Mak­ing good on bad debt

For first time, tax-ex­empt hos­pi­tals re­quired to get spe­cific on char­ity care

Modern Healthcare - - Strictly Finance -

In the com­ing year, hos­pi­tals and health sys­tems ex­empt from some taxes will, for the first time, list the ex­act amount they spend on sub­si­dies for needy pa­tients and other health-re­lated ac­tiv­i­ties on fed­eral records avail­able to the pub­lic.

Sep­a­rately, they will also re­port how much they write off for bills that pa­tients never pay. And how hos­pi­tals an­swer may de­cide whether reg­u­la­tors or Congress will con­cede to add bad debt—jar­gon for money owed by cus­tomers who can af­ford to pay, but didn’t—in the po­lit­i­cally sen­si­tive tally of how much not-for­profit hos­pi­tals give back to com­mu­ni­ties in ex­change for tax breaks.

That to­tal will be closely scru­ti­nized by law­mak­ers—notably Sen. Chuck Grass­ley (R-Iowa), rank­ing mem­ber of the Se­nate Fi­nance Com­mit­tee—state at­tor­neys gen­eral and pa­tient ad­vo­cates who have been crit­i­cal of not-for-profit hos­pi­tals’ dis­clo­sure of sub­si­dies pro­vided in ex­change for sig­nif­i­cant tax breaks.

The de­bate over whether bad debt is merely a busi­ness cost (any en­ter­prise has cus­tomers who skip out on bills, ar­gue pro­po­nents of this po­si­tion) or an un­for­tu­nate reser­voir of un­ac­knowl­edged hospi­tal char­ity, erupted in 2007 as the In­ter­nal Rev­enue Ser­vice be­gan to draft new re­port­ing rules on a yearly tax record for not-for-prof­its, the Form 990.

The de­bate—which co­a­lesced around two prom­i­nent hospi­tal trade groups with op­pos­ing views—did not end when the IRS set out ex­ten­sive new dis­clo­sure rules for not-for­profit hos­pi­tals on the Form 990 Sched­ule H.

In­stead, say health­care ac­coun­tants, lawyers, and fi­nance chiefs, fed­eral tax of­fi­cials left the ques­tion open.

Bad-debt costs were not in­cluded in a detailed list of char­ity costs promi­nently placed on the first page of Sched­ule H but nei­ther were they ex­cluded from re­port­ing, as orig­i­nally pro­posed. Rather, the sched­ule in­cludes sep­a­rate re­port­ing on Part III of Sched­ule H for bad-debt costs and how much, if any, of such write-offs may ac­tu­ally be pa­tients un­able to pay.

“It’s the chance for the next cou­ple years for the hospi­tal in­dus­try to make their best ar­gu­ments to the IRS,” says Dou­glas An­ning, a health­care lawyer with Polsinelli Shughart in Kansas City, Mo.

On op­pos­ing sides of the is­sue are the Amer­i­can Hospi­tal As­so­ci­a­tion, based in Chicago, and the Catholic Health As­so­ci­a­tion, head­quar­tered in St. Louis. The AHA con­tends bad debt in­cludes sub­si­dies for pa­tients who can­not af­ford care but do not seek fi­nan­cial as­sis­tance and should be rec­og­nized as char­ity. The CHA has lob­bied to sep­a­rate bad debt and char­ity, in line with guid­ance from the Health­care Fi­nan­cial Man­age­ment As­so­ci­a­tion.

In com­ing months, not only must not-for-profit hos­pi­tals choose, but hospi­tal ex­ec­u­tives who opt to re­port char­ity-care pa­tients within bad debt must de­vise a method to es­ti­mate the fig­ure. No uni­form stan­dard or guid­ance for such an es­ti­mate ex­ists, in­dus­try ex­perts say.

Yes, maybe, no

Some of the na­tion’s largest not-for­profit health sys­tems have adopted sig­nif­i­cantly dif­fer­ent ap­proaches to meet­ing the new re­quire­ments.

For some tax-ex­empt sys­tems, the new year marks the close of the first fis­cal year that must be fully re­ported on Sched­ule H, which was largely vol­un­tary for tax year 2008. (Oth­ers do not close their books on tax year 2009 un­til April, July or Oc­to­ber.) How­ever, those first to file do not face a dead­line un­til mid-May, and the IRS al­lows two 90-day ex­ten­sions.

BJC Health­Care, St. Louis, which owns or leases 12 hos­pi­tals in Illi­nois and Mis­souri, vol­un­tar­ily com­pleted the Sched­ule H a year ahead of sched­ule, a move a spokes­woman says was in the in­ter­est of trans­parency and an ef­fort to im­prove the sys­tem’s rigor in dis­clo­sure.

BJC wrote off $125.8 mil­lion in bad debt at cost for the year ended Dec. 31, 2008. Of that, roughly two-thirds, or $85.1 mil­lion, the sys­tem at­trib­uted to pa­tients el­i­gi­ble un­der the or­ga­ni­za­tion’s char­ity-care pol­icy “based upon an ex­ten­sive anal­y­sis of ZIP codes and other in­for­ma­tion,” ac­cord­ing to the tax doc­u­ment.

Hearle: Be­ware of “riski­est ques­tion on Sched­ule H.”

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