The Million Dollar Medical Debt Scam

[liverock]

...............or how a proper medical insurance scheme could reduce costs by up to 90%.

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

http://www.sunnyskyz.com/good-news/1663/John-Oliver-Buys-15-Million-In-Medical-Debt-Then-Forgives-It

American Consumer Debt Market: $0.004 on the Dollar.

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%.

When Karl Denninger and myself and other people (but KD is without question the leader on his topic – his book Leverage has a goodly part dedicated to this very thing), scream and yell about how galactically criminal the medical/insurance racket is, and how if the market were allowed to work that prices for all medical products and services would fall at least 90% if not more, we really aren’t kidding.

Just look at the data above. It implies a 25000% markup 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.

In terms of morality, if a creditor sells debt, both he and the market have REPRICED that debt. The new debtholder’s basis is the price he paid for the debt. And thus the creditor can and should negotiate with the debt collector on the NEW BASIS, not the original balance, because the original creditor is no longer going to receive anything – by his own choice. He “cashed out” when he sold the debt on the market.

The fact that most people have no understanding of this is precisely how these debt collection agencies make the huge profits that they do. They want the debtor to assume that the collection agency is a “pass-through” or middle man for the originating lender, when in fact, the originator is totally out of the picture. Imagine if a debtor settled a $100,000 medical bill for $0.50 on the dollar, when the collection agency had bought the debt for even $0.01 on the dollar – which we know is high. That would be a 5000% gross profit margin.

The happy ending to this little story is that the TeeVee guy FORGAVE all $15,000,000 of the debt he bought – which didn’t even require a license. Just a $50 paperwork fee, and a corporation. It seems to me that this sort of thing might be a really cool way to give alms. Can you imagine lifting that kind of burden off of so many people’s shoulders? I would limit it to medical debt, though. Just to be sure I wasn’t enabling some idiot who ran up credit card debt on strippers and bright red three piece suits.

The moral of the story is if dealing with with a medical debt agency, is start with a very low %age repayment on the dollar and stick to it. He probably only paid a few cents on the dollar to buy the debt himself.

 

[Ajax]

I used to work for a guy who also ran a debt collection agency on the side. While I was there he bought debts from a private furniture store -- about $50,000 worth but he paid $750 for it so it wasn't quite as discounted. It is only delinquent debt that is bought and sold - not just people a little behind. And if the debt collector can't collect that debt, it is usually then resold for an even bigger discount, etc etc. This debt collector I knew would send out letters that were pre-signed by a lawyer he had purchased that right from, and would also make phone calls, but it was just not worth the time or money (as he said) to actually go any further and go to court.

There is a big market for "paper" -- debts that are sold and resold and even traded for at huge discounts on the original value. This is similar to the after-mortgage market where mortgages are sold and resold to other financial institutions.

 

[liverock]

Some question has arisen as to whether the 9,000 people who had their debt 'forgiven' will have to pay a tax bill.

No, those 9000 folks on the list that the TeeVee guy bought are NOT now saddled with a tax bill because he forgave their debt. Here is a great piece from Forbes which goes into more detail on the TeeVee guy’s action.

http://www.forbes.com/search/?substream=hashtags&q=DebtBusters

Bottom line, because the medical debt would have been deductible, it would not generate “income” on the other side. The key quote is this, but do read the whole thing.

But if you were listening closely to Oliver’s explanation of the process, he added that the debt would be forgiven “with no tax consequences” to the debtor.

How can that be?

The answer is found in Section 108, a provision that offers a host of exclusions to the general rule that the forgiveness of debt generates taxable income. Hidden among the more well-known exception for bankrupt or insolvent taxpayers, or the forgiveness of a mortgage on a principal residence, is subsection 108(e)(2), which provides that “no income shall be realized from the discharge of indebtedness to the extent that payment of the liability would have given rise to a deduction.”

Another point about this situation. The scam on the part of the debt collectors is even worse than imagined. In this case, not only were they NOT telling the debtors their true cost basis on their debt, nor telling them that the originator of the debt was totally out of the picture and thus ALL funds would go to the debt collection agency, it turns out that this particular debt package from Texas was “OUT-OF-STATUTE”, which means that it was too old to be collectible by law. So, it had already been wiped, in a sense, by law.

That is why the market for this class of debt is less than $0.01 cent on the dollar. The market for “in statute” debt is higher, like $0.05 on the dollar.

Not only do these collection vultures try to collect on debts that are legally wiped, they gain access to people’s identities, including Social Security Numbers, and then harass and intimidate them, sometimes “turning their life upside down”. What a truly, truly evil business.

Let’s apply what we have learned about Diabolical Narcissism to this paradigm. What kind of people do you suppose WORK FOR SUCH COMPANIES? What kind of people do you suppose take a job calling, harassing and intimidating people, trying to collect debts, purchased for less than one cent on the dollar, that are legally uncollectible? What kind of person would take a job in which MENDACITY (lying) is the foundational premise?