Charity Care Versus Bad Debt

October 28, 2015
English: U.S. Health Insurance Status (Under 65)

English: U.S. Health Insurance Status (Under 65) (Photo credit: Wikipedia)

Alacrity regularly attends HFMA as well as AAHAM functions since our company does quite a bit of medical self-pay collections. We’ve witnessed many great presentations over the years, but the topic of a recent presentation excited the audience’s interest more than most.

The topic of the seminar was…

What is Charity Care versus Bad Debt?

Unfortunately, it’s a fact of life that patients don’t always pay for their healthcare services. The difference with medical bills is that it requires a different method for handling these past due balances. Unlike typical goods and services that people buy on credit, healthcare services are NOT typically “wanted” in the traditional sense. They are more of a “requirement” due to special circumstances and usually urgent in nature. In addition, most people don’t have money saved up to pay for such occurrences or insurance that is adequate enough to pay.

Distinguishing bad debt from charity care is not simple.  When you combine the slow nature of insurance billing/reimbursement with people buying a service they don’t actually want from a not-for-profit organization, it can get quite complex and difficult to collect past due balances.

As a result, healthcare receivables have been classified into two types – Charity Care and Bad Debt..

What is Charity Care?

If healthcare is given to a patient without them able to pay for the services – either through insurance or direct payment – then it is referred to as Charity Care. Healthcare providers 501(c)(3) hospitals under Affordable Care Act sections 501(r) must document their financial aid policies. Written processes for emergency medical ailments should contain qualifications for charity care, a formula for computing charges, a process for utilizing financial aid, and methods to promote this plan.

Collection Efforts

Because of these new laws and regulations, hospitals must regulate not just the billed amounts to patients, but the efforts to acquire payment. Hospitals are required to provide patients as much as 4 months for them to make an application for financial help. While certain collections are prohibited, this doesn’t prevent not-for-profit hospitals to take part in third party standard business collection agencies.

Separating Charity Care from Bad Debt

The distinction results if a patient is hesitant to negotiate a healthcare bill, despite it being determined that he or she has the financial ability to pay. Although similar because both types of accounts are past due, a person’s economic situation will be the determining variable. New IRS Form 990 Schedule H mandates that healthcare providers like Hospitals calculate the quantity of personal debt that could be assigned to patients qualified for financial assistance. Because of these estimates as well as the necessary waiting periods, it can be more critical than ever before to monitor billing and results. Most are optimizing collection efforts with a multi-step approach:
  • Screening process
  • Coordinating
  • Monitoring
  • Tracking

Unpaid Insurance and Obamacare

Prior to determining if accounts ought to be sent to a collection agency, it’s imperative that you understand whether collections is in fact an possibility. Because of a peculiar loophole in Obamacare, a 90-day time frame exists where physicians might be responsible for unpaid doctor bills. Should a patient become delinquent with their insurance, the carrier is obligated to pay; however, only for a specific time period. In the next 2 months, bills will still be going to the insurance company, but they are allowed to remain not paid, because of the insurance company choice of canceling the insurance policy after 3 months. Understand the dilemma?  Healthcare providers will be left trying to bill and collect from the past due patient. In case you are unsure on if you can collect from a patient for past due bills, consult an Obamacare specialist.


Regardless if you’re attempting to help a patient pay their balances, or file your company’s taxes, it is important to appreciate the distinctions between bad debt and charity care. Charity refers to patients capable of paying. It doesn’t apply globally to past due bills or insurance policy issues. Bad-debt describes patients that can pay off their bill without having support, except that they are not wanting to do it. Fresh government guidelines per the IRS as well as the Affordable Care Act demand monitoring of both, whether or not the patient applies for help. There’s also guidelines relating to insurance policies, that restrict the distinction of debt and payment. Beginning December 29, 2015, 501(r) IRS regulations for 501(c)(3) hospitals will require an additional revenue cycle challenge as well as ICD10 guidelines. It’s essential to stay up-to-date with the ever-changing rules and regulations. Please don’t hesitate to contact us to see if we can help you navigate the challenges related to bad debt collections.