As not-for-profit hospitals prepare for more detailed public disclosure of their charity care, a major healthcare finance association offered ideas on how hospitals might determine whether a patients unpaid account counts as charity care or bad debt.
HFMA takes strict stance on charity care
The Healthcare Financial Management Association late last month unveiled a sample policy for how to define and enroll needy patients in hospital programs that write off medical bills for those unable to pay. Not-for-profit hospitals across the U.S. are closely examining such policies under pressure from key members of Congress to justify their tax breaks and in advance of new tax rules for fiscal 2009 that require an itemized breakdown of hospital charity care and other community benefits.
HFMAs guidance isnt so much a standard as an example, said Rick Gundling, vice president of thought leadership for the Westchester, Ill.-based association. Gundling said that hospitals can use the newly drafted sample policy, which was designed using examples from across the U.S., as one way to evaluate whether their own policy is clear and comprehensive. Not all of the sample policy must be adopted, he said; hospitals may define charity care according to local needs.
Gundling said the sample policy grew from the HFMAs 2006 statement on the politically sensitive subject of separating unpaid bills, categorized as bad debts, from charity care. The statement defined bad debts as losses from patients who fail to pay for medical care as expected. Hospitals can consider as charity care any subsidized aid to needy patients as defined in hospital policy, the statement said.
Gundling said hospitals sought examples of charity-care policies in response to the 2006 statement.
The newly drafted charity-care policy underscores the HFMAs position on separating bad debt and charity care. Patients eligible for such aid are uninsured, underinsured, ineligible for a government program, or otherwise unable to pay, for medically necessary care based on their individual financial situation, the sample policy says.
Whether some bad debts can be counted as charity care has divided hospitals amid a national debate among the industry, lawmakers and watchdogs over how much aid not-for-profits provide in exchange for certain tax exemptions. The Catholic Health Association has rejected bad debts as charity. The American Hospital Association disagrees and argues bad debts include patients unable to pay but who fail to seek assistance.
Under the HFMA sample policy, hospitals may find ways other than an application form to identify patients eligible for charity care, including enrollment in state-subsidized food or housing programs, or enrollment for public health benefits, such as prescription drug aid. However, should hospitals presume eligibility, the only discount that can be granted is a 100% write-off of the account balance.
Julie Trocchio, CHA senior director of community benefit and continuing care, said that the sample policy adds depth to the HFMAs prior resources on defining charity care.
Melinda Hatton, general counsel for the AHA, said in a written statement: Most hospitals already have their own policies that are attuned to their communities. While HFMA may provide some guidance, its no substitute for knowing your community and crafting a policy that meets its needs.
Hospitals new tax reporting requirements, Schedule H of the Internal Revenue Services Form 990, requires hospitals to itemize charity care spending and excludes bad debts from the tally. However, the form does allow a separate accounting of bad debts. Hospitals may estimate a percentage of bad debts that may be unacknowledged care for needy patients, but also requires hospitals to explain how the estimate was reached. Such disclosure is not mandatory until tax year 2009.
Hospitals have begun collecting information, though some have been mum on whether they will voluntarily report results (May 4, p. 10).
The AHA separately has launched an effort with accounting firm Ernst & Young to collect and compare results from hospitals that practiced completing the forms.
Sutter Health in Sacramento, Calif., pulled together legal, finance, tax and community benefit experts to review the new tax form and its instructions, and alter the systems data collection, if needed, said spokesman Bill Gleeson, in an e-mail.
The system, which owns 22 hospitals and manages one more, adheres to guidelines laid out by the Catholic Health Association, he said. With respect to bad debt, we are not planning on reporting any portion as charity care.
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