January 10, 2007
HFMA's Principles and Practices Board has updated Statement 15, Valuation and Financial Statement Presentation of Charity Care and Bad Debt by Institutional Healthcare Providers to improve financial statement clarity and to reduce variation in the reporting of uncompensated care. The statement is published in this month's Healthcare Financial Management (hfm) magazine.
The need for updated guidance largely arises from two healthcare trends. First, the demand for charity care is increasing due to the growth in the number of uninsured and underinsured patients. Second, as consumers become responsible for a larger portion of their healthcare bills, providers' risk of bad debt increases.
Improved financial reporting is important in helping the industry better understand the resources consumed to meet these trends. Also, improved definitions and policies addressing these trends are needed for clearer, quicker determinations of charity care eligibility so that patients and providers share a better understanding of patients' payment obligations.
Statement 15 applies to all types of institutional healthcare providers—tax-exempt and investor-owned. P&P Board statements provide authoritative direction in the absence of specific FASB or AICPA guidance.
Overview
Statement 15 addresses the criteria for and scope of charity care policies; the valuation; recording, and disclosure of charity care and bad debt; and the classification of receipts relating to charity care. Important points of the guidance include:
Financial Reporting Disclosure
- Charity care disclosures should be based on cost, not charges.
- Revenue for patient services should be recognized only when it meets GAAP criteria, which include the existence of a payment agreement between the provider and the patient and reasonably assured collectibility.
- Bad debt should not be reported as charity care or community benefit.
Government Shortfalls
- Government shortfalls should not be included as a part of charity care.
- It is appropriate to report payment shortfalls in Medicaid or similar government programs for the indigent as a community benefit.
- Individual facilities must determine whether Medicare shortfalls are material to the facility's financial status and mission. If so, they should be separately reported, and may be included in the community benefits section.
Charity Care Determinations
- The patient's eligibility for charity care, including the timing of that eligibility, is based on the facility's charity care policy.
- Charity care eligibility decisions can be made at any time during the revenue cycle as pertinent information becomes available.
- Charity care policies should address how determinations should be made in the absence of financial information provided by the patient.
Accounting and the Business of Caring
The urgency to report uncompensated care and to distinguish between charity care and bad debt in a clear and comparable way is of great importance as the amount of unreimbursed care grows. The special circumstances surrounding healthcare services given by healthcare facilities in the business of caring, particularly for emergency care, makes it an even greater challenge. With current reporting practices having been inconsistent and contributing to the confusion about the amount of charity care provided and bad debt incurred, Statement 15 seeks to provide that much needed clarity.
SOURCE: HFMA's Principles and Practices Board Statement 15, Valuation and Financial Statement Presentation of Charity Care and Bad Debt by Institutional Healthcare Providers
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HFMA Wants You to Know ISSN: 1540-0697. Volume VI, Issue 1. Copyright 2007, Healthcare Financial Management Association. All rights reserved.