Making good on bad debt
For first time, tax-exempt hospitals required to get specific on charity care
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.”