Accounting for Bad Debt: Charity Care, IRS Form 990, and ARM

 

Unfortunately for the SEIU, changes in the Tax Code related to Form 990 are not retroactive; Beth Israel Deaconess’ 2005 and 2006 financial statements are exempt from the IRS mandate to separate bad debt from charity care.

If we assess the SEIU’s charges against Beth Israel Deaconess according to the letter of the law, it would appear that the hospital’s accounting practices for the years in question are legitimate; the first standard—Sarbanes-Oxley—does not apply, and the second—a gesture to the revised Form 990—has yet to take effect. But despite its unsound legal footing, the SEIU letter raises several important issues about the financial constancy of U.S. hospitals and their capacity to deal with bad debt.

Whatever its actual bad debt expense in 2005--$67.6 million or $55.6 million--Beth Israel Deaconess, like many other hospitals, is plainly struggling to confront the impact of uninsured volume increasing at a much faster rate than insured volume. And nonprofits are not alone in this battle to combat bad debt. Some analysts predict that the for-profit hospital sector will see total bad debt expense surpass $14.5 billion in 2008.

Thus, while Beth Israel Deaconess’ financials may pass legal muster, the decision to merge bad debt and charity care expenses reveals a deeper lack of effective collection strategies for patient payments—either at the point of sale or once they reach delinquency status late in the revenue cycle. Moreover, Beth Israel Deaconess, like all hospitals, operates in a community and speculation about a disparity between its stated and actual contributions to that community by means of charity care is likely to be heavily scrutinized.

These circumstances provide accounts receivable management (ARM) companies an opportunity to grow their businesses in a market desperately in need of their services. Collection agencies and debt buyers with healthcare receivables experience are best positioned to step in and relieve hospitals inundated by bad debt. Additionally, first party providers—or agencies with expertise in a broad range of ARM services—may be poised to bundle their back office or collection products with consulting services related to regulatory compliance, particularly in the tax and audit arenas.

Discussions of healthcare reform, a hot-button topic this election year, are often focused exclusively on universal insurance coverage for all Americans. The SEIU’s letter to Beth Israel Deaconess, even if it falls short of achieving its stated goals, underscores the need to open up calls for a revitalized U.S. healthcare system to include strategies for more efficient receivables management.

As an analyst at Kaulkin Media, Michael conducts custom research projects and writes publications focusing on the healthcare sector of the accounts receivable management industry. Contact Michael by email or at 240-499-3836.