January 23, 2008
In response to public comments and discussions with HFMA, the IRS has incorporated HFMA's Statement 15 guidance for reporting bad debt into the new schedule for hospitals which is attached to the updated version of Form 990. HFMA considers this an important step forward in improving the healthcare investing and policymaking community's ability to understand these two important categories of uncompensated care.
The Problem with Historical Bad Debt Reporting
Many organizations have a difficult time determining whether certain expenses should be classified as charity care or bad debt. These difficulties have been confounded by the fact that current Generally Accepted Accounting Principles (GAAP) literature does not provide clear guidance that is useful to the circumstances surrounding charity care eligibility and bad debt that are unique to the healthcare industry. Subsequently, both charity care and bad debt typically have been treated as uncompensated care and have not been clearly separated. HFMA believes that because of this, many healthcare organizations under-report charity care and over-report bad debt.
Preferred Reporting Practices
To address this problem, HFMA's Principles and Practices (P&P) Board updated Statement No. 15, Valuation and Financial Statement Presentation of Charity Care and Bad Debts by Institutional Healthcare Providers. This guidance is based on expert analysis of current accounting literature, extensive discussions with members of American Institute of Certified Public Accountants (AICPA) committees and leading accounting firms, and input from a three-month public comment period.
Statement 15, section 8 recommends changes in revenue recognition for uninsured patients which results in significant changes to the practice of reporting uninsured revenue and bad debts at gross charges. The historical reporting has often led to revenue recognition of amounts never expected to be collected and the related reporting of bad debt often trends significantly above both revenue or expense growth. Based on HFMA's reading of current GAAP, the preferred accounting method for reporting patient service revenue is only when it meets the following revenue recognition criteria:
- Pervasive evidence exists of a payment agreement between the provider and the patient
- Services have been rendered
- The price is fixed or determinable
- Collectibility is reasonably assured
The Financial Accounting Standards Board (FASB) and Governmental Accounting Standards Board (GASB) have clearly stated that charity care results from an entity's decision to forego revenue. Bad debts, on the other hand, result from the patient's nonpayment for services that have met the criteria for revenue recognition. HFMA encourages facilities to review their charity care policies and eligibility determination practices in light of this guidance, to ensure that both support effective patient financial interactions as well as accurate financial reporting.
Impact
The Board does not believe adoption will materially change the reported performance indicators in the financial statements. The effect of this guidance will appropriately report net revenues expected from service to patients and more meaningfully report bad debt as amounts expected to be collected but were not paid. While the effect on the financial statement's bottom line will be negligible, the reporting of revenues, bad debt, and charity care will be significantly improved.
Timing of Charity Care Eligibility
While not directly part of Schedule H, there is another provision in Statement 15 that affects bad debt classifications. The Board revised the long-standing guideline that eligibility for charity care must be decided based on the patient's financial status at the time of service. While appropriate for other business sectors, the complexities of healthcare delivery and coverage, compounded by federal regulations, make this narrow interpretation of GAAP untenable for providers. The P&P Board has updated its guidance to state that the timing period for determining eligibility should be addressed in the charity care policy.
This particular change provides business office and financial counseling staff with much-needed flexibility in making accurate charity care determinations that are responsive to the needs of the patient and regulatory requirements. It is especially important in situations where patients incur – or are expected to incur – significant medical debt after time of service.
Critical Schedule H Deadlines
In Schedule H, Part III, the IRS asks hospitals to report aggregate bad debt expense, and asks whether it has adopted HFMA's Statement 15 bad debt reporting guidance. Hospitals are also asked to provide an estimate of how much bad debt they believe is attributable to people who qualify for charity care and provide a rationale for what portion of bad debt they believe should constitute community benefit.
For 2008, organizations will be required to be complete only Part V, which provides identifying information regarding the organization's facilities. All other parts of Schedule H will be optional for 2008. However, beginning in 2009, the entire Schedule H must be completed. The additional burden of reporting could be substantial for many hospitals, particularly in the first year of reporting.
Source: HFMA's Principles and Practices Board Statement 15: Valuation and Financial Statement Presentation of Charity Care and Bad Debts by Institutional Healthcare Providers http://www.hfma.org/ppb15.
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If you have questions or comments about HFMA Wants You to Know, contact editor Maxine Harrison.
HFMA Wants You to Know ISSN: 1540-0697. Volume VII, Issue 2. Copyright 2008, Healthcare Financial Management Association. All rights reserved.