New accounting guidance narrows hospitals’ bad-debt reporting

It’s the end of bad debt as we know it. A new accounting standard dramatically narrows what hospitals can report as bad debt, or payments they anticipated but never received. The majority of what used to qualify as bad debt won’t be reported as such under new U.S. generally accepted accounting principles, which most health systems started using Jan. 1.

That could throw a wrench into how some hospitals report community benefit. Although the Internal Revenue Service does not consider bad debt part of community benefit, some hospitals still include the figure in the broader category that includes charity care and Medicaid and Medicare shortfalls. The Minnesota Hospital Association, for example, reported in its 2017 Community Benefit Report that its members had incurred $374 million in bad debt expense the previous year.

“That is something that has been top of mind with organizations, where that number is going from what was a fairly significant number down to a much smaller number,” said Marc Scher, healthcare audit leader with KPMG.

Under the former—or current, for some—guidance, some hospitals report bad debt as the difference between what they billed patients and the amount those patients ultimately paid, even if hospitals did not expect to receive the full billed amount. In some cases, those bills included discounts from their gross charges for uninsured patients and for contracts with insurers. If a hospital billed an uninsured patient $100, for example, and the patient paid

$10, many hospitals would report $90 as bad debt.

Under the new standard, called “revenue from con- tracts with customers,” or Topic 606, hospitals can only report bad debt if there was an adverse event that prevented a patient from being able to pay the expected amount. It is reported as a reduction from the predicted payment.

In other words, if the hospital expected to receive $10 for an encounter based on its historical experience and received $10, it would not report any bad debt from that encounter.

“In one extreme example, bad-debt expense could almost entirely go away under this new standard,” Scher said.

That creates a problem, though, because that $90 is an important number for many hospitals.

Rick Kes, audit senior manager with RSM US, said many hospitals will simply switch out the term bad debt for another one: implicit price concession, which refers to effectively the same thing.

“It isn’t a required disclosure, but we believe not-for-profit health systems will want to disclose that number in their footnotes of financial statements so they could then use that number for their community benefit reporting,” he said.

Tax-exempt hospitals report baddebt expense on their IRS Form 990, but it’s unclear if they’ll continue to do so, Kes said. It’s possible the American Hospital Association or state hospital associations will lobby the IRS to replace the 990’s bad-debt line with a broader option that allows for either implicit price concessions or bad debt, he said.

The AHA declined to comment for this article. State and local govern- ments have their own requirements for reporting community benefit. It’s unclear how those will change.

Hospitals can use implicit price concessions if they’ve met one of two conditions under the new accounting guidance: They continue to care for patients even if a historical analysis shows those patients are unlikely to pay, or they do not perform credit assessments on patients before delivering care, Kes said.

Most hospitals don’t expect the new accounting standard will have a noteworthy effect, if any, on their finances, but nonetheless they’ve done a lot of work preparing for the changes as well as ongoing compliance work. Some are working with their electronic health record vendors to develop portfolios for payment estimates, Kes said. Steve Filton, chief financial officer at Universal Health Services, said in an interview this month he does not expect the new standard to have a material impact on the King of Prussia, Pa.-based hospital chain’s financial statements.

“There could be some shifts between bad debt and other categories of uncompensated care like charity care and uninsured discounts, but I don’t view those as terribly meaningful,” Filton said.

The new guidance also directs hospitals to report disaggregated revenue, which Scher said will be meaningful for investors and other stakeholders, but will take a lot of work to produce.

The standard took effect for annual reporting periods beginning after Dec. 15, 2017, for the majority of large health systems, including public companies and some not-for-profits. For most others, it takes effect after Dec. 15, 2018.

“In one extreme example, baddebt expense could almost entirely go away under this new standard.”

Marc Scher Healthcare audit leader KPMG