A new accounting rule was designed to eliminate bad debt in its previous form. But that old version of bad debt is actually alive and well—it just wears phony glasses and goes by a new name: implicit price concession.
Hospitals’ relationship with bad debt is very different from that of other industries. In manufacturing, bad debt is the price of something—an airplane, for example—that a customer didn’t pay for as anticipated. In healthcare, though, most of what’s reported as bad debt is money hospitals never expected to get in the first place. It’s the difference between their billed charges and the amount they actually collect from patients.
The accounting standard change was intended to more closely align bad-debt reporting across industries and globally so that they’re easier to compare. But hospitals are holding tight to the old way of reporting bad debt—the one that yields a large number—in part because it’s how they demonstrate the benefit they impart on communities. The new version of bad debt, if hospitals are hewing strictly to the rules, is going to be far smaller than the old version. In some cases it won’t show up at all.
Some don’t see the point of that. Rick Kes, a partner and healthcare industry senior analyst with RSM, argues that implicit price concession is an irrelevant number because it’s based on chargemaster rates that are, so to speak, artificial.
“Right now, in some ways, it doesn’t have a lot of meaning,” he said.
Kes had hoped the new rule, Topic 606: Revenue from Contracts with Customers, would push hospitals to rework their chargemaster rates so that they’re based on rational mechanisms, like cost plus a margin or other market-based dynamics.
That was not health system leaders’ takeaway. “I don’t think it really had any change on the way we operate our business,” said Mike Malzewski, executive director of corporate finance at Milwaukee-based Froedtert Health. “It’s pretty much a reporting change.”
Under the former method, if a self-pay patient paid $5 on a $100 bill, the hospital would record $95 in bad debt—even if that hospital never expected to collect the full $100. Under the new rule, the hospital would record $5 in revenue from that encounter, and zero bad debt on financial statements.
Bad debt is only recorded under Topic 606 when an unexpected event—such as a bankruptcy or lost job—prevents the patient from paying the bill. It’s also recorded if patients skip out on bills for elective procedures, said Norman Mosrie, a partner with consultancy DHG Healthcare.
As a result, the reporting of bad debt is likely going to fall sharply. In Froedtert’s fiscal 2019, which ended June 30, the health system did not report any bad debt under the new accounting standard, Malzewski said.
Fiscal 2019 was not-for-profit Froedtert’s first full year under the new standard. In fiscal 2018, it reported $61.4 million in bad debt.
Going forward, health systems are not required to disclose implicit price concessions on their financial statements, and Froedtert did not provide that figure on its fiscal 2019 financial statement. Froedtert’s total revenue was $2.6 billion in fiscal 2019.
Roots of the confusion
The rule, which providers must abide by to align with generally accepted accounting principles, took effect for reporting periods beginning after Dec. 15, 2018, for nonpublic companies and for periods beginning after Dec. 15, 2017, for public companies.
In April, the CMS released instructions for reporting bad debt on Medicare cost reports that did not reflect the changes under the new accounting standard. Health systems and other stakeholders grew concerned that the agency would scrutinize providers that recorded bad debt as implicit price concessions.
“It definitely has caused some confusion,” said Jaclynn Harrison, system director of accounting analysis for Christus Health, a not-for-profit health system based in Irving, Texas.
In response, representatives with the Healthcare Financial Management Association met with CMS officials a few months ago to ensure there wouldn’t be problems with reporting bad debt as implicit price concessions.
Mosrie, who also chairs the HFMA’s Principles and Practices Board, said the CMS representatives were “very open and receptive” at the meeting, which took place at the agency’s Baltimore headquarters.
“We basically took the time to go through an education session with them explaining revenue recognition, the change in terminology,” he said. “That operationally, the requirements for providers to follow up on things to be able to claim bad debts hasn’t changed. It’s just the terminology has changed.”
But Mosrie said the CMS, which did not return a request for comment, has not yet updated its cost report forms to reflect the accounting change.
Similarly, the Internal Revenue Service has not updated Schedule H of its Form 990, where hospitals are required to report bad debt, to reflect that historical bad debt is now being reported as implicit price concessions. An agency spokeswoman said there are no plans to change Schedule H at this time.
That concerns Keith Hearle, president of Verité Healthcare Consulting, who said he thinks Schedule H must be changed to reflect the new accounting standard. If it’s not, hospitals might be confused in the future as to what should be reported as bad debt.
“That’s obviously an area that needs some clarification,” Hearle said.
SAY GOODBYE
The Financial Accounting Standards Board is doing away with the inflated bad-debt totals reported by hospitals, though the bad-debt calculation based on charges will live on in the IRS Forms 990 and Medicare cost reports
Bad debt reported by hospitals: $58.3 billion
Bad debt representing charges beyond cost: $43.2 billion
Note: Estimated totals are based on analysis of about 4,500 Medicare cost reports for fiscal 2017, and only reports that covered complete fiscal years were included.
Source: Modern Healthcare Metrics
Hospitals’ likely approach
Going forward, hospitals will report implicit price concessions in the Schedule H lines asking for bad debt, said Rick Gundling, HFMA’s senior vice president of healthcare financial practices. That’s even though many will not report implicit price concessions on their financial statements. He emphasized that the economics behind those figures haven’t changed, just the terminology.
Malzewski said Froedtert has not filled out its Form 990 since the accounting change, but will likely report that way and include a written explanation.
Peoria, Ill.-based OSF HealthCare is working with the Illinois Hospital Association to get clarification on how to report bad debt on Schedule H of the tax form, said Michelle Carrothers, the system’s vice president of strategic reimbursement. OSF also files community benefit reports with the state attorney general, she said.
“I think it’s just getting clarity from the government reporting side how we’re going to report,” she said.
OSF’s fiscal 2019 financial report, which the health system is preparing to release, will be its first year under the new accounting rule. Carrothers called the rule change a “nonevent” for OSF. The biggest difference is, like all health systems, OSF won’t report bad debt in a separate line as a reduction from its net patient service revenue.
OSF currently does not plan to disclose implicit price concessions, but Carrothers said that could change. The system reported nearly $126 million in bad debt in fiscal 2018 and $2.8 billion in total revenue.
Christus Health also did not disclose implicit price concessions in fiscal 2019. Its bad debt was $540.4 million in fiscal 2018. The health system, which has more than 60 hospitals in the U.S. and abroad, reported $5.6 billion in total revenue in fiscal 2019.
Medicare bad debt
Another point of confusion has been over the unpaid portion of Medicare coinsurance or deductibles. Gundling said providers should make sure they record that in a separate bad-debt expense account to comply with CMS requirements, even though they appear to be inconsistent with the new accounting rule.
Topic 606 requires hospitals to record as revenue what they predict they’ll collect from patient encounters based on their experience with similar patients. Preparing for the change prompted some health systems to extensively review their contracts with payers to determine how they are paid and how much they should expect to collect from certain patients.
“It was a long and lengthy process,” Malzewski said. Froedtert assessed contracts for its hospitals, pharmacies, physician clinics and lab.
Harrison, of Christus Health, echoed that sentiment.
“It was time-consuming because we had to go through all of those contracts,” she said.
Luckily, Topic 606 was issued in 2014, so health systems had years to prepare.
In the end, implementation of the new accounting rule does not have a noteworthy effect on the revenue that health system leaders said they ultimately report.
Malzewski said the change did not significantly change Froedtert’s financial position, including its operating results or cash flows.
The same is true for OSF, Carrothers said.
“It was not a material impact for us,” she said.
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