What you don’t know about your debt

A former roommate of mine turned me on to an article recently that I found pretty interesting.  Apparently, an offshoot of the Occupy Wall Street movement, Rolling Jubilee, has purchased just about $15 million of debt.  But they didn’t pay $15 million for it.  Not even close.  They paid just over $400 thousand to purchase $14.7 million of medical debt, which they immediately forgave, making some peoples lives much much better.  While the purchase price of the debt may sound crazy but is actually a fairly common practice in the finance and healthcare industries.  There are companies that exist solely to purchase charged off or way, way past due debt from banks and hospitals for pennies on the dollar.  They then go and collect.  When you’re in debt up to your eyeballs and the collectors are calling everyday, well, that’s these guys.

I wish I could come up with witty slogans that rhymed

I wish I could come up with witty slogans that rhymed

Ok, so, let me back up.  I may have rushed into the idea there.  Let’s start with the concept of medical bills and debt being sold from hospitals to parties otherwise unrelated to your medical procedures.  A hospital may do $100 million in business a year at their cost but, at the end of the day, is only able to take in $30 million in revenue.  The difference typically amounts to several areas: medicare and medicaid reimbursement rates, charity care, and bad debt provisions.  The $100 million is what the cost of the services for the hospital should be but, after they get reimbursed by everyone and deal with debts and self payers, they only ever see $30 million of the revenue.

This is where the collectors come in.  A typical hospital will see about 60% of its gross revenue being medicare or medicaid based.  The remaining 40% will be broken up between those with insurance and people the healthcare industry call “self payers.”  Basically, uninsured people or people who have hit their lifetime spending cap under their insurance.  A hospital wants to limit how many of these people it sees because, typically, they will immediately write off 95-97% of self payer revenue.  So if our example hospital has maybe 15% of its gross revenues tied up to self payers ($15 million), they can sell it to a collection agency for some immediate revenue.  Looking at the example given by Rolling Jubilee up top, the hospital can receive $400K when it believed it would never receive a thing.  It saves them the time and expense of trying to collect on it.  The collector, meanwhile, doesn’t have to get the $15 million to make a nice return. If they can turn their $400K investment into $3 million, they have made a good return after expenses.

And this is where the point of this whole thing comes in: everything is negotiable.  Right now, 60% of bankruptcies in the United States come from medical bills, meaning that somewhere in the process I mentioned above, ordinary people are losing control of their financial lives.  What no one ever told them is that debt, when it is traded on an open market, is negotiable.  If someone is accumulating debt related to medical procedures or anything done at a hospital, well, the price is far more negotiable than you think.  Just look at the above!  The hospital is going to sell your debt to someone for 3% of the full price that they want you to pay.  If you can’t pay the full amount but can pay 10%, offer it!

I know this may seem like a crazy person’s advice but I honestly mean this.  I see a lot of personal debt out there.  I review financials of companies and people.  I perform due diligence on hospitals and see them losing money as the self payer amounts rise and they continuously write the amounts off.  One of the big problems in the world of healthcare is the rising cost.  A part of the rising cost is the fact that many people have, for years, been unable to afford the healthcare.  Because they can’t afford it, the hospitals write off the amounts and pass the charges along by gradually, inexorably, raising the costs elsewhere.  As they do this, more people can’t afford the care, it gets written off, so on and so forth.  It’s a bit of a terrible spiral down.  The only people who win, in the end, are the collectors.  And let’s face it, we all hate collectors!

The next time you find yourself falling into debt, whether it is credit card or medical debt, and you’re getting to the point where you cannot pay anymore, take a deep breath and pick up the phone.  Your bank, your hospital and your credit card company will all work with you to make sure that you can pay.  In the end, they just want to be paid for services rendered and you just want to be out of debt.  Remember, in the world of finance, everything is negotiable.  Until next time everyone!


Photo courtesy of Aaron Bauer