Accurate Recordkeeping Can Help Reduce Charity Care Liability

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December 15, 2004

In the current environment of controversy over charity care practices, many financial managers feel sensitive about how they record and disclose their organizations' charity care. In 1993, HFMA's Principles and Practices Board (P&P Board) published guidance on the valuation and financial statement presentation of charity care and bad debt that can provide a useful baseline for these practices. The IRS recommends adherence to P&P Board Statement No. 15 in all representations regarding charity care.

Financial Reporting Requirements

The American Institute of Certified Public Accountants (AICPA) Audit and Accounting Guide, Health Care Organizations, requires the following with respect to bad debts and charity care:

Classify bad debts as an expense,
Eliminate charity service from both revenue and receivables, and
Disclose the charity service policy and the amount of charity service provided.

Recordkeeping for Charity Care

Although charity service is not to be reported in revenue or receivables, it is generally not known when services are rendered whether the services will meet charity service criteria. Therefore, there is no alternative to keeping records for charity service in the same manner as for any other service. The use of a charity service provision and allowance is usually necessary.

Appropriate recordkeeping for charity service consists of:

Recording services at the full established charges amount in revenue and receivables as services are rendered.
Adjusting revenue and receivables to the amount that a payer has an obligation to pay. If it is possible to determine that an amount qualifies as charity service, it is written-off immediately. Note: It is desirable to identify charity service as soon as possible to minimize collection efforts and deal with patients more equitably.
Estimating the amount of the remaining receivables that will eventually be written off as charity service. This amount is recorded as a provision for charity service (a revenue contra account) and an allowance for charity service (a receivable contra account).
Writing off receivables as they are determined to meet charity service criteria against the allowance for charity service. Retain the documentation concerning the eligibility for charity service.
Regularly evaluating the adequacy of the allowance for charity service, with adjustments to increase or decrease the allowance offset by adjustments in the provision for charity service.

Recordkeeping for Bad Debts

Consistent with the discussion of charity service, bad debts are recorded as follows:

Services are recorded at the full established charges amount in revenue, and receivables are recorded as services are rendered.
The receivable amount is adjusted to the amount that a payer has an obligation to pay, with an offsetting amount recorded in a revenue contra account.
The amount of bad debts is estimated, and a provision for bad debts (an expense account) and an allowance for bad debts (a receivable contra account) are recorded.
As receivables are determined to be uncollectible, they are written off against the allowance for bad debts. Retain the documentation concerning the collection effort and result.
The adequacy of the allowance for bad debts is evaluated regularly, with adjustments to increase or decrease the allowance offset by adjustments in the provision for bad debts.

Valuation of Charity Care Services

While the bad debt amount is valued in a fairly straightforward way as the amount that the payer has an obligation to pay, the costs of charity service may be estimated in various ways for financial reporting purposes. For example, the ratio of charges for charity service to charges for all services may be applied to costs of all patient services.

Some do not view this gross estimation process as a reliable measure of cost; however, the fact that only a portion of the services provided to a patient may qualify as charity makes a more refined determination virtually impossible. The AICPA audit guide calls for disclosure of the "level of charity care provided...based on the provider's rates, costs, units of service, or other statistical measures."

Any disclosure of cost information should describe the cost estimation method used. Disclosing only cost information may also omit important financial considerations related to these services.

The Importance of Accurate Recordkeeping

Accurate recordkeeping facilitates and validates a healthcare organization's financial statements regarding the amount of charity care and bad debt it provides. It is important to distinguish charity care from bad debt as clearly as possible to ensure that valuable charity care resources are managed wisely and to maintain a provider's eligibility for certain types of financial assistance, which depend on the provision of charity service. If the organization includes charity service in its mission statement, then clear and accurate reporting demonstrates the fulfillment of that mission. Finally, bad debt expense is a measure of the effectiveness of the organization's credit and collection process, so accurate tracking and monitoring helps ensure a healthy revenue cycle.

SOURCE:

Principles and Practices Board Statement No. 15, Valuation and Financial Statement Presentation of Charity Service and Bad Debts by Institutional Healthcare Providers.

Additional Resources

Comprehensive listing of HFMA programs, publications, and tools related to uninsured patients.
HFMA's 2005 Spring Summit -- The Uninsured, Your Community, Your Role as Financial Leader -- to be held March 6-8, 2005, in Phoenix.

If you have questions or comments about HFMA Wants You to Know, contact editor Laura Noble.

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