In a lucrative new form of fiscal alchemy, a growing number of hospitals, working with a range of financial companies, are squeezing revenue from patients with little or no health insurance. April Dial's dealings with Hot Spring County Medical Center in Malvern, Ark., illustrate how the transformation of medical bills into consumer debt means quicker cash for medical providers but tougher times for many patients of modest means.
Dial, a 23-year-old truck-stop waitress who earns $17,000 a year plus tips, suffers from Type 1 diabetes. Sudden drops in her blood sugar level have sent her to the emergency room four times in the past three years. In September she spent three days at Hot Spring, including two in intensive care, fighting complications from her ailment. The bills came to more than $14,000. Dial's job offers no health insurance.
Until recently her mother, Carolyn, who waits tables at the same roadside diner, sent Hot Spring $100 a month under the nonprofit hospital's longstanding zero-interest payment plan. Dial says she couldn't make payments herself because she spends more than $150 a month for other treatment and insulin. In October she learned that Hot
Spring had transferred her account to a company called CompleteCare, one of the many small firms fueling the little-known medical debt revolution. Enticed by the enormous potential market of uninsured and poorly insured patients, financial giants such as General Electric (GE), U.S. Bancorp (USB), Capital One, and Citigroup (C) are rapidly expanding in the field or joining the fray for the first time.
CompleteCare informed Dial that under the complicated terms of her newly financed debt, her minimum monthly payment had shot up more than fourfold, to $455. Dial says she doesn't have anywhere close to that amount left over after rent, food, and other doctor visits: "Every extra dime I have goes to paying medical bills."
Collecting from "self-pay" patients like Dial has long been the bane of medical administrators. When they don't get paid immediately, hospitals typically recover around 10 cents on the dollar owed, even when they hire collection specialists. So hospitals and clinics are bringing in more sophisticated help. They are transferring patient accounts wholesale to finance experts, banks, credit-card companies, and even private equity firms. Many of these third parties use credit scores and risk-analysis software to price the debt and impose interest rates as high as 27% on past-due bills.
Among hospitals, nonprofits like Hot Spring County Medical Center are more likely than for-profit rivals to join forces with finance firms. Fewer nonprofits have effective in-house collection departments, and in many regions a higher proportion of patients at nonprofits lack insurance. "Hospitals can't just be an interest-free finance vehicle," says Todd Cole, director of patient accounting at TriHealth, a $2 billion pair of nonprofit hospitals in Cincinnati. "The world of $5 sent to the hospital and they will never send me to collections, never sue me—that world has gone away," he adds. TriHealth sells patient accounts at a steep discount to firms that specialize in collecting delinquent consumer debt. "Hospitals need their cash," Cole says. "It is the lifeblood that supports the doctors, the nurses."
For hospitals and outside firms to obtain that cash, someone has to pay. The people most likely to feel the pain are often those least able to afford it—patients who lack private insurance but who are not poor enough to qualify for charity care or government benefit programs. The pool of self-pay patients is mammoth: Some are among the nation's 47 million uninsured; others among the 16 million whose plans offer scant coverage or have deductibles as high as $10,000. Several recent studies have shown that medical debt is a leading cause of personal bankruptcy filings.
A host of nimble firms like CompleteCare in North Little Rock, Ark., began exploring this terrain years ago. Bigger players have jumped in more recently, although the market remains fragmented and reliable market share information isn't available. U.S. Bank, a U.S. Bancorp unit, finances about $2 million in patient debt per month through a medical-benefit firm, charging most customers annual interest of 13.5%, and as much as 24% on late bills. General Electric's powerful financial arm markets its CareCredit card to dentists, plastic surgeons, and some hospitals, with loan volume expected to hit $5 billion this year, up 40% from 2006. Citigroup and Capital One now offer similar cards. "Everybody is saying [medical finance] is the next horizon—whether it is lines of credit or credit cards," says June St. John, a senior vice-president at Wachovia (WB), which is exploring the business. Whetting all these appetites is the $250 billion consumers pay in medical expenses out of their pockets, an amount that doesn't include insurance premiums. That's an estimate for 2005 from the consulting firm McKinsey & Co. The figure could hit $420 billion by 2015.
BusinessWeek's investigation of the fast-expanding medical-finance field has uncovered hazards, however. Many patients say they don't realize their debts are being shifted to such interest-charging middlemen as GE Money Bank, the unit that issues the CareCredit card. That's what happened to Alice Diltz when she visited Hillside Dental Care in Queens, N.Y., in October, 2005. Diltz, a 68-year-old part-time hospital aide, needed implants for two rotting teeth and three missing ones. The Hillside staff told her she would have to pay $7,450. But her dental insurance, provided by her retiree husband's policy, offered only $200 for extractions. Diltz paid $250 from her pocket and signed up for what she says she thought was an installment plan directly with the clinic. In fact, she signed an application for CareCredit, which was labeled as such, but in small print. Diltz says neither Hillside dentist Ben Mokhtar nor his staff mentioned a credit card.
While having her teeth pulled, Diltz began to bleed heavily. She got scared and left the dental office after the extractions. Four days later she canceled the implants, assuming her dealings with Hillside were over. But several weeks later she received a bill from CareCredit for $7,000. Hillside had transferred that amount to the credit-card company, which in turn paid the clinic about $6,300 up front. Diltz says she called CareCredit to dispute the charge, but bills kept arriving. Several weeks later, she says she called again and objected in writing. But GE told her she had missed a 60-day deadline and couldn't reverse the charge.
The GE card typically comes with an introductory 0% interest rate, but after Diltz didn't make her initial payment, the rate leapt to 26.99% on an annual basis. In August, 2006, GE Money Bank sued her in state court in Queens. With the help of the nonprofit Elder Law Clinic at St. John's University School of Law, she contested the debt, which grew to $10,175. "It was horrible to get those letters from GE," says Diltz. She and her husband live on $18,000 a year from her part-time job and social security benefits. "It was so stressful from day to day."
A GE spokeswoman, Cristy F. Williams, said in an e-mail that the vast majority of CareCredit's 6 million customers are satisfied. In the Diltz case, "we provided her with a dispute form and discussed the dispute process with her a number of times," Williams added. "She did not respond for several months." However, on Nov. 12, after BusinessWeek inquired about the case, GE said it had changed its stance. Williams said the company would erase Diltz's debt and remove any reference to it on her credit report. The spokeswoman said GE had begun to reassess Diltz's account on its own initiative. "We could have and should have been more sensitive to Ms. Diltz," she said.
Diltz's lawyer, Gina Calabrese, said she was skeptical that GE would have reversed itself absent a reporter's asking questions. "They knew about all these facts almost a year ago," the attorney said. "Imagine what is happening to all the unrepresented people who have valid cases." Mokhtar and his staff declined to comment.
In another instance, BusinessWeek's questions prompted GE to acknowledge that a medical clinic had pressured uninsured patients into using the CareCredit card. Dawn Shelly, 33, visited the Christie Clinic in Urbana, Ill., in late 2003 for a sinus infection. She told a staff member she couldn't afford to pay the $90 bill in cash. At the time she earned $7.50 an hour as a part-time school bus monitor; the job didn't offer insurance. The clinic, Shelly says, told her the only option was to apply for CareCredit. She says she thought she was signing up for a program similar to insurance, under which she would owe only a modest co-payment. "I never would have signed up if I knew it was really a credit card," she says.
Her CareCredit balance mounted with several additional visits to the clinic and a local emergency room, where she was treated by a clinic doctor. Unable to keep up with payments, Shelly, now unemployed, owes $3,485 to CareCredit, according to an Oct. 24 collection letter. Much of that balance comes from late fees and finance charges of 26.99%.
Until recently, the Christie Clinic's Web site stated that patients who couldn't pay in full "must apply for CareCredit." After BusinessWeek asked GE about the clinic's policy, the company said it would correct the situation. "We are instructing the provider to remove the language and change their policy for soliciting applicants for CareCredit," said GE's Williams. She added that GE would drop all fees and finance charges from Shelly's bill. The company also will try to resolve the concerns of any other patients who were required to use CareCredit, she said.
In early November the Christie Clinic removed all references to payment policies from its Web site. Anni McClellan, the clinic's director of financial services, said it is reviewing the policies. Christie discusses a variety of payment options with patients, she said. "There are so many specific circumstances surrounding each patient's financial conditions."
THE FINE PRINT
Early experiments with financing self-pay medical bills began in the 1980s, when consumer-credit executives saw an opportunity in soaring debt levels and inefficient hospital billing practices. Most patients think that "your doctor will probably see you again and the hospital will not turn you away if you don't pay the bill," says Richard L. Clarke, chief executive of the Healthcare Financial Management Assn., an industry group. "On the other hand, with the credit card or a loan [from] the bank, people will be more concerned about defaulting because that is almost certain to cut them off from credit."
That's precisely the strategy that drives CompleteCare, the small Arkansas firm, which says it works with 40 hospitals and more than 400 physician practices across the country. Addressing potential health-industry clients, the company boasts on its Web site that it "pioneered the concept that patients become consumers the minute they walk out of your facility." April Dial, the diabetic waitress, says she didn't realize she had been transformed in this manner until weeks after leaving Hot Spring Medical Center in September.
Dial says a hospital financial counselor told her mother by phone in October that Hot Spring had discounted her debt by roughly 50%, to $7,300, before transferring the balance to CompleteCare under a contract the company signed with the hospital in June. Although she was surprised to learn about the transfer, Dial in fact had signed an admission-consent form at Hot Spring that included a small-print section authorizing the hospital to turn over her account. In contrast to the hospital's former zero-interest payment plan, CompleteCare charged Dial 5.75% interest on the first $2,500 of her balance, with a minimum monthly payment of 10% of the outstanding debt.
CompleteCare initially applied the 10% rate to only $4,545 of the total bill, and required that Dial pay $455 a month.
After BusinessWeek contacted CompleteCare in early November, and Dial asked to have her case reviewed, the company said it would lower her minimum payment to $125, interest-free. CompleteCare President Steven C. Owen said the company changed the terms because Dial's "situation is so dire in terms of the balance owed. Our whole philosophy is trying to make it easy to pay."
Hot Spring's chief financial officer, Sheila Williams, said the hospital switched to CompleteCare hoping that patients "would pay a little faster if they were charged interest. It would become like a credit card." CompleteCare ran an ad in a local newspaper this summer to announce the change. But in recent weeks, she said, the hospital has reconsidered the arrangement in response to a complaint from a patient other than Dial. Hot Spring decided that effective Nov. 9, patients using CompleteCare would no longer be charged interest. "We just rethought it and decided that maybe it is not in the best interest of our patients," the hospital executive said.
Dubious innovations in medical financing are beginning to gain attention in Washington. Lawmakers and the IRS are investigating more broadly whether nonprofit hospitals provide sufficient free care to the uninsured to warrant more than $50 billion in annual tax breaks. Senator Charles Grassley (R-Iowa), the ranking Republican on the Senate Finance Committee, says some new financing arrangements appear to undermine the justification for tax-exempt status enjoyed by more than half of the country's 5,700 hospitals. "I'm very troubled by what we're seeing with some nonprofit hospitals' cozying up to banks, debt buyers, and credit-card companies over patients' medical bills," Grassley said in a statement responding to questions from BusinessWeek. The American Hospital Association said it hasn't studied the financing in question, but the trade group has repeatedly asserted that nonprofits provide ample community service to justify their tax benefits.
One of the leaders in this new field, HELP Financial, says that it merely makes the health-care business run more smoothly. The privately held Plymouth (Mich.) firm, whose initials stand for Hospital Expense Loan Program, says it has financed close to $300 million in medical bills at 100 hospitals nationwide. HELP purchases the debt at a discount and then charges patients interest of 10% to 18% over periods of one to five years. "The motivation for the hospital is really to keep them in the health-care business and out of the banking business," says HELP Vice-President Steve Posa.
Mia and Jase Redick reluctantly became HELP customers earlier this year and then discovered that they owed the company a hefty 14.5% on a bill of $6,293. In January, Mia, 36, had been rushed to Satilla Regional Medical Center in Waycross, Ga., after suffering a mild stroke. Tests revealed a small hole in her heart, a congenital defect that eventually required surgery. Mia, a pharmacy worker, and Jase, a job trainer for the state of Georgia, earn a combined $90,000 a year and have two small children. They lost state-provided insurance when Jase became an independent contractor in 2005, and had chosen to save money by going without coverage at the time Mia had the stroke. The couple assumed they would be able to pay the $6,293 tab for emergency care and tests in monthly interest-free installments. For years that's how Mia's family, Waycross natives, had used Satilla's in-house payment program. "It's what we always did," she says.
But on the winter morning when Mia arrived at the emergency room, a hospital administrator informed the Redicks that Satilla no longer offered its old payment plan. Jase says he was distraught and refused to discuss money that day. At a meeting the next week, the Redicks say they were told they had two options: retire the debt within 90 days and receive a 15% discount, or finance through HELP. With insufficient cash in the bank, the Redicks chose HELP. Distracted by Mia's condition, they didn't ask about having to pay interest. The bill arrived in March with the 14.
5% rate, which translates into a monthly payment of $148. On top of $24,000 they owe to another hospital where Mia had surgery in February, "the overall cost of the debt is a lot to handle," says Jase.
Officials at Satilla say they brought in HELP in 2002 to reduce bad debt levels among the large population of uninsured patients in the hospital's rural south Georgia region. Through October, HELP had acquired $718,000 in Satilla debts. HELP pays 92 cents per dollar owed to the hospital. Satilla could trim the firm's 14.5% interest rate by selling debts at a greater discount but has chosen not to, according to Brenda Williamson, the hospital's accounts-receivable supervisor.
Barbara G. Albert, Satilla's patient financial services manager, stressed that the Redicks turned down Satilla's discounted 90-day payment plan. With more uninsured patients failing to pay medical bills, she said Satilla has to rely on HELP. "When you go to the dentist or the vet, you know you have to pay. If you go to the hospital, why should it be different?" said Katrina Wheeler, Satilla's chief financial officer. HELP's Posa said that it's up to Satilla and other hospitals to decide on appropriate interest rates: "What is right in one market may not be right for another."
Melvin Johnson, 55, another Satilla patient, has insurance, but his low-cost policy with AARP, the retiree-advocacy group, didn't cover the colonoscopy his doctor ordered in September. Johnson turned out not to have cancer, but the visit produced a bill for $3,304. He and his wife, Dolores, earn about $35,000 a year from her work as an outreach coordinator at a community health center and his construction job. Satilla's cut-off for charity care is twice the federal poverty level, or $27,380 for a two-person household. Unable to pay in cash, the Johnsons chose HELP. The 14.5% interest rate means their monthly payment comes to $125. "It has caused us to rearrange our budget," says Dolores, 35. "We've had to cut other expenses and reduce our savings."
Satilla's Albert said the couple could have bought better private coverage. "They're saving money," the hospital manager said. HELP imposes a cost on the hospital, her colleague Williamson added, in that Satilla gives HELP an 8 cents-per-dollar discount on patient debt.
Some medical financing programs manage to turn a profit without charging patients conventional interest. Aequitas Capital Management, a Portland (Ore.) private equity firm, provides financing through its CarePayment card to 50,000 patients treated at two dozen hospitals. CarePayment charges no interest on debts repaid over 25 months. Aequitas Chief Executive Robert Jesenik says his firm makes money by buying patient debts for about 80 cents on the dollar and then seeking to recover the full amount.
But patients aren't necessarily better off with CarePayment because they sometimes forgo discounts hospitals offer to people who pay in cash. At Spectrum Health, a nonprofit group of seven hospitals in Grand Rapids, Mich., self-pay patients who can write a check within 30 days receive a 20% discount; those who pay within six months get 10% off. Patients who charge their debts to CarePayment get no discount. Referring to CarePayment, Kathleen Engel, an associate professor at Cleveland-Marshall College of Law, asserts: "This is a markup, not a markdown." Engel, a consumer law expert, says that because hospitals effectively charge more when patients use CarePayment, the hospitals should disclose the price difference as the equivalent of an interest rate under the federal Truth in Lending Act.
Joseph Fifer, Spectrum's vice-president of finance, said its disclosure is legally sufficient. Steven M. Wright, Aequitas' senior managing director for health markets, agreed. Wright said Aequitas complies with the law by disclosing its payment terms when it sends CarePayment charge cards to new customers.
From his position as chief financial officer of Methodist Le Bonheur Healthcare, a $1.2 billion nonprofit network in Memphis, Chris McLean has grown increasingly skeptical of all these developments. Five of his seven hospitals serve a large portion of Memphis' poor population. Instead of selling medical debt, Methodist gives self-pay patients a 50% discount. Many are then allowed to pay over five years, interest-free. The debts of many others are immediately written off. One of Methodist's facilities serves a wealthier clientele and another is the city's only children's hospital; those units subsidize the other five.
"We get a lot of tax breaks, and for that we should produce some community benefit," says McLean. "If we heal somebody medically, but we break them financially, have we really done what is in the best interest of the patient?"