One of the reasons West Penn Allegheny Health System fared so badly in the recently concluded fiscal year, according to a spokeswoman's remarks last week, was because of "much higher bad debt."
More than $80 million of it, to be precise.
While hospital systems -- and other companies with significant bad debt, from banks to manufacturers to commercial landlords -- often paint bad debt, or unpaid bills, as a financial fact of life largely out of their control, that's not the whole picture. Experts in the field of revenue-cycle management say that, even in bad times, there are things hospitals can do to improve their billing results.
"If they are not collecting the $50 [co-pay], that's a process issue," not an economy issue, said Brian Sanderson, managing partner of the health services division at Crowe Horwath LLP, a Chicago-based professional services consultant.
And if the hospitals aren't doing the little things right, paying patients and their employers pick up the tab.
"It's not like there's a pot of money" that hospitals can access to cover unpaid invoices, said Denis Lukes, vice president of provider relations and reimbursement at the Hospital Council of Western Pennsylvania. "The cost of bad debt or charity care eventually gets spread to the rest of the individuals, employers and insurers that are paying for care."
Bad debt is money owed to a company that is eventually written off as a loss because the bill hasn't been -- or can't be -- collected. For a hospital, bad debt generally takes the form of care that has been provided to a patient, but not paid for within 120 days.
At hospitals across the country, overdue patient invoices are increasingly being converted to the bad debt column. A year ago, the Cleveland Clinic reported that its spending on bad debt had increased 49 percent, to $86 million, for the fiscal year.
One driver behind the increase, related partly to the economy as well as the ever-increasing cost of health care, is the growing adoption of higher deductible, higher co-pay health plans. When a patient owes more to the hospital out-of-pocket, there's a better chance he won't make that payment and a better chance the hospital eventually eats the cost.
"The hospital used to get the largest part of their payment from the insurer," Mr. Lukes said. "That shifted" over the last decade.
More recently, bad debt growth can also be tied to changes in accounting rules that took effect a year ago, forcing hospitals to record bad debt as a reduction to net revenue, as opposed to an operating expense.
The result, according to some bond ratings services, is that hospitals are now -- or soon will be, depending on when their fiscal year began -- calculating their bad debt more accurately, moving the expense out of the "charitable" care column.
What's the difference?
Bad debt, for a hospital, includes care that should have been paid for but wasn't.
Charity care, on the other hand, originates not from people who skipped out on a bill, but from people who were unable to pay up in the first place. As such, it can be categorized as a charitable deduction and converted to a write-off come tax time.
Both types of "uncompensated care" -- charity care and uncollected bad debt -- have been increasing regionally, according to the Hospital Council, collectively growing 30 percent since fiscal year 2009 among member hospitals.
But while the dollar figure is growing, the share is somewhat steady -- most hospitals, according to hospital data disclosed to the Internal Revenue Service, devote less than 2 percent of total expenses to charitable or subsidized care.
Bad debt, on the other hand, usually eats up 3 to 4 percent of annual revenue for the average hospital. For WPAHS, where bad debt provisions grew to $80.8 million in fiscal year 2012 from $69 million the year before, it now accounts for about 5.5 percent of net patient revenues and 5.2 percent of total unrestricted revenue.
Gross receivables -- the sum of the money owed to a company before bad debts are deducted -- are also up at West Penn Allegheny, an increase that is partly tied to the reopening of the West Penn Hospital emergency room in Bloomfield, WPAHS officials say.
"You'll find that WPAHS isn't alone in experiencing a jump in bad debt" in the most recent fiscal year, said hospital system spokeswoman Kelly Sorice. "If you look at UPMC's recently released audited financials, they experienced an increase in bad debt of 18 percent year-over-year and bad debt is 4.3 percent of its net patient revenue."
One way for hospitals to reduce bad debt is to simply become more aggressive about collecting late bills in-house.
That job would normally fall to a billing and collections department. But WPAHS in March closed its billing departments at Allegheny Valley Hospital and Canonsburg General Hospital, getting rid of nearly four dozen employees and consolidating that function to the WPAHS Pittsburgh headquarters.
Ms. Sorice said the billing layoffs didn't have any effect on collections. "Bad debt [happens] regardless of how many people you have in the billing department."
But WPAHS's interim CEO, Keith Ghezzi, testified last week in Allegheny County Common Pleas Court that the move to achieve "economies of scale" in WPAHS's billing operations backfired on the company.
"It did not work well in practice," he said. Over the course of the last year, WPAHS had to cut ties with its previous revenue-cycle management consultant, PricewaterhouseCoopers, because PwC was already doing work for Highmark. As a result, WPAHS had to hire a new consultant and promote a new revenue-cycle operations chief, on the fly.
"It was a quick battlefield promotion," Dr. Ghezzi said last week.
While some bad debt is unavoidable, especially in areas with elevated unemployment rates, it's a problem that needs to be managed -- and it can be, with attention to detail, Mr. Sanderson said.
His firm's research shows that most bad debts come in small amounts -- $10, $25, $50. In other words, people aren't paying their co-pays, which are the fees that are required by insurers and supposed to be paid by patients whenever they receive medical care.
"Point-of-service collection is going to be increasingly more important" at every point of care, he said.
Hospitals, already dealing with thin margins, also need to get better at immediately identifying who can pay and who can't before the care is provided, not after, and helping those who can't pay sign up for Medicaid or make other long-term payment arrangements, he said.
Hospitals often miss an opportunity by not cracking down on repeat offenders, who account for about 30 percent of a hospital's bad debt and who could be confronted each time they return. Steering people away from the emergency room and into urgent care clinics or more appropriate care settings can also help, since more than half of all bad hospital debt originates from the emergency department.
Once patients leave a hospital, it can be difficult to convince them to pay up -- people generally put delinquent hospital fees on the bottom of the late-bill pile when they are struggling financially.
"If you have a loan for your car and you don't pay it, your car gets repossessed," MeritCare Health System executive Doug Okland told a Minnesota radio station. "If you don't pay your electric bill, they turn off your electricity. ... So we're at the very bottom end, because there really aren't any direct repercussions to not paying your medical bill."
Hospitals whose billing departments get too aggressive, or hospitals that turn late bills over to third-party collections agencies too quickly, also have to be careful about drawing the scrutiny of attorneys general or state legislatures, some of which have proposed "fair billing and collection practices" acts, aimed at curbing too-aggressive hospital debt collection.
In other words, it's a delicate balancing act -- get too aggressive during a bad economy and the hospital has a perception problem on its hands. Remain too lax and it loses out on millions a year.
The same goes for charitable care -- if you claim too much of it, writing off as a charitable deduction what should have been categorized as bad debt, regulators will be watching. But if you don't give away enough subsidized care, lawmakers will question your charitable mission, as happened in 2011, when the Illinois Department of Revenue denied property tax exemptions to three hospitals because their charity care levels were too low, and the hospitals, in the eyes of the state, didn't deserve their tax breaks.
Bill Toland: firstname.lastname@example.org or 412-263-2625.