The nation's top accounting policy body last week proposed new standards for how hospital and health system financial statements report free and discounted care for low-income patients.
A new standard ...
... aims to make charity-care reporting more uniform
The Financial Accounting Standards Board, whose standards are recognized by the Securities and Exchange Commission and set the rules for auditors, released a draft of its standard, which would measure charity care using direct and indirect costs.
With the proposal, FASB joins the Internal Revenue Service in seeking uniform disclosure of how much subsidized care hospitals provide, a figure at the center of a debate over the tax-exempt status of not-for-profit hospitals.
Hospital reporting of charity care has varied widely, to the frustration of Congress, state attorneys general and irate consumer watchdogs. The nation's not-for-profit hospitals receive tax breaks in exchange for providing subsidized care and other aid to communities.
If adopted, the accounting board's proposal would replace existing standards that allow hospitals to select either costs, statistical measures or the charges billed for charity care. No deadline has been set for the switch, which would also be applied to prior financial statements under the proposed standard.
Martha Garner, a managing director with accounting firm PricewaterhouseCoopers, said many not-for-profit hospitals and health systems measure charity care using rates charged for services, or the sticker price that hospitals bill before any of the discounts negotiated or set by public and private insurers.
For that reason, Garner described charges as “a bit of an artificial number.” Charges are also problematic because they vary from one hospital to another.
Still, the switch to using cost to measure charity care likely won't be significant for not-for-profit hospitals because of new tax reporting rules, said Garner, who is also on a healthcare expert panel for the American Institute of Certified Public Accountants, which recommended the charity-care accounting switch proposed by FASB.
Garner said the institute has sought FASB review of six healthcare accounting standards, including charity care, to revise the group's audit guide for healthcare organizations.
FASB has moved to review two other issues, according to a February report by the board's emerging issues task force. One issue addresses how financial statements report care provided to uninsured, self-pay patients and the second addresses how medical malpractice, similar claims and related insurance recoveries should be recorded.
The IRS yearly tax form for not-for-profits, the Form 990, began requiring disclosure of charity care and other subsidized community benefits at cost, effective for tax year 2009.
The FASB said the change will “enhance comparability” of charity-care disclosure and noted the IRS Form 990 already requires that subsidized care be reported based on direct and direct costs.
Because hospitals do not count charity care as revenue, the write-offs are not included in financial statements as operating performance, but reported separately in supplemental notes. For that reason, an accounting change to charity care won't affect primary financial statements, the accounting board said.
FASB said it will seek public comment on the change through May 17.
The board asked for comment on an alternative measure of charity care based on the average rate collected from paying patients for similar services, which some members of a task force who drafted the proposal believed to be more meaningful.
However, such a measure would likely require new systems to collect the information and the task force that drafted the proposal “does not believe the benefits of such a disclosure justified the costs of such system changes.”
Members of the task force also rejected eliminating charity-care disclosure because the figures provide lenders and donors with useful information “such as an indication of the entity's level of benefit provided to the community and information about the economic environment in which the entity operates.”
The accounting board's proposal also follows industry efforts to recommend standards and methods for reporting the politically sensitive tally, including the Healthcare Financial Management Association's guideline, released in 2006 and known as Statement 15, and more recent related pronouncements from the professional group, that clarified bad-debt accounting.
Keith Hearle, president of Verite Healthcare Consulting, said the proposed standards do not go as far as the HFMA recommendations, which do not allow hospitals to deduct charity care for sliding-fee patients who pay enough to cover the hospital's costs.
Richard Gundling, vice president of healthcare financial practice for HFMA, said the 2006 statement on charity-care accounting recommends hospitals use cost accounting or the most accurate estimate available.
He said the accounting board's proposed switch to counting charity care at cost is in line with HFMA's policies.
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