New IRS Form Means More Collections Details By Hospitals

Is the charity care that non-profit hospitals and medical facilities provide enough to justify the estimated $12 billion in tax breaks they claim each year?

Hospitals seeking to continue writing off this bad debt may soon be required to provide extensive information every year on their collection practices, including their use of third party agencies.

No doubt, these not-for-profits are essential to the country’s well being—they provide about 80 percent of the medical care in the U.S. But some say the not-for-profits do not provide the benefits locally that they write off on their taxes.

The Internal Revenue Service found that nearly a quarter of non-profit hospitals spend less than one percent of their revenue on charity care, and about half of them spend three percent or less.  The Senate Finance Committee recently recommended that non-profit hospitals dedicate at least five percent of their annual patient operating expenses or revenue to charity care.

This led to demands that not-for-profit medical providers release more details on their charity care, including how they seek to collect debts.

The IRS recently proposed a redesign of its Form 990 that not-for-profits and other tax exempts file with the agency. Included in the redesign is a new Schedule H, which focuses specifically on hospitals and the particular issue of their community activity. On Sept. 14, the IRS closed its comment period on the redesign.

One section of Schedule H requires the medical provider to define its definition of bad debt, and to “describe its debt collection policy as fully as possible in the space provided.”

The description should include how the provider collects debts, if it conducts its own collections or out sources the work, give further details on its out sourcing activities, and explain how it informs patients of its debt collection policy, according to an online help guide for filling out the form.

In addition, the medical provider must explain whether the debt that is defined as charity care may be subject to further collections activity, and whether that debt is “referred for collection to a third party before or after the charity care determinations is made.”

An IRS spokesperson said that the “Schedule (H) is a request for more specific supporting information for something you have on your 990.”

Some hospitals have argued against any change in the form. In a letter to the IRS, the American Hospital Association said that “patient bad debt is a fact of life. … (T)he IRS should recognize any reasonable method to count patient bad debt as a quantifiable community benefit.”

The IRS has said it anticipates it will begin using the new form and Schedule H for returns filed in 2009.