Charity care accounting likely to be the next area of scrutiny
To protect DSH dollars, hospitals should be prepared
If your hospital, like many others, has a policy for designating charity care but lacks the time and staff to implement it consistently, take heed. Experts warn that many hospitals are not properly documenting charity care upfront, so there is little or no proof to distinguish it from bad debt. Since proof of charity care is required to receive Medicare or Medicaid disproportionate share dollars (DSH), that funding could be in danger if government auditors decide to take a closer look at charity care practices. The legislative and bureaucratic noose already could be tightening on the 1,900 hospitals that receive Medicare or Medicaid DSH dollars. Consider the following:
• More and more legislation requires that to maintain tax-exempt status, nonprofits must demonstrate they are returning more to the community than they’re receiving as a tax break. Under traditional patient accounting methods, it’s impossible to demonstrate charitable care since it is lumped together with bad debt on the balance sheet.
• With the Medicare budget slated to be reduced dramatically over the next five years, one of the targets will likely be the block granting, reduction, or elimination of disproportionate share funds money given to hospitals that provide more than their share of indigent care.
When government officials start talking about cutting a program, it’s a sure bet they’ll start looking at who’s getting the money now. They might not be shy about reclaiming funds given in earlier years if the accounting’s not up to speed and clear proof of charity care is not visible.
• State governments are calling into question the charity care practices of some hospitals. Methodist Hospital in Houston came under fire in the early ’90s when it showed big profits but could demonstrate almost no charity care. That case prompted the state legislature in 1995 to pass a new, more clearly defined law, with specific criteria for tax-exempt status.
The sort of "gentlemen’s agreement" attitude toward charity care designation the government maintained in the past is totally out of step with the current attention being paid to compliance, and hospitals that fail to recognize this are assuming a significant risk, warns Jack Duffy, FHFMA, director of patient financial services at ScrippsHealth in San Diego.
Could you pass an audit?
He poses these questions to tax-exempt hospitals: Could you successfully undergo an audit if government regulators wanted to compare your practice with your policy? What if they asked to see the interviews upon which you based your decisions to grant charity care? If your policy says you make a decision on charity care cases within 72 hours, can you produce the decision file to support that?
The Healthcare Financial Management Association (HFMA) has published a Principles and Practices Board Statement (No. 15) updating its position on the financial accounting and reporting of charity care. The document reflects the substantial revisions made by the American Institute of Certified Public Accountants to its guide, Audits of Providers of Health Care Services.
Among other things, the guide substantially changes the reporting of bad debt and eliminates charity service from revenue and receivables. It also requires the health care entity to disclose its policy for providing charity service and the level of charity service provided.
Many hospitals, however, are not using the new charity care definition adopted by HFMA, which could put them at risk. "With all of the federal and state scrutiny on the health care industry, it behooves [health care] managers to appropriately classify any financial transaction to the best of their ability," says Richard L. Gundling, FHFMA, CMA, technical director for HFMA. The key is to set up the appropriate policies and procedures and follow them before charity care becomes the next focus of government scrutiny. "No one cared about billing until the Attorney General started looking at that. It’s good policy to put in place the resources needed to collect the appropriate information," Gundling adds.
The HFMA principles and practices statement points out a number of issues which must be considered in regard to charity care, including these:
• what criteria are used to identify patients who qualify for charity service;
• when the patient’s eligibility for charity service must be determined;
• what charity service records are needed;
• how charity service is valued and disclosed;
• how bad debts are valued and disclosed;
• how receipts that relate to charity service or bad debts are classified.
Look-backs’ are possible
Gundling points out that even hospitals who put these financial practices in order immediately still face the possibility of a "look-back" by federal investigators, who in 1997 may be settling with health care organizations based on 1994 data.
Actually, he notes, liability for federal violations goes back indefinitely, although there are some record retention rules.
"What you do this year won’t have an impact till 1999 or 2000," adds Duffy. "You’ve got to think three years ahead, but most access managers are worried about what happens in the next 30 minutes. How many access departments are staffed at an adequate level to interact with patients in an interview to determine that they qualify under the charity care policy? In a large trauma case they might have someone, but how about at the next level of cases, maybe OB? Do you have somebody on the weekend who could complete the interview? How about in the emergency department or in ancillary areas?"
Most access departments don’t have adequate facilities, such as a private office, where a 15- or 20-minute review of a patient’s financial situation can be conducted, Duffy adds. Nor do most hospitals have an adequate tickler system for completing the application. "By the end of the shift, the account’s on its way to the business office, never to be an access problem again, then to the collection agency, never to be seen again.
"But one day," he adds, "the state auditor will want to see that account and then will take out a red pen and scratch it off the list. You will fall below the threshold for Medicare DSH."
Hospital chief financial officers because of the broad scope of their responsibilities are notorious for not understanding what individual departments do, Duffy points out, and may be alerted to the need for better charity care accounting only when the investigators come calling. The solution, he says, is to elevate the access manager to professional status in the organization, so he or she can act more independently.
"If [hospitals] don’t make a meaningful investment, they will never implement a charity care policy that’s auditable," Duffy says. "Unfortunately, most hospitals will have to suffer a loss of income before they do anything about it."
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