Redefining Bad Debt and Charity Care

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March 16, 2016; OpenMinds.com

Monica Oss has identified an intriguing trend in hospitals and healthcare. First, a brief background is in order: Since the passage of the Affordable Care Act (ACA), otherwise known as Obamacare, in 2010, policymakers have anticipated a move toward insuring more Americans through a combination of expanded Medicaid eligibility and subsidized health insurance available through state-managed insurance exchanges. Healthcare, and thereby health insurance, would become more affordable over time through increased policy premiums being paid by both governments (through Medicaid and subsidies for private insurance) and policyholders benefitting from subsidies making insurance more affordable. One consequence of this model, as NPQ reported in 2012, was the possible reduction in the need for charity care services. Fewer people would be medically indigent due to expanded insurance availability, especially to the poor, the middle class receiving subsidies, and people with chronic health conditions who were previously unable to secure insurance.

Hospitals often talk about “uncompensated care.” Oss says:

To explore this topic, we need to consider the two elements of uncompensated care—bad debt and charity care. Bad debt is defined as any bill submitted for payment by a third-party payer or patient which is not paid in full. Charity care is defined as care provided to consumers at no cost with no expectation of payment.

On the one hand, Oss says, charity care costs at many hospitals have declined as a result of increased percentages of insurance-covered patients. This is especially the result of Medicaid expansion. On the other hand, some hospitals have seen significant increases in bad debt expense. This has resulted in their combined “uncompensated care” figures as high or higher than before the ACA was enacted. Moreover, hospitals and hospital systems have had vastly different experiences with these changes; between 2013 and 2015, some hospitals experienced as much as a 57 percent decrease in uncompensated care costs, while at least one system experienced increases of 42 percent.

Bad debt isn’t as predictable as charity care. This requires nonprofit hospitals to do more proactive budgeting to make provision for bad debt while simultaneously working within ACA-imposed restrictions on debt collection by nonprofit hospitals. NPQ recently reported on a Louisiana hospital that chose to give up its IRS tax exemption, in part due to the ACA’s debt collection provisions.

Having a higher percentage of insured patients isn’t necessarily a help to nonprofit hospitals, either. Medicaid payments to hospitals and doctors are typically lower than payments made by private insurance, and all payors have been squeezing provider payments for years. Nonprofit hospitals’ operating margins, especially rural hospitals, are at historic lows and continuing to decline.

Oss mentions the same possibility that NPQ identified four years ago: that nonprofit hospitals will need to move their rationale for tax exemption away from charity care as the need for charity care continues to decline. The question is whether Congress and the states are ready to consider a new definition of tax-exempt hospitals when cash-strapped government itself is looking for tax dollars from nonprofits in the form of PILOTs (payments in lieu of taxes) to support service provision in communities.—Michael Wyland