Understanding hospitals’ bad debt expenses and profitability

By

Updated

Hospitals’ bad debt expenses

Uncompensated care includes services for which hospitals don’t get any payment—neither from the patient nor from the insurer. It’s a combination of charity care and bad debt expenses. In charity care, hospitals don’t expect to be paid for the services. On the other hand, bad debt expenses accrue when patients who haven’t applied for charity care are unable to pay for the services they’ve used.

Graph 67

Bad debt expenses and uninsured rate

Article continues below advertisement

According to the American Hospital Association (the AHA), uncompensated care costs in 2013 amounted to about $49 billion. Bad debt expenses closely relate to unemployment levels and the total number of uninsured people. According to a poll conducted by Gallup, the percentage of uninsured people increased from 14.8% to an average of 17.1% in the fourth quarter of 2013. This number has, however, reduced to 13.4% in the second quarter of 2014.

You can attribute this improvement in insurance coverage to the implementation of Obamacare provisions of Medicaid and employer-sponsored insurance expansion. The bad debt expense of the sample for-profit hospitals also shows the same trend, as it decreases with decreases in the uninsured rate. HCA Holdings (HCA), Tenet HealthCare (THC), Community Health Systems (CYH), LifePoint Hospitals Inc (LPNT), and Universal Health Services (UHS) are a few of the for-profit hospitals that have benefitted from this trend.

Graph 29

Graph 30

Bad debt expenses and hospital location

Despite a decrease in the uninsured rate in the fourth quarter of 2013, you can observe a spike in the total bad debt expense. This is mainly attributable to the increase in bad debt expenses for Tenet Healthcare and Community Health Systems, with quarter-over-quarter increases of 66% and 18%, respectively.

LifePoint Hospitals Inc. reported a modest increase of 7% quarter-over-quarter. Community Health Systems and Universal Health Services Inc. reported a decrease of 7% and 1% quarter-over-quarter, respectively. These variations are a result of the varying percentages of uninsured people across regions. Tenet Health Care includes hospitals that are mainly concentrated in the southern region. According to Gallup, these hospitals had an uninsured rate of 21.7% in the third quarter of 2013.

Community Health Systems has a better-distributed portfolio of hospitals with a strong foothold in the Northeast, which had the least uninsured rate of 13.5%. The geography and concentration of hospitals in that region therefore play an important role in determining hospitals’ profitability.

Advertisement

More From Market Realist