...Economics of Healthcare: Hospitals and other healthcare service providers essentially extend credit to patients at the time of treatment. Treating uninsured and underinsured patients means these companies recognize a substantial amount of revenue that they do not ultimately expect to collect. When reviewing a healthcare provider's financial position, it is therefore important to consider whether a company's bad debt reserve methodology appropriately measures its uncollectible revenue. Historical Experience Cause for Concern: A company with a faulty reserve methodology will systematically understate its bad debt expense while overstating revenue, net income and accounts receivable (A/R). When levels of uncompensated care rose in the middle part of the last decade, bad debt reserve methodologies overestimated the collectability of uninsured (self- pay) patient A/R. As a result, several companies had to record large one-time charges to bad debt expense to increase their balance sheet allowance...
