Hospital Accounting
I wonder how hospitals and doctors calculate their accounts for bad debts and for charity? If they do it the way I suspect, bad accounting is raising health care costs by discouraging out-of-pocket payment in favor of insurance. Here’s the reason.
Suppose a hospital provides a bypass operation as charity. The accounting question is how this affects income and costs. The way I suspect it is done is that the hospital reports 0 income and reports the list price of the operation as a cost. Thus, if the list price is $100,000, the operation has reduced the hospital’s profit by $100,000.
A big problem with this is that it depends on “list price”, and in most businesses, and certainly health care, nobody pays list price. People with insurance pay whatever rate the insurance company negotiates– say, $15,000. People without insurance become bad debts, or, more likely, negotiate to pay off $20,000 and the other $80,000 becomes bad debt. (Bad debt accounting is another potential problem, though there they probably report the original $100,000 as income.)
Thus, $100,000 is not the value of the charity, either in opportunity cost or in production cost. It would be better to use the average amount received for a bypass operation, where the averaging would include payments net of bad debts.
We aren’t done there, though. The hospital also is subtracting most or all of its production costs— the wages, building cost, and equipment costs– on the cost part of its accounts. It shouldn’t be able to deduct those twice. So really the hospital should be counting the charity care as income and then subtracting it as donation, for a net of zero. The effect of the charity care will still show up on income, but via the cost of its production, which isn’t balanced by any revenue.
This topic is important for corporate income tax accounting, for non-profit status (is the hospital making a profit?), and for compliance with rules mandating levels of charity care.
I did a little googling and Lexising to try to find out what hospitals do, but couldn’t. I just found this:
Originally, “cost” was calculated using the Medicare cost report. In 1995, the Texas legislature recognized the Medicare cost report calculation was not a complete reflection of a hospital’s “cost” so they changed the formula to reflect “unreimbursed costs” as determined under generally accepted accounting principles (GAAP). GAAP is standardized, has a broader focus, and reflects more accurately costs and expenses on all types of patients.
Bad debt is not considered “unreimbursed care” for the purposes of determining the amount of Community Benefit, but it is considered an expense when calculating the cost to charge ratio of the hospital under GAAP.
That hospital (Baylor) had net patient revenue of 17 million, bad debts of 1.4 million, and charity care of 1.6 million.