Should bad debts be reported as community benefits?

by For the MBJ

Published: April 16,2007

Bad debts, charity care and community benefits can be very costly to hospitals and healthcare systems (“hospital,” from this point on in the column). Opinions amongst the healthcare industry vary as to the most effective means to deal with these three areas of accounting, and a lack of uniformity exists among how to report results. Influential groups such as the American Hospital Association, Healthcare Financial Management Association (HFMA) and the Catholic Hospital Association have recently offered differing opinions regarding disclosing bad debts as a broader community benefit.

Bad debts result when a patient who has been determined to have the financial capacity to pay for healthcare services is unwilling to pay the claim. Bad debts are reported in the hospital’s financial statements either as deductions from revenue or as operating expense, depending on the Accounting Reporting Standards that are applicable to the reporting organization. Bad debts are presented in the financials of the hospital as full charge master rates and often represent 80% to 90% of self-pay revenue.

Charity care is providing services to patients with a demonstrated inability to pay. Because of the current practice of discounting full charge master rates to various contractual payors (self-pay patients who have signed a contract) ranging anywhere from 10% to 50%, it is imperative that hospitals have a clearly defined charity care policy tailored to the individual hospital. The policy should include the method of determination of eligibility, which usually relates to the federal poverty level, extent of verification and documentation and timing of determination (preference would be before or when the service is rendered but can be made anytime during the revenue cycle process.). Charges for charity services are not to be reported in the hospital’s financial statements in revenues or receivables. The cost of these services is to be disclosed in the financials along with the method used to calculate the cost.

Community benefit is a planned, managed, organized and measured approach to a hospital’s participation in meeting identified community health needs. It implies collaboration with a “community” to “benefit” its residents — particularly the poor, minorities and other underserved groups — by improving health status and quality of life.

Federal tax law provides 501(c)(3) tax-exempt status to any organization that is organized and operates for charitable purposes. The provision of healthcare services by non-profit hospitals has long been recognized as a charitable activity for this purpose. The community benefit standard established by the IRS in a 1969 revenue ruling continues to be the primary standard applied by the IRS in determining whether hospitals qualify for 501(c)(3). The community benefit standard does not prescribe any minimum charity care requirement as one of its elements.

Documentation

Documenting community benefit underlies tax exemption. Fully reporting community benefit on your organization’s IRS Form 990 is important because the form’s disclosure regulations, adopted in 1999, requires tax-exempt organizations to make available their Form 990 to anyone requesting it. This regulation heightens the emphasis on not-for-profit accountability to communities, government and consumers. In fact, Form 990 information is readily accessible by the public at www.guidestar.org.

In addition to charity care, the community benefit disclosure should include community health services, health professions’ education, subsidized health services and financial contributions. It is also important to note that some hospitals not required to file an IRS Form 990 are disclosing their community benefits.

The question arises as to whether or not bad debts should be disclosed as a community benefit. HFMA and the Catholic Hospital Association argue that bad debts should not be treated as a broader community benefit. However, some industry experts agree that a certain amount of charges that are classified as bad debts are, in effect, charity.

Clear line?

HFMA’s recently issued new accounting guidance draws a clear line between bad debt and charity care. “Our stand has always been that bad debt is the amount of money you expect to be paid in good faith but were not paid,” Laura Noble, HFMA director of policy, told CCRHealthLine news source in a recent interview. “That is very different from a community benefit.”

The HFMA’s revised standards also suggest that a provider count a patient as bad debt only if collectability is “reasonably assured.” Thus, self-pay patients should only count as bad debt if the hospital can be reasonably assured the patient will pay the bill. If not, they may be reported as charity care. An informal industry standard shows that hospitals typically collect only 10% of a bill from a self-pay patient, indicating that true self-pay patients may better be counted as charity care than bad debt, Noble says.

HFMA’s treatment of not counting bad debts as a broader community benefit is in line with recent testimony given by the Catholic Hospital Association representatives before Congress.

From another viewpoint, the American Hospital Association strongly believes that bad debts should be included as a community benefit, largely because certain services are provided on an urgent basis as federal laws do not permit consideration of a patient’s ability to pay. This difficulty is compounded by complex healthcare billing and payment arrangements that implicate government agencies and third-party payers, which often result in processing and payment delays. As a result, some hospitals are disclosing bad debts and charity as part of their community benefits.

Because of this difference of opinion, it may be possible to see various versions of reporting develop. In the meantime, we will continue to see differing opinions as to disclosing bad debts as a community benefit.

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