November 25, 2008
Bad debt continues to rise in the healthcare industry, as patients take on an ever-increasing share of their healthcare costs and a weakening economy stretches pocketbooks. Many hospitals are finding that sale of their bad debt is a practical solution, but it is a decision that must be made carefully. That's the advice offered in a new educational report, Choosing the Right Debt Buyer, sponsored by Capio Partners.
Healthcare debt is different from other types of bad debt. It is not voluntarily incurred, as opposed to much consumer debt. Providers have an ongoing relationship with their patients and are sensitive to their reputation in the communities they serve. They are also subject to unique charity care and privacy requirements. Accordingly, there are many factors that must be considered when identifying a buyer of bad debt.
Setting the Criteria
A basic criterion for selecting a debt purchaser should be experience with buying healthcare debt. Buyers without this experience pose too great a risk to a hospital's reputation through inappropriate collection practices.
Hospitals should also look at a buyer's involvement in both debt buying and healthcare professional associations. One example is the ACA International, an association of credit and collections professionals that has published a statement of principles and guidelines for the collection, purchase, and sale of healthcare debt.
Debt purchasers should be familiar with the Health Insurance Portability and Accountability Act of 1996 (HIPAA). HIPAA contains numerous provisions protecting the privacy of patients' health information, and hospitals can face substantial fines and other serious consequences if rules are violated.
Finally, providers need to be concerned with how prospective buyers intend to handle the accounts. If the buyer intends to hand the purchased accounts over to another firm for collection or to sell the accounts to another firm outright, the provider can be in the same position as having done no due diligence at all.
Your peers are also a good source of advice when considering how to deal with bad debt. The HFMA Revenue Cycle Forum, an online peer-discussion group, recently hosted a feature on "Taming Bad Debt."
Structuring the Contract
Most contracts for the purchase of bad debt include a business associate agreement. The collections process is subject to the HIPAA privacy rules, and a business associate agreement helps ensure that the hospital maintains an appropriate amount of control in the relationship with the buyer.
Transactions where there is no ongoing relationship once the sale occurs are not recommended. Although these transactions are still subject to HIPAA, the provider has no control over the accounts once they are sold.
If a hospital does not have the resources to monitor an ongoing relationship with a bad debt purchaser, "They would have to be extra careful that under absolutely no circumstances would the buyer ever be able to come back to the seller and traipse through medical records to obtain additional data," says Timonium, Md.-based attorney Leslie Bender, CIPP.
The contract should also define the buyer's collection practices. The provider may want to specifically identify what methods can and cannot be used, remembering that the number and degree of restrictions can affect the portfolio's value. The hospital should maintain the authority to buy back accounts at a predetermined price if there are problems with the way the accounts are being serviced.
Monitoring the Collections Process
Once the contract has signed, it is important to follow up the sale with specific controls to help ensure that the relationship is working as the contract intended. Hospitals may require periodic reports detailing any disputes that arise with patients. They may also want to review any form letters or communications used in the collections process.
Attorney Barbara Sinsley of Barron, Newburger, Sinsley & Weir, PLLC, who serves as general counsel for McLean, Va.-based DBA International, a debt buyers association, suggests conducting audits of buyer's collections practices, specifically with regard to HIPAA compliance and the security of the buyer's information technology system.
Warning Signs
A good sign of trouble is a high volume of consumer complaints. Remember, however, that complaints by themselves don't necessarily mean that the buyer's collections practices are inappropriate.
Rozanne Andersen, executive vice president and general counsel for ACA International, notes, "Debt collector communications are by definition fraught with emotion and anxiety from the perspective of the patient. As such, there may be a host of reasons, unrelated to the debt collection process, that may drive a patient to a point of frustration and to consequently file a complaint."
Because hospitals provide such necessary and personal services for their patients, they must do more to construct a good transaction and expect more from a buyer. Providers should especially concentrate in the areas of performing due diligence on the buyer and ensuring HIPAA and charity care regulations will be followed. The HFMA Conference recording, "Charity Care: Protecting Your Hospital's Reputation," can help you understand the legislative and regulatory issues affecting charity care.