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 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.


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