Credit card receipts. Lottery winnings. Health club memberships. Even a rock star's royalties on future music sales. There are few limits today on what financial institutions will buy and package for sale to investors.
Asset-backed securities are what Wall Street calls these packages of unpaid bills traded as bonds or promissory notes. And the recent collapse of health care financier National Century Financial Enterprises illustrates what can happen in one of the newest, smallest -- and some say riskiest -- corners of the $1.5 trillion market.
Credit card receivables and home equity and auto loans are the biggest chunks of the asset-backed market, an offshoot of the $7.6 trillion mortgage-backed securities market.
National Century bought medical bills from struggling health care providers and repackaged them to sell to investors, using the payments on the underlying bills to cover the principal and interest payments on the debt securities. But the Ohio-based company apparently didn't have the receivables to back up the bonds. It filed for bankruptcy protection Nov. 18 with $3.35 billion in asset-backed debt owed to its bondholders.
Like the overall asset-backed securities industry, the market for financing health care receivables has grown rapidly during the last decade as cash-strapped providers have sought ways to raise money while waiting for patients, insurance companies and government programs to pay their bills.
National Century had been on the short list of national companies in a field that includes GMAC Commercial Holding Corp., GE Capital Healthcare Financial Services and Morgan Stanley.
Most major banks opt not to trade health care receivables because of the complicated system for collecting medical payments from insurers and government programs.
"You don't see a lot of health care receivables, and the biggest reason is all the uncertainty over what's going to get paid," said Brian M. Mellone, first vice president of fixed-income banking at Memphis-based Morgan Keegan & Co.
For asset-backed receivables such as credit cards, payments usually arrive in 30 days or so. It can take up to 120 days or even more for health care providers to collect on their accounts.
"The reason that the market doesn't work very well is there is a significant amount of work in trying to collect the reimbursements," said Sean Nicholson, a health care finance professor at the University of Pennsylvania's Wharton business school. "There's still a lot of back and forth between the insurance company and the hospital. That's not true of credit cards. We're not debating whether I bought this item and whether the HMO is going to pay."
Before its problems, National Century reported revenue of $307 million in 2001. Other companies that finance health care receivables see great potential in the market.
GE Capital is one of them. It inherited a sizable share of the market when it bought Heller Financial Inc. last year.
"We're extremely excited about this market," said Darren Alcus, general manager of GE's health care commercial finance unit. His company has more than $1 billion of its $3 billion in health care loans backed by health provider receivables. GE uses its own money to loan to health care providers and does not repackage the receivables for public sale to investors.
"The market is not that complicated if you understand the payment stream. We understand. When we do our audits, we look at the collectibles," said Alcus, who is based in Chevy Chase, where GE employs 200 people in health care receivables financing. "This is a safe market," he added. "I'm trying to take away the impression that this is some kind of nonstandard way of providing financing. Most companies borrow against their working capital."
Most of the companies that finance health care receivables are not as big as GE Capital. Scores of smaller operations reach struggling health care providers through the Internet.
M-One Funding Group allows potential customers to fill out a form online to see if it is eligible for financing. Or customers can call the phone number listed on the Web site -- which turns out to be the cell phone of the company founder and lone employee Jeff Glines, of St. George, Utah.
Glines said in a recent interview that he simply connects customers with a health care financier in California. The health care companies that contact him for help are "cash-strapped," Glines said. "They can't meet payroll. They can't meet certain debt obligations. They have tax liens causing them problems."
The Securities and Exchange Commission is ultimately responsible for regulating asset-backed securities. It has an office that reviews the securities that are publicly traded. But because most of them are traded privately, the market has expanded relatively unchecked.
"There is a responsibility gap," said Mark R. McKissick, vice president of Denver Investment Advisors. "You have investors relying on the banks and the banks' ratings agencies. No one is auditing the receivables in a closely monitored process and following those trails all the way to the bottom."
The asset-backed securities market has had few scandals to slow it down in the past decade. One of the largest involved Towers Financial Corp., another firm that specialized in financing health care receivables. That company collapsed in 1993, and three of the company's former executives, including its chairman, Steven Hoffenberg, received prison terms for their roles in the fraudulent sale of $475 million in promissory notes.
SEC and federal authorities are investigating whether National Century intentionally deceived government health programs and committed wire and securities fraud in dealings with its clients, including the parent company of Washington's Greater Southeast Community Hospital. That company filed for reorganization in bankruptcy court after National Century cut off its funding.
"The big question that is going to be emerging is what's been set up to appraise the securities," said Claire A. Hill, a visiting law professor at Georgetown University. "We have a system that is extraordinarily well-equipped to gauge the difference between good quality and exceptionally good quality. But the more egregious kinds of cases where things are not what they seem, I wonder if elaborate processes are in place. What are people looking at?"
Claudia A. Kocher, associate professor of finance at the University of Michigan in Dearborn, said the concept of selling securities backed by trade receivables can work. But she said it requires a sophisticated understanding of the health care system.
"If you can find people who know health care and the asset-backed securities market, there's money to be made," she said. "You would need people assessing the receivables who understand what the health care providers are doing and which accounts are no good if the management and operations are not good."