Tax Change Could Reduce Charity Care by For-Profit Hospitals

Beginning in 2009 not-for-profit hospitals will have to disclose how much they spend on charity care and how much of their expense is attributable to patients not paying their bills. That means these healthcare providers could be picking up more of the tab for indigent care, a Fitch Ratings healthcare facilities analyst told insideARM.

“I think it would depend on what’s disclosed,” said Lauren Coste, a director of Corporate Finance at Fitch who specializes in for-profit healthcare facilities. “In a local market, if it’s disclosed that a not-for-profit (hospital) is not providing as much charity care as a for-profit, you might see more pressure on the not-for-profits to help the indigent.”

Coste said if not-for-profits do end up providing more charity care to justify their tax-exempt status, it would have a positive impact on for-profit hospitals in those communities. For profit hospitals would likely provide less charity care and discounted care, lowering their bad debt, she said.  

Industry expert say not-for-profit hospitals provide about 80 percent of the medical care in the U.S.  And the American Hospital Association, which represents about 5,000 hospitals, contends that not-for-profit hospitals provide a variety of “community benefit” programs in addition to free care.

But critics have said the not-for-profits don’t provide enough free or discounted care to justify the billions they write off on their taxes. These critics, including Iowa Republican Sen. Charles Grassley, demanded  not-for-profit medical providers release more details about their charity care and debt collection practices.

Last December, the Internal Revenue Service issued an updated tax form that tax-exempt organizations must file annually to support their tax exempt status.  Form 990 now includes a separate itemized form called Schedule H, specifically designed for not-for-profit hospitals to define and disclose their spending and policies on charity care and bad debt. For-profit hospitals already disclose their spending on charity care and amounts set aside to cover bills not paid by patients.  

The AHA opposed the IRS changes to Form 990, saying that the information required in the Schedule H has no relation to the “community benefit” standard that make non-profit hospitals and medical facilities eligible for tax exemption status. However, when the redesigned form was completed and released the association praised the IRS for eliminating some “burdensome questions that were unrelated to community benefit,” and for allowing a one-year filing delay for Schedule H.

“While we are concerned that, absent instructions and worksheets for Schedule H, hospitals will be seriously hampered in their efforts to collect and report the information required, we will continue to work with IRS to monitor hospitals' progress and advocate for more time if IRS delays encumber hospitals' data collection efforts,” Rich Umbdenstock, the AHA president, said in a statement.