Revamping charity care strategies helps manage impact of uninsured population

July 1, 2006

In the past two years, not-for-profit hospitals have faced increasing scrutiny from a variety of sources. Lawsuits alleging unfair billing practices for the uninsured, congressional hearings regarding hospitals' tax-exempt status, federal and state legislative policies regulating hospitals' provision of charity care and front-page articles in major newspapers outlining overly aggressive efforts to collect payments from uninsured patients have all conspired to put this healthcare sector on red alert.

In the past two years, not-for-profit hospitals have faced increasing scrutiny from a variety of sources. Lawsuits alleging unfair billing practices for the uninsured, congressional hearings regarding hospitals' tax-exempt status, federal and state legislative policies regulating hospitals' provision of charity care and front-page articles in major newspapers outlining overly aggressive efforts to collect payments from uninsured patients have all conspired to put this healthcare sector on red alert.

The cost of uncompensated care, including charity care, has increased 20% between 1999 and 2003, from $20.7 billion to $24.9 billion. Large increases have even been seen in for-profit hospital chains. Two of the largest, Hospital Corporation of America (HCA) and Health Management Associates (HMA), reported increases of 60% and 70%, respectively, between 2002 and 2004.

These rising charity care and bad debt costs come when increases in Medicare, Medicaid and commercial insurances have not kept pace with rising expenses, making it difficult to shift costs for uncompensated care and putting the nation's safety net at significant risk.

Within this changing landscape, hospitals must reevaluate their charity care policies, both to assuage concerns regarding the community benefits provided and to better manage the increasing stress of the growing uninsured population.

And some have. The PwC survey found that nearly 70% of hospitals have voluntarily revised their charity care policies in recent years, primarily by raising the Federal Poverty Level (FPL) percentage to expand eligibility. Many also instituted sliding scale discounts or liberalized existing discounts.

CHARITY CARE-WHAT AND WHOM

Charity care is provided to patients who cannot pay for services rendered and who are not expected to pay. This differs from bad debt, which is the value of care to patients who have the resources to pay, but don't.

In the early 1990s, the American Institute of Certified Public Accountants (AICPA) mandated that hospitals separate bad debt from charity care in their financial reporting. It was left up to individual hospitals, however, to determine exactly what defined charity care.

Thus, there is no consistent method of defining or reporting charity care. Hospitals use various methods, including costs, charges, unit of service statistics or a combination, complicating the comparison of hospitals based on what they report. Seventy-six percent of hospitals calculate charity care in terms of charges, not costs, according to the survey.

Not-for-profit hospitals must demonstrate their community benefit to maintain tax-exempt status. The largest component of community benefit is charity care, yet many hospitals inadvertently underreport this figure because of difficulties classifying patients as charity care. One problem is that no uniform regulatory guidance regarding such qualification exists, despite the requirement for disclosing charity care in financial statements.

Additionally, hospitals struggle to implement their charity care policies because paperwork and documentation often leads to a lack of patient cooperation. Thus, an unpaid account that might otherwise be classified as charity care becomes bad debt. In fact, 92% of hospitals surveyed said part of their bad debt could be classified as charity care.

For instance, if an uninsured patient classified as charity care qualifies for a 50% discount on a $100 bill, then $50 can be considered charity care and is never booked as revenue-the rest must be collected from the patient or be considered bad debt.