The American Hospital Association (AHA) last Thursday released a report stating that non-profit U.S. hospitals provided 11.3 percent of total annual hospital expenses toward community benefit. The AHA contracted with consulting firm Ernst & Young LLP to evaluate data from tax year 2009, the first year that federal reporting on hospital community benefit programs became mandatory. The report, “Results of the 2009 Schedule H Project,” represented about 30 percent of all hospitals required to file Schedule H with the IRS. Footnote: The 30 percent of hospitals analyzed in the report represents those who voluntarily submitted their Schedule H reports to the AHA or Ernst & Young for evaluation.

Unfortunately, in addition to the potential bias from self-selected reporting, creative accounting helps paint a rosy picture in this report that’s a bit far from reality.

We’ll start with where we agree with the AHA: Communities are unique, with local problems demanding local solutions, and we’re supportive of any efforts that shed light on all the good things non-profit hospitals are doing to improve access to care and health.

But, we have a problem with some of the ways that AHA has classified community benefit in this document.

First, the AHA report counts “bad debt expense attributable to charity care” as community benefit. The AHA is taking a few too many liberties with semantics here. Consider this: You’re uninsured and low income, and I send you a $20,000 bill for emergency care you received at my hospital when you broke your leg, and you haven’t paid that bill because you can’t afford it, but I have sent the bill to a collections agency (cut to: notice to appear in court, wage garnishment, etc.), even though I don’t really expect you ever to pay. Do you think you’ve received a “benefit”? Probably not. A “benefit” would be if I told you, based on your income level and insurance status, I understand you can’t afford the bill, and you don’t have to pay it, or I will work with you to come up with an amount you can pay. (After all, I’m a non-profit hospital and my mission likely includes caring for all who need care, regardless of ability to pay.)

Unfortunately, the AHA counts the first situation, “bad debt,” as a community benefit. The IRS, the Catholic Health Association (which is recognized for setting the bar on community benefit standards), and most consumer advocates we’ve talked to, do not count “bad debt” towards the community benefit calculation.

(There’s actually a simple solution that could benefit everyone – make more efforts to find out if patients qualify for the hospital’s financial assistance policy, and whatever part of the bill is reduced can be counted as community benefit. Hospitals make pennies on the dollar for bills sent to collections. And most importantly, that unaffordable bill isn’t hanging over the head of the unlucky patient who needed care they couldn’t afford.)

Similarly, the AHA report counts shortfall from Medicare reimbursements as community benefit. We disagree with that characterization (as does the IRS). The Medicare Payment Advisory Commission (MedPac), the independent Congressional agency that advises Congress on issues affecting the Medicare program, finds in their March 2011 report that Medicare payments are adequate for efficient providers. If a hospital has a Medicare shortfall, it most likely either is inefficient or exists in a market where they can charge fairly high private rates, which reduces pressures to be efficient and can be used to subsidize Medicare patients.

Counting bad debt and Medicare shortfall as community benefit are controversial moves that contradict current IRS policy and the recommendations of other hospital and consumer groups. It’s precisely for these reasons that we need mandatory, complete community benefit reporting on Schedule H. The 2011 Schedule H form, recently released by the IRS, requires consistent reporting of community benefit expenditures as well as the new financial assistance and debt collection provisions that were included in the Affordable Care Act in 2010. We applaud the IRS for recognizing the need to require true reporting rather than questionable accounting on a self-selected sample. Non-profit hospitals, which are accountable to the taxpayers, must present a true picture of how much they are giving back to their communities, not just PR spin.

— Anna Dunbar-Hester, Policy Analyst