Tax Exempt Hospitals Back On IRS, Senate Radar

The debate over treatment of bad debt by tax-exempt hospitals was renewed last week as the Internal Revenue Service released results of a preliminary survey of the hospitals and their treatment of patient debt.

The survey found that 61 percent of the hospitals refer past due bills to commercial collection agencies. On average, the hospitals wait 13 days before sending a bill to the patient and give the patient 55 days to pay the bill. The average tax-exempt hospital waits 126 days before classifying the unpaid bill as bad debt.

To collect the debt, the hospitals said they place a lien on a patient’s third party liability claims (such as accident settlements); place a lien on the patient’s personal property including his residence; garnish a patient’s wages; add attorneys fees and other collection costs to the bill if the hospital uses an attorney to start collection procedures; and files a claim against a decedent’s estate.

The report also detailed the activities of hospitals that do not turn accounts over to collection agencies. Some of the hospitals reported that they imposed a number of explicit restrictions on their collection departments including a prohibition from foreclosing on a patient’s primary residence; a ban from reporting the patient’s failure to pay to a credit agency; take no legal action unless the patient has the ability to pay and then only for bills over a certain amount; and a suspension of billing in some instances such as death of the patient, bankruptcy, and pending application for assistance.

Beginning in 2008 hospitals will have to report their bad debt and collection practices to the IRS through a new Section H on the 990 form. Hospitals must report at cost their charity care and other community benefits they provide, their charity care policies, revenue profile, bad debt expense, collection practices, and certain other activities.

Not-for-profit hospitals receive tax benefits making them more competitive with for-profit hospitals. Some have argued that not-for-profit hospitals should be able to include their bad debt totals when determining their community benefits. Others believe that bad debt should be left off the community benefit equation.

The survey was released as the Senate Finance Committee reviews tax-exempt hospitals’ practices. Sen. Chuck Grassley, ranking Republican committee member, has charged the tax-exempt hospitals must justify their extensive tax breaks with public service.

Grassley noted in a press release that they IRS survey found that 22 percent of nonprofit hospitals spend less than 1 percent of their revenue on uncompensated care, and nearly 22 percent spend less than 2 percent on community benefit. Grassley said in a statement, "The report makes clear that we need to change business as usual at many of our nation’s nonprofit hospitals.”

The Finance Committee held hearings on the topic last September.

The IRS surveyed 487 not-for-profit hospitals on activities, governance, expenditures, and executive compensation practices.