Wednesday, June 8, 2016

Quickies: The True Value Of A Debt

     Ann Barnhardt posts some revealing facts about a recent, seemingly enormous charitable gesture:

     I came across this story and really felt the need to make sure you all are aware of this and understand it.

     So some guy on TeeVee decided to go into the consumer debt market and buy some consumer debt – this is what COLLECTION AGENCIES do.

     He bought $15,000,000.00 (fifteen million dollars) of medical debt out of Texas and paid… wait for it… just under $60,000 for it. And he paid the asking price. That is what the portfolio of bundled debt was OFFERED at by the previous holder, who may or may not have been the originator.

     Guys, that is $0.004 cents on the dollar. FOUR TENTHS OF ONE CENT per dollar. Which means that if a debt collector settles with the debtor for $0.01 on the dollar, his gross profit margin would be a mere 250%.

     If you’re unfamiliar with debt trading among the institutions in that market, you’re probably already startled, if not shocked. But please remember two things above all else:

  1. The “just under $60,000” was the seller’s asking price.
  2. This was debt incurred for medical products and services.

     Now back to Ann, a bit further on in her tirade:

     Just look at the data above. It implies a 25000% markup [on those medical products and services] to the paying private consumer. Everyone else (namely insurance companies and government… but I repeat myself) backs out of the TWENTY-FIVE THOUSAND PERCENT CUSHION.

     These are the toxic fruits of third-party funding for anything. Whenever Smith buys anything from Jones and (for whatever reason) Davis must pay for it, Smith becomes unconcerned with the “price” to him. Why should he be concerned? It’s not his job to cough it up. Neither is it his job to assure Jones’s happiness with the results. Compound the damage by allowing government to get involved as a provider of subsidy or the guarantor of payment, and the destruction of any logical connection between goods and services, their end-user prices, and the ultimate payment for them is guaranteed. The numbers will no longer bear any relation to reality.

     You are more or less guaranteed that whatever amount your doctor, dentist, surgeon, or anesthesiologist bills your insurance company for, he’d take ten percent of that amount as a payment-in-full from you and be happier than a clam at high tide. That’s why so many physicians are going “patient’s cash only:” i.e., refusing to take third-party payment. Given the costs of administration and record-keeping, the insurance companies’ bargaining power, and the physician’s greater dependence on prompt payment, he’d almost certainly get less than ten percent from your insurer. Possibly a lot less.

     Now think about education costs for a while. Especially college tuitions. I’ll be taking a healthful walk around the block.


Adrienne said...

All I have to do is look at what Medicare pays to know there is major fraud going on. Something that should cast $50.00 is billed at #300.00.

What's really funny about this whole thing is the stupid libtards who actually think this guy spent 15 million dollars instead of 60K.

Eric said...

I'm really surprised that Ann is so wrong on this. The debt in question has been sold to Debt buyers for a tiny fraction of the face value. There's nowhere *near* a 25000% markup. More like the originating doctors & hospitals took a 99%+ bath. The debt collectors do not settle for a penny on the dollar; they want *the whole thing*. They only get 1% at most to pay, though.

Francis W. Porretto said...

Yes, Eric, Ann does wildly overstate here, but she has a penchant for doing so. However, the ratios involved are important even so. Why is the collection agency willing to accept such a small fraction of the face value of the debt? First, because they purchased it at a huge discount; second, because special provisions of the tax laws that specifically address "bad debt" make it possible to gain further via the "write-down" of other income, which is also one of the reasons the originators are willing to discount the debt so steeply.

The point is that the non-specialist's eye cannot see any logical connection between the original debt amount and the amount that ultimately "satisfies" the debt. Rationality has blown a fuse due to government intervention, as is so often the case.

Linda Fox said...

The price paid by the final buyer has no relationship to the original debt. It was acknowledgement that collecting the debt was unlikely, apt to be expensive, and not worth the trouble. The medical people off-loaded it to the collection agency, for a pittance, with the result that they had a tax write-off.

The collection agency likely made a small profit, or, at least, not a heavy loss. They also got a tax write-off if they lost money, plus, they got CASH, right then.

The final owner of the debt gets to feel, and appear to be, a prince of a man in public opinion. He, too, gets to write off the debt.

The loser? The federal government, who gave at least 3 different entities tax deductions. Which will be made up by schmucks like the original debtors, who are high-fiving themselves at their good fortune, but who will have to pay higher taxes as a result.