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Charity Care and Bad Debt

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Charity care (also known as uncompensated care) is health care provided for free or at reduced prices to low income patients. The concept of charity care has been linked to the development of hospitals. Charity care includes all the costs and write-offs associated with services rendered to individuals determined prior to service delivery to be unable to pay. A hospital may write-off all or part of the cost of providing service to such a patient. A write-off results from removing items from the accounting books. The number of Charity care cases has dropped in recent years. Potential reasons for the decline include changes in physician practice patterns and increasing financial pressures. Many hospitals do not inform their patients that charity care is available to them. “Investigators also found non-profit hospitals charging poor, uninsured patients more than they did patients with health insurance” (Day, 2006). Over half of all government reimbursement for uncompensated care comes from the federal government; most of that is provided through Medicare and Medicaid. These federal funds are a primary source of support for health care providers that serve the uninsured. (Hoffman, 2007). Increasing demand for free and low-cost health care services by uninsured patients and Medicaid beneficiaries is, along with increased competition, placing a growing financial strain on safety-net health care providers. Bad Debt is referred to as any bill submitted for payment by a third party or patient which is not paid in full and unlikely to be paid for various reasons.

While hospitals must make an effort to collect outstanding debts, many argue that current collection practices target poor and uninsured individuals who might otherwise qualify for charity care. Bad debt should include only those cases where patients were expected and able to pay but did not. Bad debt should not be considered charity care. According to research by McKinsey Quarterly, consumer bad debt resulted in more than $65 billion in uncollected healthcare revenue in 2010. This figure represents a significant portion of the more than $2.5 trillion spent on healthcare in the United States each year. The patient financial services personnel would take a look at the patient’s financial information. The patients would be required to submitted paperwork with their income statements, tax returns and possibly other bills they have to pay. The financial service person would then take all that into account and determine what category the patient would properly qualify for charity care or some other assistance program. “Some customers may never pay for the goods and services they have received. The provider should not carry the resulting Accounts Receivable on its balance sheet once it has become clear that it will not be paid. A simple process for accounting for uncollectible accounts is the direct write-off method” (Epstein, 2014). Accounting rules changed in 2011 for healthcare organizations, bad debt for healthcare organizations is shown as a deduction from revenue in a line item called Allowance for Bad Debt. (Epstein, 2014)

Catherine Hoffman, Karyn Schwartz, Jennifer Tolbert, Allison Cook and Aimee Williams, “The Uninsured: A Primer,” Kaiser Family Foundation, October 2007 Epstein, L. & Schneider, A. (2014). Accounting for Health Care Professionals. San Diego, CA Kathleen Day, “Hospital Charity Care Is Probed: Investigators Find Nonprofits Overcharge or Deny Services,” The Washington Post, September 13, 2006 Sanders, Susan M. “Measuring Charitable Contributions: Implications for Hospital’s Tax-Exempt Status.” Hospital & Health Services Administration

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