The Great American Medical Debt Machine
How Medical Debt Became Big Business
By Luke Messac
The following is an excerpt of a forthcoming book, titled Your Money or Your Life: Debt Collection in American Medicine, to be published by Oxford University Press in 2023.
Image by Esther Moon and Jason Silverstein.
This is the story of how a few industry leaders made a fortune from medical debt collection.
In the past thirty years, medical debt collection has gone from a primarily in-house venture, done by hospitals’ own collections departments, to big business.
Michael Barrist bought his family firm, NCO Financial Systems, from his mother in 1986, two years after graduating from Drexel University with a degree in accounting. His mother had been running the company with three employees out of her home garage. They had only 60 clients and annual revenues of $40,000. Michael paid just $25,000.
Determined to make something more of the tiny operation, Barrist hired Charles Piola, a former high school teacher who had become better known as a leading area sales representative for debt collections. Piola was, according to Inc. magazine, the “king of cold calls.” He specialized in unannounced visits to office buildings, where he tried to convince executives to hire NCO to collect their debts. Driving a Mercedes and dressed in a double-breasted, pinstriped suit, a cashmere topcoat, freshly shined shoes, and cufflinks, he ambled into law offices, ophthalmology practices, insurance companies, banks, and almost any other business acting like he belonged until he found someone who looked like they controlled the books to strike up a conversation with. He attributed his success to his indifference to rejection. So devoted was Piola to this identity that when he eventually left the company, he became a motivational speaker. He promised to rouse business audiences with such themes as “Christ was a Cold Call Salesman.”
For his part, Barrist aimed to use software to partially automate the process of sending letters and making calls. Today these “collection management systems,” software platforms which, for a monthly subscription fee, help collectors track calls, payments, and discussion with debtors, are standard throughout the industry. But at the time, they were rare, and thanks in part to this innovation, NCO could offer lower contingency fees than the competition. The company would take as little as 11 percent of the debt collected, while other agencies would take at least 20 percent. With this combination of shoe-leather charm, cutting-edge software, and cut-rate offers, they were able to rapidly expand their client list.
And while those clients were many and varied, medical debt was the main focus. After an economic recession in the early 1990s, Barrist saw his clientele grow even faster. “A lot of doctors in the past year have decided to use collectors for the first time because they have to do it,” he told the Philadelphia Inquirer. In the company’s first few years, Piola had called hundreds of doctors’ offices, hospitals, and medical clinics looking for business, and his efforts had borne fruit. By 1991, the company mailed out 120,000 computer-generated collection letters every month for its 1700 clients, of which 70 percent were medical.
Barrist and Piola admitted that medical debt collection involved difficult conversations. Barrist lamented that “most people want to pay their bills, they just don’t have the money.” But the business model proved a smashing success, perhaps because so few physicians wanted to have any direct role in collecting bills at all. As Piola explained, most businesses “hate chasing after delinquent accounts. Professional people, especially doctors, lawyers and accountants, find it undignified to hound patients and clients who refuse to pay bills. That’s not their business. But it was our business, and over time we became very adept at it.”
Through aggressive collection tactics and buyouts of rival collection firms, the company grew so large that it became known as “the Wal-Mart of debt collection.”
Through aggressive collection tactics and buyouts of rival collection firms, the company grew so large that it became known as “the Wal-Mart of debt collection.” How did it go about collecting debts? A reporter for Inc magazine got the gist of it as he followed Piola through Wills Eye Hospital in Philadelphia, where the salesman was in his element, handing his business card to any administrator he could find. When Piola happened across a new manager of an ocular oncology practice, who told him about her frustration collecting bills, he described how NCO would collect from one of her delinquent patients: “After four or five months in our system he’s going to get 45 or 50 attempts [to collect]. We’ll send letters . . . We’ll get a neighbor to tell us where he works and go after him there.” Impressed, the manager offered Piola a contract.
Barrist took the firm public in 1996. In its initial public offering on the NASDAQ stock exchange, the firm was valued at $30 million. In the years that followed, Barrist’s star continued to rise. Shares of NCO nearly tripled in value in the first six months on the stock market. Revenues rose from $30 million in 1996 to over $100 million in 1998; during this period, it acquired 11 companies. The company, like many other large firms in the collection business, also offered hospitals the opportunity to outsource the entire billing process, even before bills were past due.
The local papers wrote of Barrist’s rise with wonder, even pride, befitting a local boy made good, with nary a word about the maladies and financial hardships that made his fortune possible. In 1998, Barrist was named the Greater Philadelphia Entrepreneur of the Year by Philadelphia Enterprise Magazine. “I never dreamed in a million years that NCO would be what it has become in size,” he told the Philadelphia Inquirer. But he was nowhere near satisfied. NCO was the fastest growing debt collection company and, the next year, after another round of acquisitions, it was the largest. By August 2001, the company had 8400 employees, and was worth $529 million.
Medical debt collection was a large part of NCO’s work. These were, in the words of Albert Zezulinski, executive VP of global portfolio operations at NCO, “fresh and fertile markets.” In 2007 the company devoted 2,000 of its 9,000 collectors to medical debt. Barrist wanted to go further. Rather than just collecting debt on a contingency basis, he wanted to buy the debt outright, and keep all the revenue from debt collected thereafter. On an earnings call, Barrist told analysts that he expected hospitals to begin selling large volumes of debt for two reasons. First, debt purchasers like him were trying to find new investments, “so they’re going to start waving larger amounts under these hospitals’ noses.” Second, hospitals facing budgetary woes “are going to have to face up to the fact that they need alternate means to generate cash in the door.” His “challenge” he explained, was “getting a hospital client to crack and basically let us buy [their debt].”
Barrist’s prediction came true. A few years later, a growing number of hospital executives had thrown away their old qualms about selling debt. Tenet Healthcare Corp. one of the largest for-profit hospital chains in the country, sold $1.2 billion in debt for $16 million. When a large public hospital put up its bad debt for sale, a reporter was asked why they were not hiring collection agencies so that they could retain more control over the tactics employed. The CFO was defiant. “We’re done with that. From now on, we’re going to sell the paper at 180 days. We’re not going to wait around for our money.” Hospital executives were eager to offload debt even though they would have to sell at a steep discount. Internal hospital collection departments tended to collect only 6 to 9 cents on the dollar from uninsured patients.
Large publicly traded companies, including Portfolio Recovery Associates and Acceptance Capital Corp, announced new units devoted to buying medical debt. Cargill, a Minnesota-based agricultural company and the largest private company in the United States, was best known on financial markets for grain dealing. But between 2002 and 2007, it purchased over $7 billion in healthcare receivables. Encore Capital Group, a publicly-traded company that was fast becoming one of the largest buyers and collectors of consumer debt in the US, started its medical debt buying business in 2005, when it spent $4.27 million to buy $274 million in face value of self-pay debt. To finance its mission to “build the leading company in the distressed consumer space,”
Even with all the powerful new entries, NCO remained the biggest player. In 2006, Barrist worked with One Equity Partners, the private equity unit of JPMorgan Chase, to buy out NCO for $1.26 billion. By 2007 NCO Financial was America’s largest debt collector. Drexel University, Barrist’s alma mater, named him to its alumni Hall of Fame.
But Barrist was eventually a victim of his own success. In part because the trade in medical debt had become so popular, its profitability fell. Cost-cutting and automation, the kinds of disruptions that Barrist had long championed, also pushed down fees. Meanwhile, hospitals were becoming more effective at collecting from the willing and able debtors before they went into default, so recovery rates for third-party debt collectors were also falling, from around 25 percent in the early 1980s to around 10 percent three decades later. In 2011, after the company had endured years of losses, NCO’s board reported it had “terminated” Barrist as CEO. He did receive a $3.4 million severance payment, and was allowed to remain as chairman.
The lucre of medical debt collection had grown so irresistible that it piqued the interest of some of the world’s richest people.
JPMorgan then combined NCO Financial Systems with other debt collection firms to form a holding company called Expert Global Solutions. This was, at the time, the largest debt collector in the world, with 42,000 workers at 120 call centers in the U.S., the Philippines, India, Canada, Barbados and Panama. Aside from the dazzling revenue and growth figures, NCO and its successor, Expert Global, became well-known for illegal collection tactics. In 2004, NCO had paid a $1.5 million fine to the Federal Trade Commission for failing to file timely records to clear debts from the credit reports of debtors who had paid what they owed. This was, at the time, the largest fine ever levied by the Federal Trade Commission. In 2012, the company agreed to pay $1 million in a settlement involving 19 states to refund customers who had been harassed into paying debts they did not actually owe. The next year, Expert Global set a new record for an FTC fine when it paid $3.2 million, this time for breaking the Fair Debt Collections Practices Act. The FTC complaint laid out the violations in detail. NCO collectors failed to verify that the people they were contacting were the actual debtors, even after the people contacted insisted that the debts were not theirs. They called multiple times per day, or at the debtors’ place of employment, or after being asked to stop, with what the FTC called an “intent to annoy, harass, or abuse.”
Barrist had been a trailblazer in medical debt collection, and other companies took his lead. As early as 2013, hospitals and health care providers were the largest group of customers for collection agencies and their largest source of recoveries in dollar terms. A 2018 survey of 100 hospital executives found that 54 percent used a third-party vendor for at least a portion of their bad debt recovery. Among nine major debt buyers, medical debt accounted for 28 percent of accounts purchased, trailing only credit card debt. Four years later, medical debt was the leading reason for being contacted by a debt collector, and accounted for 38 percent of debt collected. The lucre of medical debt collection had grown so irresistible that it piqued the interest of some of the world’s richest people.
One of those people would soon buy the operations built by Barrist. In 2014, the medical debt portion of Expert Global Solutions was placed under the aegis of Transworld Systems Inc (TSI) and sold to a private equity firm called Platinum Equity. This firm was headquartered in Beverly Hills and owned by the billionaire Tom Gores. As of July 2022, Gores was the 424th richest person in the world, just behind Twitter founder Jack Dorsey and Star Wars creator George Lucas. Gores is best known as owner of the NBA’s Detroit Pistons, and as a philanthropist. He was a member of the Board of Directors of the UCLA Medical Center, a donor to Children’s Hospital Los Angeles and to various causes in Detroit and Flint, Michigan, where he grew up. He was a giant of industry, and a fixture in the civic life of two great American cities.
In spite of this public image, Gores was the owner of a debt collection machine, a network of call centers and legal teams and software designed to chase down patients who owed medical bills.Under Gores’ stewardship, TSI was not nearly so charitable as his public image. In 2017, the Consumer Financial Protection Bureau fined the company $2.5 million for illegally suing people for student debt. Transworld hired a network of law firms to file and prosecute collection lawsuits, but consumers were sued for debt that companies could not prove was owed or that had passed the statute of limitations. According to the CFPB the affidavits filed by these firms falsely claimed personal knowledge of account records.
In medical debt collection, TSI did not have a better reputation. By 2017, it was the company with the most medical debt collection complaints on the CFPB’s database. One person in Georgia claimed TSI had called a friend to find him (which is allowed), but during that call had said the inquiry was in regard to a medical debt that he owed (which is not). A resident of Illinois complained that a negative action had been filed on his credit report by TSI for a medical debt that he had never heard of, and was sure he did not owe. He claimed he had tried to call TSI numerous times to settle the matter, but could never get anyone on the other end of the line. Another in Missouri claimed that despite his pleas that TSI contact him at home, they called his work cell phone so often that his supervisor became annoyed and passed him over for a pay raise.
Divorced from any clinical or social bonds to patients, collectors of debt are often draconian. As their tactics have become the norm, hospitals, too, have abandoned their erstwhile lenience, sometimes surpassing the third-party debt collectors in their relentlessness. Hospitals and their collectors report patients to credit bureaus, harming chances to qualify for home mortgages and jobs. They sue patients, adding legal woes to physical illness. After winning these cases, as they almost always do, hospitals garnish patients’ wages, seize their bank accounts, and even foreclose on their homes. In some cases, police show up at the homes of patients who do not appear in court for these cases to bring them to jail. To be destitute and sick is to be subjected to the same punishments levied against a violent criminal.
Patients are pursued for these debts even when they qualify for hospitals’ own charity care programs, often because they had not been informed or did not have the wherewithal to complete all the paperwork to apply. This unmerciful attitude to debtor-patients conflicts with the reigning vision of non-profit hospitals as pillars of community service and charity. In a rational response to the cascade of misery that could follow unpaid bills, low-income patients delay necessary care. Their wounds fester, their cancers metastasize.
In a rational response to the cascade of misery that could follow unpaid bills, low-income patients delay necessary care. Their wounds fester, their cancers metastasize.
As I discovered just how widespread aggressive collection tactics are, and how long debt collectors have been a plague on patients, I attempted to grapple with the overwhelming silence among physicians on the matter. There are, of course, physicians crusading against this problem, in particular the tens of thousands of members of Physicians for a National Health Program who have been calling for a single-payer system that is free at the point of care. And when asked directly about their own hospitals’ practices, doctors usually express solidarity with patients. But with the exception of periodic waves of short-lived interest in the issue, medical journals are not filled with stories and data about medical debt.
Part of the issue is that most of us have little to do with billing. We do not know the charges for our services, and we do not see patients’ bills. Physicians are busy enough with patient care and mounting bureaucratic demands. Many of us have no idea what kinds of collections practices our hospitals resort to, or the ins and outs of our financial assistance policies. Hospitals are not eager to share this information with physicians, particularly when the methods are harsh and assistance is paltry. When Marty Makary, the Johns Hopkins surgeon and writer, asked doctors at Carlsbad Medical Center about their hospital’s practice of regularly suing and garnishing the wages of their patients, “they had no idea their patients were being sued. When I showed the doctors what I had learned about the predatory billing practices, they said they detested what was happening.” Should we use this widespread ignorance as an excuse? No, particularly when our patients are being harmed by actions that result from our care.
There is, though, another reason doctors have been relatively absent from this debate. The physician as an independent professional is becoming a distant memory, seen in old television shows but rarely in real life. While there are plenty of private practices, more and more are being bought out by hospital systems and, more recently, private equity groups. By 2022, 74 percent of physicians were employed by hospitals, health systems, and other corporate entities, including private equity firms and health insurers.
We are no longer the masters of our own destiny. Particularly early in our careers, physicians are dependent on employment to pay back six-figure medical school loans. If we are willing to stomach working for a private equity-owned or for-profit facility, our pay is likely to be higher. In exchange, we agree, at least tacitly, to keep complaints out of the public square. Increasingly this agreement is no longer even tacit, as physicians found during the early days of the COVID pandemic, when some who spoke out about unsafe working conditions found themselves summarily fired.
In 1948, the former coal miner and labor organizer Aneurin Bevan was asked how, during his tenure as the Minister of Health in the UK, he had convinced reluctant doctors to agree to sign up for the government-run National Health Service. “I stuffed their mouths with gold,” he explained. He had, he elaborated, allowed physicians to keep seeing private pay patients so long as they also took NHS patients. American physicians today have also had our mouths stuffed with gold, though not by the government and for less noble ends.
Now is the time to choose: do we want to be in league with debt collectors, private equity, and business-minded hospital executives, or with patients? Debt collectors are not evil villains, but their natural incentives are antagonistic to those of people in debt. Every dollar they extract from the patient on the other end of the phone, or sitting across from them in a courtroom, is a dollar that patient won’t have to pay their rent, feed their children, or buy their medicine. We have to ask, in short, whether we want to be allied with predator or prey.
Luke Messac is an emergency physician and historian at Harvard Medical School. He studies the political economy of health financing in the United States and Africa. Read more about Luke’s work at lukemessac.com and connect with him on twitter.