How to Define Charity Care?

September 17, 2012; Source: Forbes

A recent Forbes article titled “ObamaCare Could Cause Nonprofit Hospitals to Lose Their Tax-Exempt Status: Here’s How” presents an interesting theory, but it conflates several issues. State laws governing establishing and maintaining status as a nonprofit corporation are different from the federal (IRS) regulations regarding tax-exempt recognition. Generally, incorporation as a nonprofit precedes application for tax-exempt recognition from the IRS. Once state incorporation and IRS tax-exempt recognition are established, it’s unclear how one is related to the other. The definition of “charity care” is rather inexact. Congress abandoned setting a specific level of charity care for nonprofit hospitals in the late 1960s; this has led to questions about charity care levels in the decades since. So what is “charity care?” There are at least three variants being discussed:

The first definition of charity care is the classic definition: not billing poor people for care they receive. Of course, this definition is typically not fully valid anymore, because it is standard practice for most hospitals to attempt to get poor patients approved by Medicaid and have Medicaid pay for all or part of the expenses.

This leads to the second nonprofit definition of charity care: identifying and covering the difference between the cost of services a poor person receives and the amount received through third parties (such as private insurance, Medicare, Medicaid) plus the amount, if any, paid by the patient in deductibles and co-pays. This definition is also problematic, as many hospitals refer residual unpaid debt to collection before ultimately writing it off as a business expense. This process makes it more difficult to identify it as “charity.”

The third definition is commonly referred to as “uncompensated care.” This refers to the difference between a hospital’s posted rates for services and the rates paid by third party insurers, whether private or governmental.

There are those who believe that all three definitions should be expressed as a single percentage and identified as a hospital’s contribution to the community. Others have argued that all three forms of charity care should be added to the “community benefit” monies that nonprofit hospitals spend on everything from community-based wellness screenings to advertising campaigns promoting access to a hospital’s services. What do you think of these definitions and proposals? –Michael Wyland