Fitch Report: Bad Debt in the U.S. For-Profit Hospital Sector

Fitch Ratings-Chicago-09 February 2007: Fitch Ratings believes that the for-profit hospital industry will continue to be pressured from the growing numbers of uninsured patients, leading to rising levels of uncompensated care and further scrutiny of bad debt accounting practices, according to a report published today. In the report, Fitch presents a detailed discussion of each provider’s accounts receivable reserving methodologies, historical account collection rates, and overall levels of bad debt and charity care, allowing Fitch to assess which providers are most at risk for future margin degradations or one-time accounting charges.

The impact of the rising numbers of uninsured (15.9% of the population in 2005) on the for-profit hospital industry has been substantial. In 2006, providers recorded nearly $300 million in one-time charges related to changes in bad debt accounting methodologies. At the same time, margins have been pressured across the industry as a result of rising bad debt. Fitch projects that these pressures will continue in 2007, and that providers will need to continually evaluate their accounting methodologies and discounting policies to deal with the growing numbers of uninsured and underinsured patients.

Fitch notes that reported bad debt expense is only part of the story; total levels of uncompensated care (including charity care and discounts to the uninsured) are growing much faster than reported bad debt, and currently average more than 17% of reported revenues. The report presents more detail and analysis on the charity care and discounting policies for each provider, and accounts for differences in these policies when comparing reported bad debt expense and accounts coverage across the industry.

The report also discusses strategies that are being adopted in the industry to mitigate the impact of rising bad debt, from centralized collections to unique collaborations with managed care and financial services companies.

The full report ‘Bad Debt and Reserving Methodologies in the For-Profit Hospital Sector’ can be found on the Fitch Ratings web site at ‘www.fitchratings.com’. Fitch’s 2007 outlook report for the U.S. for-profit hospital industry is also available.