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Quantifying Bad Debt

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    Jody Branham

    Posted by: Shannon Jordan, Good Samaritan Hospital

    Date: November 2, 2009, 8:24 am

    Wondering if others could share how they estimate the amount of bad debt that is attributable to patients who likely would of qualified for charity care, but for some unseen reason info was not obtained to make determination on eligibility. We do have these patients but have no idea on how to quantify it.

    Jody Branham

    Response: Mary Luthy, St. John’s Health Center

    Date: November 2, 2009, 11:09 am

    We cannot count them as Charity Care until they go through the application process.

    Jody Branham

    Response: Shannon Jordan, Good Samaritan Hospital

    Date: November 3, 2009, 11:12 am

    But the IRS asks you to give an estimate of bad debt that can be attributable to patients eligible for charity care, for example proper paperwork doesn’t get filled out to qualify as charity so the account ends up being wrote off as bad debt. In your bad debt there should be a portion of patients who could of qualified as charity had the proper paperwork been completed. If you have that estimate you can reclassify it as charity.

    Jody Branham

    Response: Jo Anne Leslie, Henry Ford Health System

    Date: November 3, 2009, 12:59 pm

    Shannon, I would agree with Mary’s response that they cannot be counted as Charity. However, on Form 990 Schedule H, Part III, Section A, question #3 does ask that organizations estimate the cost of bad debt attributable to patients eligible under their charity care policy. We too struggle with that, as most hospitals, particularly urban, probably do. We have come up with a data base of our bad debt write-offs that can be drilled into by street address/zip code to look at the income level of that address in order to make an assumption that the patient would or would not have qualified for charity had the application process been completed. They still remain as bad debt, and aren’t reclassified as charity. It does give us a way to estimate that number.

    I would be interested in getting other ideas on how to tackle this issue.

    Jody Branham

    Response: Mary Luthy, St. John’s Health Center

    Date: November 3, 2009, 1:28 pm

    We struggle the same as others and do not have a way to quantify that population. Plus, because Schedule H this year was optional, we didn’t complete it.

    Jody Branham

    Response: Michelle Brooks, University Health Systems of Eastern Carolina

    Date: November 3, 2009, 2:51 pm

    I am not sure that you can reclassify the estimate as charity care, unless you use presumptive modeling and auto-qualify them for charity care. There is another section of Schedule H that asks what portion of your bad debt you feel is charity care and why.

    Jody Branham

    Response: Eileen Barsi, CHW

    Date: November 2, 2009, 10:51 am

    I’ve attached information about PARO scoring that is used in our organization to determine which accounts would likely qualify as charity care accounts using presumptive data based on socio-economic information. The contact information for Neil Smithson is included in the document.

    PARO – Payment Assistance Rank Order

    PARO was developed as a tool to help hospitals more effectively, efficiently and less intrusively identify patients who may be eligible for charity care/payment assistance.

    The application and approval process for healthcare payment assistance efforts and charity care is widely fragmented, time consuming and not effective in assisting many of the patients it is intended to assist.

    Healthcare providers need a tool to simplify interactions with the patients in order to streamline the process for those patients who are engaged and to evaluate those accounts when the patient is not responsive to the charity care/payment assistance application process.

    Existing scoring systems, such as collection scores and credit scores, analyze a debtor’s likelihood of repayment and were developed based on an approach to maximize cash collections. For example, credit scores focus on the credit capacity of the responsible party. However, in healthcare, scoring systems should be based on the debtor’s ability to pay, which is the purpose of the PARO system.

    PARO Development
    PARO was conceived as a methodology to apply consistent screening and application standards to all patients. Special attention was paid to those socio-economic factors that might adversely affect those patients deserving the most attention.

    Historically, healthcare providers have used manual application processes to assess a patient’s financial need, largely for accounting and regulatory purposes. These processes require patients to complete complicated forms and to submit personal financial documents such as bank statements and tax returns with the application. The information submitted by the patient during this application process is then usually verified by credit/FICO scores.

    PARO research has proven that patient financial need has a high correlation to where a patient lives, educational background, marital status, age, gender, and language/culture. Traditional credit scoring does not provide an adequate measure of these underlying conditions. The PARO score has been demonstrated to aptly identify those individuals with the highest level of financial need. More than 47 million people in the U.S. are uninsured while 78 million are considered poor or are likely to fall into poverty within any 12 month period. Many consumers living in poverty are challenged by literacy and the high cost of banking. This further contributes to lack of participation in traditional charity programs which require completed applications including bank account information and tax returns. A large portion of these people have been overlooked for charitable assistance.

    The developers of PARO approached CHW with the proposition to utilize historical data to develop a predictive model for healthcare financial assistance that encompassed approved financial assistance applications, rejected financial assistance applications, and non-responsive patients.

    Based on historical financial assistance approvals, PARO was developed accessing the aggregate data from 9,000 sources encompassing 2 billion records. Recognizing the most qualified applicants would likely have the least credit data, and incorporating the demographic fundamentals essential to economic conditions, PARO utilizes US Census data and public data sources to estimate a patient’s liquidity position. The PARO score is not a credit or collection score, but a payment assistance score.

    Using a scale from 1 to 1000, PARO assigns a numeric value to each account based on the evaluation of a complex set of criteria used to define that patient’s financial condition. The database process attempts to confirm the patient’s identity through address and phone number matching. The process then estimates economic conditions with the patient’s sub-ZIP code. This data is then matched to consumer activity and asset ownership files. The resulting score is returned with any updated demographic data.

    PARO results have proven to be more than twice as effective as traditional credit/collection scores. The PARO Charity Score Results chart shows the relationship between the PARO score and approved cases. The distribution of outcomes of the score ranges demonstrates the higher likelihood of lower scoring patients to qualify for financial assistance. In fact, the majority of approved cases fell below a 600 score threshold.


    PARO is typically deployed as a final screen for accounts that have completed the initial billing cycle. PARO estimates (score, Federal Poverty Level estimates, and asset indicators) can also be used at the time of service to condense the charity care application. PARO estimates can be used to determine accounts eligible for full discount or partial discount based on financial need.

    Contact Information

    PARO™ Decision Support, LLC

    Jody Branham

    Response: Angela Haggard, Provena Health

    Date: November 2, 2009, 1:22 pm

    You will want to reference the worksheets for the IRS 990 H instructions – worksheet 1 for Charity and Worksheet 3 for Medicaid. You will also have to complete worksheet 2 for the cost to charge ratio. These calculations are slightly different than what we have done historically. I am working directly with our finance department.

    We report on a quarterly basis so we have some indication as to how we are trending compared to previous years. At year-end we make the necessary adjustments in CBISA software to assure the year-end # is accurate.

    Jody Branham

    Response: Melissa Hutchison, Allina Hospital and Clinics

    Date: November 2, 2009, 2:57 pm

    Allina reports Charity Care and Cost in Excess of Medicaid into CBISA on a quarterly basis using a quarterly calculated cost to charge ratio. The final annual numbers are true-d up at year end using the current annual cost to charge ratio.

    Allina does not have a tracking method for bad debt that is attributable to patients that may qualify for charity care, but do not submit the application.

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