New Lows In Hospital Management: Auctioning Patient Debt

(MoneyWatch)  Just when you thought the hospital industry had plumbed the depths in its quest to reduce costs associated with care of the under- or uninsured, it pulls out a new twist. The latest one is a doozy, too, borrowed as it is from the mortgage industry: Some hospitals are auctioning uncollected patient debt online.

Where banks have long bundled together home mortgages and sold them off to investors as a way of reducing their exposure to foreclosure problems -- one major reason for the subprime mortgage fiasco -- some hospitals have taken the analogous step of auctioning off bad patient debt for pennies on the dollar via sites such as ARxChange.com or medipent.com. The logic is simple: Hospitals get an immediate if meager return and no longer have to worry about collections -- or, for that matter, about negotiating discounts to their arcane and inflated bills or offering financial assistance to strapped patients. Meanwhile, the buyers --usually collection agencies -- get to keep the entirety of whatever they recover from patients, which also means they have every incentive to pursue them aggressively.

Here's how the process works, courtesy of the WSJ:

Woman's Christian Association Hospital of Jamestown, N.Y., last fall auctioned about $7 million of debt on ARxChange.com that had already gone through collection efforts by the hospital's staff and by CBJ Credit Recovery, an outside collection agency. CBJ decided to take another shot at the accounts and submitted the winning bid, an agreement to pay the hospital $80,000 over the course of a year in exchange for keeping what it collects from the debtors. "Even though [the unpaid bills] were very old, it was additional value we were able to extract from them," says Chuck Iverson, chief financial officer at the hospital.

CBJ co-owner Andrew Hartweg says his firm is approaching the collection effort in the same way it would if it were working on a traditional contingency basis. This generally involves sending letters to debtors, calling them on the phone, reporting them to credit bureaus and, as a "very last-ditch effort," getting clearance in court to garnish their paychecks, he says. Mr. Hartweg wouldn't say how much CBJ has collected so far on the accounts, but said it has extracted payments on bills dating back to 2003 and anticipates making a profit.

The practice isn't yet widespread, and the WSJ notes that some hospitals have backed away from the auction process, fearing that it doesn't reflect well on their community role. As times get tougher and more hospitals start feeling pinched by unpaid bills -- brought on largely by escalating medical costs and the shrinking insurance safety net -- I suspect those sorts of qualms will look increasingly quaint. So file this together with hospitals' new penchant for charging patients in advance and other aggressive collection measures under "Desperate Times Call For Desperate Measures."