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5.2 Uncompensated services
Publication date: 31 Mar 2023
us Health care guide
Health care services provided under fee-for-service arrangements are typically billed to the patient (and if applicable, to the patient’s third-party payer) after the services are provided. In the normal course, certain amounts billed will ultimately not be collected. Some of those uncollected amounts may be revenue adjustments attributed to charity care or implicit price concessions (see HC 3.2.3), while others may be credit losses (bad debts). Collectively, these three classes of write-offs constitute what is generally referred to as “uncompensated care.” This section will explain the three types of adjustments and the financial reporting implications of each type.
Charity care refers to free or discounted services provided to patients who are unable to pay and who meet specified criteria related to their income and assets. If a patient lacks a private health plan or government program coverage for health care services, providers that offer charity care will typically first consider whether the patient will qualify for care at reduced or no charge under its policy. IRS regulations require tax-exempt hospitals to have charity care policies as a condition of their tax-exempt status; other types of providers may voluntarily establish such policies. Patients whose services are designated as charity care are not billed for those services (or if they are billed, the amount is reduced by a charity care adjustment). For additional information on charity care, see HC 5.2.1.
If a patient does not qualify for charity care, amounts that are owed by a patient will typically be designated as “self-pay,” and the provider will bill and attempt to collect from the patient the amounts to which it is contractually entitled. In these situations, revenue should be reduced for amounts the provider does not expect to be able to collect and a provision against the notional amount of the receivable should be established such that accounts receivable is similarly reduced for these implicit price concessions.
Once the revenue and receivables have been reduced by the amount of the implicit price concessions, any portion of the amount to which the provider expected to be entitled that they expect will ultimately become uncollectible would be considered a credit loss. Credit losses are reported as an expense (e.g., bad debt expense or credit losses) and revenue is not subsequently adjusted.
5.2.1 Distinguishing between implicit price concessions, charity care, and credit losses
Charity care, implicit price concessions, and credit losses (bad debts) are all attributable to instances when a provider renders services but ultimately receives less consideration than the amount to which it is contractually entitled. While they are sometimes described in a general category of “uncompensated care,” the financial statement presentation and disclosure requirements for charity care, implicit price concessions, and credit losses (bad debts) differ significantly (see Figure HC 5-1). The provision for credit losses (bad debts) is a period expense that is reported separately from the revenues that gave rise to the uncollectible receivables. On the other hand, implicit price concessions represent reductions of revenue. For services provided that qualify in full as charity care, no consideration is received (services are provided for free); therefore, no revenue is recognized and only the costs of that care appear in the income statement. ASC 954-605-50-3 requires specific disclosures regarding charity care, and, while implicit price concessions are not explicitly addressed in ASC 954, because they are considered a form of variable consideration, a healthcare provider should consider the requirements of ASC 606-10-50-20. Refer to HC 5.2.3 for additional details.
Figure HC 5-1
Uncompensated care components – presentation and disclosure
Uncompensated care components – presentation and disclosure
The services provided as charity care can be specifically identified by an organization’s charity care policy. However, the distinction between implicit price concessions and credit losses (bad debts) may be less clear. In the Basis for Conclusions to ASU 2014-09 (codified in ASC 606), the FASB acknowledged that in some cases it may be difficult to determine whether the entity has implicitly offered a price concession or whether the entity has chosen to accept the risk of default. That judgment may be even more challenging under the current expected credit loss (CECL) model under ASC 326, Financial instruments – Credit Losses. As described in HC 5.2.4, the CECL model requires consideration of expected future losses, which may be difficult to distinguish from additional price concessions.
AAG-REV 7.6.24 provides factors to consider in determining whether a health care entity intends to provide an implicit price concession. One of the factors is whether the health care entity has a history of performing credit assessments. In practice, many providers do not perform credit assessments on patients prior to treating them. In those situations, the providers are not extending credit to a customer in the traditional sense. Instead, they are providing services with the knowledge and understanding that they likely will not receive all of the compensation to which they are entitled. Thus, in most healthcare revenue transactions, anticipated uncollectible amounts are viewed as implicit price concessions, estimated as variable consideration under ASC 606, and, as a result, are excluded from reported amounts of revenue and receivables.
The distinction between whether a health care entity has offered an implicit price concession or suffered a credit loss is important because it affects the timing and classification of recognition in the income statement. Under ASC 606, subsequent changes to estimates of implicit price concessions are accounted for as changes (increases or decreases) in the transaction price for the revenue transaction and are recorded as an adjustment to revenue. However, a credit loss on a receivable recognized pursuant to ASC 326 is an expense. The key consideration is whether the adjustment is due to a change the amount the provider was willing to accept in exchange for services provider (implicit price concession) or if the adjustment is a write-off of an amount to which the provider believed they were entitled, but ultimately were unable to collect due to a credit loss. Providers will need to apply judgment to determine whether an amount that ultimately becomes uncollectible is truly a credit loss or an additional implicit price concession. Refer to HC 5.2.3 for further discussion of implicit price concessions and HC 5.2.4 for further discussion of credit losses.
For additional information, see AAG-HCO chapter 10, Health Care Service Revenue and Related Receivables and AAG-REV chapter 7, Health care entities. Two publications by the Healthcare Financial Management Association—an issue summary titled Revenue Recognition, Including Implicit Price Concession and Bad Debt Considerations, for Healthcare Organizations: Accounting Issues and Trends, and Principles & Practices Board Statement 15, Valuation and Financial Statement Presentation of Charity Care, Implicit Price Concessions and Bad Debts by Institutional Healthcare Providers, provide further commentary.
5.2.2 Charity care
Providers often render services free of charge or at discounted rates under a formal charity care (or “financial assistance”) policy established by the entity. The GAAP requirements for reporting charity care in financial statements are contained in ASC 954‑605, Health Care Entities – Revenue Recognition—Charity Care and Related Fundraising Entities. For financial reporting purposes, charity care is defined in the ASC Master Glossary.
ASC Master Glossary
Charity care. Charity care represents health care services that are provided but are never expected to result in cash flows. Charity care is provided to a patient with demonstrated inability to pay. Each entity establishes its own criteria for charity care consistent with its mission statement and financial ability.
ASC 954-605-25-11 discusses the timing of charity care determinations. It explicitly states that a facility does not have to determine that a patient meets the criteria at the time of admission in order to classify services provided to them as charity care for financial reporting purposes.
Although it is not necessary for the entity to make this determination on admission or registration of an individual, at some point the entity must determine that the individual meets the established criteria for charity care.
Because no cash flows are expected to arise from charity care services, charges pertaining to charity care do not qualify for recognition as revenue (or receivables) in a provider's financial statements (ASC 954‑605‑25‑10). In some circumstances, a patient may receive a partial reduction in their charges for services, rather than a full reduction. In these instances, the partial adjustment is considered a price concession and is recorded as a reduction of revenue. If the provider does not plan to seek any payment for services rendered (i.e., the patient is receiving a full reduction in their charges for service), the contract with a charity care patient is not considered a “contract with a customer” under the ASC 606 revenue model (AAG-REV 7.6.15).
Excerpt from ASC 954‑605‑25‑10
Charity care does not qualify for recognition as revenue in the financial statements … Only the portion of a patient's account that meets the entity's charity care criteria shall be recognized as charity.
The provision of charity care does not qualify for recognition as receivables in the financial statements.
Services provided to patients are considered charity care only after attempts to seek compensation from other sources (such as health insurance or Medicaid) have been rejected or exhausted. In many cases, providers may first see if uninsured patients can retroactively be enrolled in Medicaid. If that is not an option, patients will be encouraged to apply for charity care. The process requires the patient to supply personal, financial, and other information relevant to determining financial need.
Patients may apply for charity care at the time services are provided or thereafter. Normally there is no time limit on when the application must be filed; patients may even be able to apply after their bills have been sent to collection agencies. Because charity care determinations may not be made by the provider until well after the services have been provided, entities that routinely provide charity care will typically estimate and record a provision for charity care in the same period that the services are provided (similar to the provisions established for implicit price concessions discussed at HC 5.2.3).
Even though the provider expects no compensation, providers typically record gross patient charges related to charity care in the patient accounting system for recordkeeping purposes (see HC 2.1.2). Similarly, in the patient accounting system, the provision for charity care will be netted against the related gross charges so that for financial statement purposes, no revenues for charity care will be included in patient service revenue. The gross charges related to charity services will often be used in developing the disclosures of the estimated cost of charity care required by ASC 954-605-50-3, discussed in HC 5.2.2.1.
While not authoritative GAAP, HFMA Principles & Practices Board Statement 15, Valuation and Financial Statement Presentation of Charity Care, Implicit Price Concessions and Bad Debts by Institutional Healthcare Providers, provides useful commentary on matters related to charity care policies, accounting practices, and reporting.
5.2.2.1 Disclosure requirements for charity care
The fact that charity services do not result in recognition of revenue is generally disclosed in either the summary of significant accounting policies or a separate charity care note. Also, because users cannot obtain information about the provision of charity care from the face of the income statement, ASC 954-605-50-3 requires disclosure of the level of charity care provided.
Management's policy for providing charity care, as well as the level of charity care provided, shall be disclosed in the financial statements. Such disclosure shall be measured based on the provider's direct and indirect costs of providing charity care services. If costs cannot be specifically attributed to services provided to charity care patients (for example, based on a cost accounting system), management may estimate the costs of those services using reasonable techniques. For example, one such estimation technique might involve calculating a ratio of cost to gross charges, and then multiplying that ratio by the gross uncompensated charges associated with providing care to charity patients. Other reasonable techniques also are permitted. The method used to identify or estimate such costs shall be disclosed. Funds received to offset or subsidize charity services provided, for example, from gifts or grants restricted for charity care or from an uncompensated care fund, also shall be separately disclosed.
These disclosures are required for all entities that provide charity care, whether that care is provided under a regulatory requirement (in the case of tax-exempt hospitals) or voluntarily. Key elements of the disclosures include:
- A statement of management's policy regarding charity care. Typically, entities disclose that they provide services without charge (or at amounts less than their established rates (gross charges), if applicable) to patients who meet charity care criteria established by the entity. Some also include a brief description of the criteria (such as family income, net worth, extent of financial obligations for healthcare services) and, if applicable, the criteria for application of sliding scale discounts based on financial need.
- The amount of charity care provided during each period covered by the financial statements. Measurements of the cost of charity care are based on the fully-loaded costs (i.e., direct and indirect costs) of providing the services. Although this measurement basis is generally consistent with the basis used by not-for-profit hospitals for the “financial assistance” component of community benefits reporting in IRS Form 990 Schedule H, the amount reported for GAAP purposes might differ from the amount determined using IRS rules. Entities can supplement the required disclosure with measures of charity care expressed in terms of the gross value of the care at established rates, if desired.
- The method utilized to identify or determine the costs. Costs should be identified or determined using the best information available. An entity may obtain the information directly from a cost accounting system or using reasonable estimation techniques, such as multiplying the gross charges associated with charity patients by a cost-to-charge ratio.
- The amount of funds received to offset or subsidize charity services provided during the period (if any). This might include, for example, contributions that are donor-restricted for charity care, or local government grants for indigent care. These amounts must be separately disclosed as contributions and not netted against the cost of the charity care provided (see paragraph BC7 of the Basis for Conclusions in ASU 2010-23, Measuring Charity Care for Disclosure, which is the standard that is codified in ASC 954-605).
Figure HC 5-2 illustrates these disclosures.
Figure HC 5-2
Illustrative disclosures –charity care
Illustrative disclosures –charity care
Example 1
Health System provides care without charge or at amounts less than its established rates to patients who meet certain criteria under its charity care policy. Because Health System does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Of Health System’s total expenses reported ($125 million and $100 million in 20x1 and 20x0, respectively), an estimated $20 million and $15 million arose during 20x1 and 20x0, respectively, in connection with services provided to charity patients. The estimated costs of providing charity services are based on data derived from Health System's cost accounting system. Health System received $100,000 and $75,000 in contributions that were restricted for the care of indigent patients during 20x1 and 20x0, respectively.
Example 2
Hospital provides care without charge or at amounts less than its established rates to patients who meet certain criteria under its charity care policy. Because Hospital does not pursue collection of amounts determined to qualify as charity care, they are not reported as revenue. Of Hospital’s $80 and $75 million of total expenses reported in 20x1 and 20x0, respectively, an estimated $12.5 and $10 million arose from providing services to charity patients. The estimated costs of providing charity services are based on a calculation which applies a ratio of costs to charges to the gross uncompensated charges associated with providing care to charity patients. The ratio of cost to charges is calculated based on the Hospital’s total expenses associated with patient care (less bad debt expense) divided by gross patient charges. During 20x1, Hospital received a grant of $2 million from ABC County to help defray the costs of indigent care.
5.2.3 Provision for implicit price concessions
When a patient is assigned to a “self-pay” payer class, the provider will bill and attempt to collect from the patient the amounts to which it is contractually entitled. At the time the services are provided, the provider will need to estimate the amounts that it does not expect to be able to collect, which constitute implicit price concessions. See HC 5.2.1 for a discussion about distinguishing between implicit price concessions and credit losses.
In many self-pay situations, the provider chooses to provide services without knowing whether the patient would be able or willing to pay, which essentially constitutes a practice of granting implicit price concessions. Evaluating arrangements to determine whether a provider is offering implicit price concessions is discussed in HC 3.3.1; the approach for estimating the amount of the provision is described at HC 3.3.1.1.
Implicit price concessions will directly reduce the amounts of both patient service revenue and the related receivables that can be recognized. This is a fundamental presentation difference from the provision for credit losses (bad debts), discussed further in HC 5.2.1 and HC 5.2.4, which is recognized as an expense and an allowance against the receivable corresponding to the amount of revenue recognized.
In developing the estimate of implicit price concessions, the provider should consider its expectations of cash collections based on all information (historical, current, and forecast) that is reasonably available to the provider. If the actual collection experience differs from the initial expectation for reasons other than the creditworthiness of a patient, the subsequent changes are accounted for as increases or decreases in the transaction price—that is, as additional revenue, or as a reduction of revenue—in the period in which the estimate changes, consistent with the guidance in ASC 606-10-32-43 (see discussion at HC 3.3). Judgment is required to determine whether subsequent changes in the estimated amount expected to be collected are due to credit losses or should be considered an additional implicit price concession. Question HC 5-1 addresses whether additional allowances for credit risks (credit losses) are required for receivable balances that incorporate implicit price concession reductions.
Question HC 5-1
Provider provides services to self-pay patients without knowing if the patient is willing or able to pay. When Provider initially recognizes revenue and receivables from self-pay patients, the amounts recognized are reduced by amounts that Provider does not expect to collect (i.e., implicit price concessions).
Does the guidance on impairment losses related to customer credit risk in ASC 326Financial instruments – credit losses,apply to Provider’s receivables that have already been reduced to incorporate implicit price concessions?
Provider provides services to self-pay patients without knowing if the patient is willing or able to pay. When Provider initially recognizes revenue and receivables from self-pay patients, the amounts recognized are reduced by amounts that Provider does not expect to collect (i.e., implicit price concessions).
Does the guidance on impairment losses related to customer credit risk in ASC 326Financial instruments – credit losses,apply to Provider’s receivables that have already been reduced to incorporate implicit price concessions?
PwC response
Yes. The credit loss considerations in ASC 326 apply to all receivables. However, providers should apply judgment in determining if subsequent adjustments to a patient account are due to changes in implicit price concession estimates under ASC 606 or credit losses under ASC 326. In instances when health care providers administer care regardless of a patient’s ability to pay and have a history of accepting less than the full contractual amount, it may be appropriate for a health care provider to consider all adjustments to patient care collections to represent an implicit price concession.
5.2.3.1 Presentation and disclosure for implicit price concessions
ASC 606 does not explicitly require disclosure of the amount by which revenues were reduced for implicit price concessions provided during a reporting period. However, as implicit prices concessions, and changes in estimates related thereto, are often significant factors in determining the overall transaction price, additional disclosures may also be required under ASC 606-10-50-2. Under this guidance, health care organizations will also need to disclose information about the methods, inputs, and assumptions utilized in estimating implicit price concessions. Refer to FSP 33 for additional information on specific disclosures required by ASC 606.
5.2.4 Provision for credit losses (bad debts)
While providers often render services to self-pay patients without the knowledge of the patients’ willingness or ability to pay, there are also instances when services are only performed if the provider believes that it is probable the patient will pay the full amount for services. This is often the case with elective procedures. When a patient is assigned to a “self-pay” payer class, and the provider believes it is probable they will be paid for the related services (either by the patient or a third-party payer), and, therefore, determines that they have a contract with the patient, the provider recognizes revenue for the amount to which it expects to be entitled. ASC 326 requires a provision for credit losses (bad debts) to be recognized at the same time the receivable is recognized. Unlike implicit price concessions, the provision for credit losses (bad debts) and subsequent changes in estimate thereto are reflected as an expense. Consequently, in fee-for-service healthcare, the provision for credit losses (bad debts) is associated with write-offs of amounts receivable from patients who originally had been determined to have the willingness and financial capacity to pay for services but who ultimately are unwilling or unable to settle the claims. The provider initially recognizes revenue and receivables at the billable amounts, and then subsequently accounts for the receivable pursuant to ASC 326; revenue is not affected.
In the income statement, the provision for credit losses (bad debts) is shown as a period expense that is reported separately from the revenues that gave rise to the uncollectable receivables. HC 5.2.4.1 describes how the provision is estimated.
Example HC 5-1 illustrates a fact pattern in which estimated uncollectible amounts would be reflected as an allowance against recognized receivables and as provision for credit losses (bad debt expense). For additional information, see AAG-REV 7.6.36.
EXAMPLE HC 5-1
Contract results in credit loss (bad debt expense)
Contract results in credit loss (bad debt expense)
Ambulatory Surgery Center (Center) performs elective procedures and does not have a history of providing price concessions to patients. As part of their admissions process, Center performs credit checks on all patients wishing to schedule elective surgeries to verify that it is probable they will collect consideration for services rendered. Center’s collection experience indicates that it collects substantially all of the amounts it bills to customers receiving elective surgeries. Thus, revenue and corresponding receivables are recorded for the gross amounts billed to patients. An allowance for uncollectible accounts is separately assessed under ASC 326.
Patient contacts Center to schedule an elective surgery that is not covered by their insurance. The charges for the surgery will be $4,000. Center performs an assessment on Patient’s credit and agrees to schedule the surgery. Patient pays $500 up front and signs a promissory note for the remaining $3,500, payable in seven monthly installments of $500.
After receiving the surgery and paying five monthly installments, Patient ceases to make payments. After several attempts at collections, Center determines that it will not be able to collect the $1,000 remaining balance.
How should Center reflect the write-off of the uncollectible receivable?
Analysis
The $1,000 write-off would be charged against Center’s allowance for credit losses. At the inception of the contract with Patient, Center expected to collect substantially all of the consideration to which it was entitled so recognition of revenue for the full $4,000 transaction price is appropriate.
5.2.4.1 Estimating the allowance for doubtful accounts
Prior to the adoption of ASU 2016-13, Measurement of Credit Losses on Financial Instruments (codified in ASC 326), entities typically estimated their allowance for doubtful accounts using historical loss data such as aged accounts receivable trial balances, collection trends, and subsequent period write-offs. This methodology is referred to as the “incurred loss” model for receivables, and it is described in ASC 310-10-35-7 through ASC 310-10-35-11. Under this approach, recognition of impairment losses (bad debts) occurs when it becomes probable that receivables are impaired (and thus, that losses have been incurred).
ASC 326 supersedes the guidance in ASC 310-10-30 for impairments associated with extensions of credit. It replaces the incurred loss model with a current expected credit losses (CECL) model. The CECL model eliminates the backward-looking threshold of “losses that are probable of having occurred.” Instead, it requires recognition on day 1 (i.e., at inception of a revenue contract) of credit losses that are expected to occur in the future. In addition to historical loss information, CECL requires entities to consider current conditions and reasonable, supportable forecasts when estimating the allowance for uncollectible accounts. For additional information on how the CECL model is applied to receivables, see LI 7.7.
Calendar year-end providers that are public business entities (except for smaller reporting companies as defined by the SEC) were required to adopt ASC 326 in calendar 2020 financial statements. All other entities (smaller SEC reporting companies, all NFP entities, all private companies) will be required to adopt the CECL model in fiscal years (and interim periods within those fiscal years) beginning after December 15, 2022.
5.2.5 Disclosure of “community benefits” information
Many US hospitals operate as not-for-profit organizations and, as such, are exempt from most federal, state, and local taxes. This favored tax status is an acknowledgement of the benefit these institutions are expected to provide to the communities they serve (“community benefit”).
Community benefit encompasses a broad range of services and activities a tax-exempt hospital might carry out in meeting such expectations. In addition to providing free or discounted services to patients who qualify under the hospital’s financial assistance policy (i.e., charity care), such activities might include participation in low-paying government programs such as Medicaid, operating costly services at a loss (e.g., a trauma unit), sponsoring community health programs, helping to train health professionals, and performing health research, among others.
Community benefits provided must be quantified in annual reporting to the IRS (on Schedule H of Form 990, the annual information return filed by not-for-profits). When calculating the values of benefits provided, hospitals use definitions and costing methodologies prescribed by the IRS.
Charity care is one type of community benefit reported on Schedule H for which GAAP prescribes disclosure in general-purpose financial statements, which is set forth in ASC 954-605. As discussed in HC 5.2.1, differences can exist between charity care amounts determined for financial reporting purposes and charity care quantified under IRS regulations due to differences in FASB and IRS reporting requirements.
Similarly, differences may exist in how uncollectible amounts are reported for regulatory and financial reporting purposes. For example, in Medicare cost reports and IRS Form 990 filings, providers whose uncollectible accounts are considered implicit price concessions for financial reporting purposes will continue to report those amounts in accordance with instructions provided by those regulators (generally, reflecting all uncollectible accounts as bad debt expense).
Some organizations may wish to augment their financial statement charity care disclosures with additional disclosures related to other types of community benefit. Because the FASB has not developed any standards with respect to community benefit information other than charity care amounts, disclosures of community benefit amounts are likely to be either non-GAAP measures or key performance indicators.
According to the FASB’s conceptual framework, not all information that might be useful to users of financial statements is incorporated into financial statements. Information reported in the financial statements and notes generally is limited to that for which standards have been specified by FASB and which FASB considers necessary for fair presentation. However, other information that management believes would be useful might appropriately accompany the financial statements through including it in management’s discussion and analysis, or in a separate supplemental schedule.
If quantitative information about community benefits calculated using the IRS framework is presented in a supplemental schedule that accompanies the financial statements, it typically would be accompanied by a note that explains to the user the nature of the information and the basis under which it has been prepared (for example, in according with IRS reporting requirements for Schedule H of Form 990).
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