Healthcare bad debt expense
The total bad debt expense in the healthcare industry is highly correlated to the level of unemployed and uninsured people in the economy. The Health Care Select Sector SPDR ETF has holdings in the healthcare industry (XLV).
Bad debt expense trend
The above graph shows the trend in provisions for doubtful accounts, which is a proxy for HCA Holdings’ (HCA) bad debt expense. These provisions are based on management’s assessment of historical write-offs and expected net collections in the future. Provisions as a percentage of total revenues has sharply declined from 10.1% in 2013 to 7.9% in 2014 on an year-to-date basis.
Uninsured rate falls
According to a survey conducted by Gallup, the uninsured rate in the US has fallen to its lowest level, at 13.4% in the third quarter of 2014. This sharp decline is a result of the Medicaid expansion and the healthcare insurance exchanges launched by the Affordable Care Act (or ACA).
In the 3Q14 transcript, HCA Holdings announced an increase in Medicaid admissions by 37%, plus a corresponding 56% decline in uninsured admissions in the five markets opting for Medicaid expansion. In case of non-expansion markets, the company noted a 4% decline in uninsured volume. The average decline in uninsured volume for all the states amounted to about 10%.
The decrease in unemployment rate from 7% in January 2014 to 5.8% in October 2014 also increased the number of people covered by employer-sponsored insurance programs. The resulting decline in the uninsured rate translated into savings for HCA Holdings, which does not have to write off care costs. Instead, the care will be compensated by private insurers or government programs.
According to the Department of Health and Human Services, the ACA is expected to reduce the bad debt expense of hospitals by approximately $5.7 billion in 2014. Out of this, around $4.2 billion savings are expected in states that expanded their Medicaid program.