bad-debt expenses, but it won't boost earnings —or relieve the
pressure on hospital share prices.
T en et H ealthcare Corp., of Santa Barbara, Calif., the second-largest publicly traded hospital
chain, has instituted a new discount policy toward uninsured patients who are having trouble
paying soaring hospital bills. Tenet hopes this new program will eventually erase 40% to 60% of
bad-debt expense from uninsured patients once it is in place at all 98 of its hospitals by the end of
next month.
Until recently, Tenet and other hospital companies charged full price to uninsured patients. Under
Tenet's new "compact" with the uninsured, the company is offering discounts similar to those it
has negotiated with managed-care companies. Now Tenet will charge lower prices to uninsured
patients; when they can't pay, the resulting "bad debt" figure also will be lower.
"A significant amount of the revenue will never be recorded in the first place due to this
managed-care-style pricing, so it will not have to be written off as bad debt," Stephen Farber,
chief financial officer, said. This change won't increase Tenet's earnings, he said, because it will
reduce both reported revenue and reported bad-debt expense. Other hospital companies are
adopting similar discount programs with similar accounting effects.
This accounting device won't erase the underlying problem of rising bad debt at hospitals. "The
impact is more cosmetic than financial," said Kemp Dolliver, an analyst at SG Cowen. W ith the
new accounting treatment, "What you do get is a financial picture that is much closer to reality on
a cash basis."
Several analysts have turned cold on hospitals, including Susquehanna Financial Group, which
sounded an alarm about bad debt in December. Maryann Hennessey, an analyst at Criterion
Research Group, said she recently issued a "sell" recommendation on HCA Inc. after the nation's
No. 1 operator missed her first-quarter earnings target, indicating that efforts to rein in bad debt
have been "ineffective."
In recent weeks, one hospital company after another has rolled out disappointing earnings blamed
mostly on ballooning bad debt. HCA raised its provision for doubtful accounts to $694 million, or
11.7% of revenue, up from 8.1% a year earlier. U n iv ersa l H ealth S e r v ic e s Inc.'s bad-debt
ratio soared to 10.5% in its general hospitals and 8.4% overall. Triad Hospitals Inc. warned that
its 10% ratio could go higher this year.
Spurts in hospital bad debt usually trail slowdowns in the economy, which is happening in this
cycle. W hen people are laid off, they can extend their employer-sponsored medical insurance for
as long as 18 months. So even as the economy appears to be strengthening, hospitals are hurting
because of the delayed impact. And there are signs that the damage isn't finished yet.
"We're seeing a fundamental change" in the insurance market that is driving up hospital bad debt
and could be permanent, said David Haushalter, an accounting analyst at Susquehanna Financial
Group. "I don't think this problem is going to go away once the economy improves."
That is because many working people with shrunken benefits aren't paying their hospital bills, or
at least not the full amount. Employers across the country are rejiggering coverage to push a
larger share of the health-care cost onto their workers. Meanwhile, hospital prices continue to
climb. Employees' out-of-pocket expense for health care will rise 23% this year, according to a
forecast by Towers Perrin, a national benefits consultant.
The bad-debt problem has been acute at Tenet, which is facing challenges on many operational
and legal fronts. Last year, Tenet's bad-debt expense was $1.4 billion —70% from uninsured
patients, 20% from managed-care companies and 10% from the unpaid balance of insured
patients. Tenet said last week that bad debt in the quarter jum ped 29% over the year-earlier
quarter to 11% of revenue. The percentage fell from 11.9% in the preceding fourth quarter, but
Tenet hasn't backed off a warning that the figure could settle at about 12% for the year. As of 4
p.m. yesterday in New York Stock Exchange composite trading, Tenet's stock was up 14 cents to
$11.90.
Tenet's high bad debt is partly a remnant of an aggressive pricing policy the company renounced
in late 2002. Hospital gross charges, similar to the list price of a car, are rarely paid by anyone.
But accounting rules require that bad-debt expense be written off in an amount equal to the
charges presented to the patient.
HCA, of Nashville, Tenn., admitted 18,000 uninsured patients to its hospitals during the first
quarter, an increase of 2,200 from the same period last year. HCA, which implemented a discount
program in October, is trying to improve financial case management at its 191 hospitals.
Individual hospitals have a point person who works with the registrars, financial counselors and
cashiers to manage the collection process. HCA's shares were up 19 cents to $40.82 as of 4 p.m.
in Big Board trading.
W rite to Rhonda L. Rundle at rhonda.rundleA wsj.com and Paul Davies at
paul.davies@wsj.com4
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