From 1996 to 2006, the amount of national uncompensated care delivered by registered community hospitals went from $18 billion to more than $31 billion per year, according to American Hospital Association. HFMA notes that the rise in uncompensated care is "boosting health systems' bad debt to the point of making a significant dent in their revenue, enough to get dinged by ratings agencies." At the same time, according to the Association, the reporting of charity care and bad debt has come under scrutiny as health systems blamed the influx of consumer-directed health plans, along with growing numbers of the uninsured, for the trend.

Charity Care vs. Bad Debt

However, while both charity care and bad debt are components of uncompensated care and have a negative effect on a provider's bottom line, confusion in the classification of each is at the root of reporting problems. According to HFMA, "the complexities of charity care policies and the difficult task of documenting charity care qualification have generally resulted in many charity care patients being classified as bad debt. The practice of reporting bad debts at gross charge also has led to reported bad debt trends often significantly above revenue or expense growth.

The AHA defines uncompensated care as "an overall measure of hospital care provided for which no payment was received from the patient or insurer. It is the sum of a hospital's "bad debt" and the charity care it provides." Uncompensated care excludes other unfounded costs of care such as underpayment from Medicaid and Medicare. Scott C. Withrow, Esq., Partner in the law firm of Withrow, McQuade and Olsen, LLP, who serves as an advisor to hospitals and physicians on healthcare compliance, sums up the difference this way:

"With bad debt there is an assumption at the time the care is rendered that the debt will be paid, while with charity care the provider knows in advance that payment will not be made, but provides the care anyway. Bad debt happens when a patient presents at a health care facility and requests care. The facility provides the care in good faith and bills the patient, who doesn't pay. The facility tries to collect and is unable to do so. The bill has to be written off as a bad debt."

HFMA's December 2006 "P&P Board Statement 15: Valuation and Financial Statement Presentation of Charity Care and Bad Debts by Insitutional Healthcare Providers," is intended to clarify and address Congressional and legal questions about the charity reporting practices of tax-exempt hospitals and to recommend "best accounting and financial reporting practices for uncompensated care." In the introduction, the document points out that as "the magnitude of unreimbursed care grows, so does the urgency to report uncompensated care-and to distinguish between charity care and bad debt-clearly and comparably [however], the urgency of some treatments, as well as certain federal regulations, often requires the provision of service without consideration of the ability to pay.

New IRS Requirements

The confusion in reporting uncompensated care is complicated by new Internal Revenue Service (IRS) requirements about how such care is reported. In December 2007, the IRS released an updated Form 990 for tax-exempt organizations, with a new schedule designed specifically for hospitals. The IRS is phasing in Schedule H for the 2008 tax year, and will require it mandatory in the 2009 tax year. To comply, hospitals have the 2008 tax year to ready themselves by assessing their charity processes and related reporting in order to meet the 2009 requirement.

According to Bruce Nelson and Jordan Levitt, with the firm of SearchAmerica, a company that predicts payment and provides automated charity, Medicaid, other government program processing, believes the timing of the new schedule is not surprising. On the firm's Web site, they write that, "Hospitals have come under more and more scrutiny by the IRS and the Senate Finance Committee to justify their tax-exempt status by demonstrating how they benefit their community. Many legislatures and government officials are lobbying for tighter standards for hospitals to keep their status."

They go on to note that Senate Finance Committee Chairman Max Baucus (D-Mont) and Sen. Charles Grassley (R-Iowa) have both expressed concern over the overcharging of uninsured patients, the allocation of too few resources to charity care, and overstatements of the amount of free care provided. Baucus believes that hospitals should allocate at least five percent of their annual revenues to free care for those unable to pay.

According to Nelson and Levitt, Form 990 is forcing hospitals to reassess their charity care programs, if they haven't already. "The evaluation should be two-fold, examining the process itself and the measurement of a successful program."

Using Charity Care to Offset Bad Debt

From an accounting standpoint, charity care and bad debt cannot be co-mingled. The reporting for each must be documented and reported separately. However, as a practical matter, how uncompensated care is rendered and documented can affect how it is classified, and that sometimes happens after the provision of care. HFMA's Statement 15 notes that Emergency Medical Treatment and Active Labor Act, (EMTALA) regulations requiring the provision of emergency care before discussing patient financial information, combined with the potential for medical indigence that develops after the time of service, make it more appropriate for the provider to define a window of eligibility for their charity care policy, based on community needs and the facility's available resources."

Robert F. Hill, Jr. FACHE, Principal of Health Strategies & Solutions, Inc., a healthcare strategy firm, notes that information provided by a patient or family member at the time of service may indicate that the patient qualifies for a charity care program that allows the bad debt to be reclassified and reallocated after the fact.

The Key is Accurate Record Keeping and Asking Patients the Right Questions

The key to being able to take advantage of such reclassification is accurate and timely gathering and documentation of information from patients and their families at the time of service. Hill says the most common mistake providers make is not accurately documenting the date and procedure. He offers the following strategies to avoid this common pitfall:

  • Assure accurate and timely registration of patients
  • Develop guidelines that inform patients that they may qualify for assistance programs
  • Respond to denials from insurance companies and assistance programs with aggressive appeals
  • Document billing and collection attempts

HFMA's Statement 15 reminds providers that while they should make "every practical effort to make charity care eligibility determinations before or at the time of service (in compliance with state agency and reimbursement requirements regarding them, they can be made at any time during the revenue cycle, and there should be no rigid time limit for when they are made, because in some cases, eligibility is readily apparent, while in other cases, investigation is required, particularly when the patient has limited ability or willingness to provide needed information."

The document also cautions that in gathering information about charity care eligibility, providers should ensure their financial communications and counseling are clear, concise, correct, and considerate of the needs of patients and family members, in accordance with the principles of the PATIENT FRIENDLY BILLING® project, a nationwide initiative to improve financial communications with patients.

Accurate and timely record keeping is just as important for reporting bad debt. HFMA offer the following:

  • Services are recorded at the full-established charges amount in revenue and receivable are recorded as services rendered.
  • If a self-pay patient does not meet the collectivity criteria, charged amounts may not be recognized as revenue at the time of service. Revenue should be recognized only when collections are reasonably assured and for an amount that is determinable.
  • The receivable amount is adjusted to the expected payment amount, with an offsetting amount recorded in a revenue contra account.
  • As expected payments are determined to be uncollectible, they are written off against the allowance for bad debt. Documentation concerning the collection effort should be retained.
  • Bad debt determinations, like charity care determinations, should be made as close to the time of service as is practical; however, no determination should be made until there is sufficient evidence to support it, based on the patient's financial or other qualifying status.

Trends in Uncompensated Care

Given the ever-growing numbers of the un-and underinsured, rising healthcare costs, and fewer employers offering their employees third-party health coverage, what trends can providers expect to see in the future? Health Strategies & Solutions' Hill says simply: "There will be more of it, due to a struggling economy and inflationary pressures, unless the government steps in with a bailout."

In the meantime, Withrow, who has written two books for the American College of Healthare Executives' (ACHE's)Health Administration Press (Managing Health Care Compliance and Managing HIPPA Compliance) sees more private foundations bailing out hospitals. "In Atlanta recently, Grady Hospital, a major trauma center, which serves a large population of uninsured, went through restructuring then received $200 million which allowed it to stay afloat."

However, he also predicts that increasingly, patients are seeking to obtain free primary care by going to the emergency room for routine primary care. This coupled with a growing population of uninsured people is creating a deluge of charity care liabilities for hospitals.

More on Uncompensated Care...

Publication Date: Thursday, June 05, 2008