Healthcare Debt: Not Your Typical Portfolio

February 10th, 2007

Our recent research, Healthcare ARM 2006, found that healthcare providers set aside $129 billion annually to cover bad debt – that’s roughly 7 percent of industry revenues. Yet despite the pressures to recover this debt, the size of the healthcare debt purchasing market is still relatively small. Of the estimated $110 billion in face value of delinquent debt purchases that took place in the United States during 2005, we estimate less than 4 percent was healthcare debt.

We anticipate the healthcare debt buying marketplace will grow, however, as healthcare providers increase their willingness to sell portfolios, and debt buyers compete for them. Prices of healthcare portfolios have been increasing in recent years, feeding added incentive to some healthcare providers to sell their debts. Kaulkin Ginsberg’s research suggests that the average price of a healthcare debt portfolio ranges from 0.25 percent to 5 percent of face value, with an average between 1.5 percent and 3 percent.

Hospital debt portfolios aren’t like other asset classes. One factor in the relatively small size of the market segment is the unique nature of medical debt. The charitable mission of many healthcare providers and their overall sensitivity to public relations problems preclude many from selling debt at all. When debt sales do take place, portfolios may not be awarded to the highest bidder. Healthcare providers are aware of the impact the debt buyer will have on their reputation within the community. As a result, retaining control over accounts may rank as high on a seller’s requirements for the transaction as making a profit.

Since healthcare providers are unusually sensitive to the effects of the collection process on their community reputations, liberal buy-back provisions have been included in their agreements with debt buyers. These provisions allow hospitals to repurchase accounts that have been sold to a debt buyer on request.

Another important distinction between healthcare and other sectors of the debt buying market is the absence of a secondary market. While reselling accounts and portfolios is common in other industries, the practice is excluded in contract provisions by hospital finance managers who may be concerned more with maintaining control and mitigating public relations risks than with maximizing profits as part of a transaction. The absence of a secondary market for medical debt also has the consequence of holding prices relatively low relative to other markets, in which cash flows from the expected resale of debt portfolios are often incorporated into the price of a purchase.

The good news is that with the prolonged relationship between debt buyer and seller, forward-flow agreements have become more popular in recent years with healthcare providers that sell debt. These agreements involve the ongoing sale of delinquent receivables, typically on a monthly basis. These agreements can decrease the administrative work on behalf of the hospital and can serve to strengthen the relationship between the healthcare provider and the debt buyer. As hospitals become more comfortable selling debt, the number and frequency of forward-flow agreements are likely to increase. This may cause successful debt buyers in the space to cultivate relationships with debt sellers and work closely with them as if they were clients, rather than sources of inventory.

This article is based on Kaulkin Ginsberg’s Healthcare ARM Report, 2006 (October 2006). This 60-page research publication was developed in partnership with healthcare providers and receivables management companies throughout the United States. Kaulkin Ginsberg’s research on the healthcare ARM market is available online at www.insidearm.com/go/research. A copy of the executive brief, “Healthcare Receivables Management: Strategic Data on a Growing Market,” is also available free of charge on this section of the site.

 

For more information, contact us at hq@kaulkin.com.

 

Comments are closed.

LATEST BLOGS

Can I Determine the Market Value of my Business Before Going to Market?

January 16, 2018

The decision to sell your business should not be taken lightly. Before you respond to the next inquiry from an unknown buyer and potentially turn your business upside down, make sure you have a thorough understanding of your company's value.....

» see this post    » all posts


Another Successful Semester: Kaulkin Ginsbergs Fall 2017 Internship Highlights

January 11, 2018

Every spring, summer, and fall, the Kaulkin Ginsberg team selects highly qualified students in the Greater DC Metro Area to join our team as an intern for the duration of the semester. We strive to create a program that not only benefits our firm, but also provides unique opportunities for students, and this fall was no exception.....

» see this post    » all posts


ARM Industry Benchmark: Five Key Ratios Explained

January 4, 2018

Far too often, owners struggle to assess opportunities for growth or investment because they lack the information needed to make informed, strategic decisions on how best to position their business for long-term success. As you develop 2018 goals, Kaulkin Ginsberg has identified, and defined, five key benchmark ratios to assess your company's 2017 performance.....

» see this post    » all posts


RECENT ANNOUNCEMENTS

Mike Ginsberg to speak at RMA's 2018 Annual Conference

January 9, 2018

Mike Ginsberg, president and CEO of Kaulkin Ginsberg, will be joining a panel of industry experts at RMA's 2018 Annual conference to discuss M&A and financing in the ARM industry.....

» see more




Kaulkin Ginsberg Company announces the addition of the U.S. federal government market segment on KG Prime.

December 5, 2017

As part of Kaulkin Ginsberg expanding market intelligence series on KG Prime, their market research team recently retrieved and examined data regarding the US federal government market segment.....

» see more




Kaulkin Ginsberg Company Teams up with Topline Valuation Group to Offer a New Valuation Service

November 21, 2017

Kaulkin Ginsberg, in conjunction with its sister company Topline Valuation Group, announces the release of a product that provides ARM company owners with an in-depth assessment of their company's strategic opportunities.....

» see more