Hospitals Expanding Charity Care Guidelines to Ensure Tax-Exempt Status: Analyst

Not-for-profit hospitals have a year or two before they have to provide detailed information to the Internal Revenue Service about their bad debt and charity care. But investors already are seeing a new reporting trend by not-for-profit hospitals wanting to better justify their tax-exempt status, said a Fitch Ratings public health care analyst.

Many not-for-profit hospitals are being more generous with charity care, lowering the threshold for which a patient can qualify for free care, said Jeff Schaub, senior director, Fitch’s public finance health care group. Some of these hospitals have increased the free-care qualifying limit to patients who earn as much as 400 percent of the poverty level from 100 percent previously, he said.

Starting in the 2009 tax year the IRS is requiring not-for-profit hospitals to file a Form 990, Schedule H that defines and discloses their spending and policies on charity care and bad debt (“Tax Change Could Reduce Charity Care by For-Profit Hospitals,” March 5). Industry experts estimate about 80 percent of hospitals are categorized as not-for-profit.

“The increase in the uninsured and scrutiny of tax exempt status have caused hospital boards and management teams to review their eligibility for charity care,” Schaub said. “In many cases that review has resulted in an increase in the income limit.”
 
Schaub said the practice has essentially transferred money from the bad debt column to the charity care column in not-for-profits financial statements.  However, the industry’s bad debt hasn’t subsided.

“They have more patients that fall into uncompensated care, which is either bad debt or charity care,” Schaub said. “So to that extent they cancel themselves out.  That has happened for the last couple of years.”

The Healthcare Financial Management Association (HFMA) has said it believes many healthcare organizations under-report charity care and over-report bad debt largely because current accounting rules don’t provide clear guidance on the issue specific to the healthcare industry.
 
The HFMA is encouraging healthcare facilities to review their charity care policies, including the time period for determining eligibility. The association, which represents more than 34,000 healthcare financial management executives, also is encouraging healthcare facilities to keep in mind the Financial Accounting Standards Board’s definition of bad debt as a patient’s non-payment of services that meet the criteria for revenue recognition, and charity care as the organization’s decision to forgo payment.
 
Schaub believes the 400 percent of poverty threshold will become the maximum for most not-for-profit healthcare providers. “I think we’re coming to the end of the liberalization of charity-care guidelines,” Schaub said. “Four times the poverty level seems to be the benchmark and we’ve seen a lot of hospitals move to that level. I wouldn’t expect much more movement upward in the near term.”