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Published March 11, 2021

Evaluating the Methods for Calculating and Reporting Uncompensated Care

In the years leading up to the COVID-19 pandemic, hospitals have experienced greater scrutiny regarding the determination and reporting of uncompensated care costs. Medicare uses the information to distribute uncompensated care pool amounts. Similarly, many states use this information to distribute funds that supplement Medicaid reimbursement levels. Community groups, attorneys general, and other “watchdogs” are focusing on what the hospitals are doing in terms of “giving back.”

The Internal Revenue Service (IRS) uses this information to support tax-exempt status, and the users of published financial statement information desire to understand the level of foregone revenue as hospitals have incurred uncompensated care costs. Each user receiving this uncompensated care information has its own definition and instruction to hospitals for determining and reporting these costs. The often inconsistent instructions are also impacted by the timing of the reporting. The treatment of charity care and discounts, as well as total bad debt write-offs, can significantly affect revenue streams related to uncompensated care amounts.

Some of the reporting differences start with the definitions applied in the various contexts.






Uncompensated Care

Per the cost report instructions (Chapter 40):

Consists of charity care, self-pay discounts, non-Medicare bad debt, and non-reimbursable Medicare bad debt. Uncompensated care does not include non-medically necessary services, courtesy allowances, discounts given to patients who do not meet the hospital’s charity care policy, discounts given to uninsured patients who do not meet the hospital’s financial assistance policy (FAP), or bad debt reimbursed by Medicare.



Financial Assistance

Per the IRS Form 990 H instructions:

Financial assistance includes free or discounted health services provided to persons who meet the organization’s criteria for financial assistance and are unable to pay for all or a portion of the services. This assistance does not include: bad debt (handled separately) or uncollectible charges that the organization recorded as revenue but wrote off due to a patient’s failure to pay, or the cost of providing such care to such patients; the difference between the cost of care provided under Medicaid or other means-tested government programs, or under Medicare and the revenue derived therefrom; self-pay or prompt-pay discounts; or contractual adjustments with any third-party payers.

The IRS instructions allow hospitals to use “the organization’s most accurate costing methods (cost accounting system, cost-to-charge ratio, or other)” to calculate the reported amount.

Generally Accepted Accounting Principles (GAAP)


Charity Care 

Per FASB guidance:

The Financial Accounting Standards Board (FASB) Accounting Standards Codification® (ASC) Master Glossary states that “[c]harity 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.” Distinguishing charity care from bad debt requires appropriate policies and procedures to evaluate the facts of a particular patient account and the exercise of judgment.

American Hospital Association (AHA)


Uncompensated care 

Per the AHA Fact Sheet on Uncompensated Care:

Uncompensated care is an overall measure of hospital care for which no payment was received from the patient or insurer. It is the sum of a hospital’s bad debt and the financial assistance it provides. Financial assistance includes care for which hospitals never expected to be reimbursed and care provided at a reduced cost for those in need. A hospital incurs bad debt when it cannot obtain reimbursement for care provided; this happens when patients are unable (or unwilling) to pay their bills, but do not apply for financial assistance. Uncompensated care excludes other unfunded costs of care, such as underpayment from Medicaid and Medicare.


The tables below summarize the attributes of reporting uncompensated care costs under Medicare, IRS, and GAAP guidance:

Category: Use


Allocation of Uncompensated Care Pool Funds to substantially replace “traditional” Disproportionate Share Hospital funding


Establishment of entities’ not-for-profit status / compliance with 501(r) regulations


Disclosure to make financial statements consistent for users across reporting entities (and industries)

Category: Data Reported


Actual write-off amounts during cost reporting period for charity care (insured and uninsured patients) and bad debt amounts, including non-covered Medicare bad debts; only applies to hospital charges, excluding  any professional component charges.


Charity care and bad debt expense reported during the year; may include hospital and professional component services, depending on entity comprising tax-exempt entity.


Charity care and bad debt provision determined under accounting rules are applied to the reporting entity; may represent a valuation adjustment applied to accounts receivable; the amount is an element of Net Patient Service Revenue (NPSR), but not separately reported.

Category: Measurement


Charity care reduced by actual patient obligations and bad debt write-offs, adjusted to cost, using Medicare cost-to-charge ratio (based on Medicare principles of reimbursement).

Note: Beginning in FY2021, the uncompensated care will be calculated only using a cost-to-charge ratio derived from acute services.


Charity care and bad debt expense reduced to cost, based on Medicare Cost-to-Charge Ratio or other acceptable methods, including management costing, or procedure-based methods.


Charity care is excluded entirely from the determination of NPSR; footnote disclosure of the cost of charity care can be based on various methods; bad debts are currently shown as a reduction in NPSR (not separately reported on published statements); under current financial accounting guidance, amounts formerly known as charity care and bad debts are considered part of implicit price concessions.

Note: Total bad debts must include amounts identified as Medicare bad debts.

Category: Timing


The Medicare cost report is prepared up to 5 months after year-end. Due to the Public Health Emergency [PHE], many hospitals received a minimum 2-month extension on filing timelines for FY2019 and FY2020 fiscal year-end cost reports.


990H can be filed up to 11 months after fiscal year-end (tax year) (with extensions).


Financial statement audits generally completed 3-4 months after fiscal year-end.

Category: Policy


Requirement for hospitals to establish and document that medical indigence was determined by the hospital; hospitals’ FAP may establish thresholds for charity based on:

  • Federal poverty level
  • Treatment of uninsured discounts
  • Presumptive charity
  • Other factors
  • Additional policy/procedures may be necessary for Medicare bad debts

CMS is requiring audits of all reported uncompensated care costs (separate from normal cost report audit process).


The hospital needs to document the existence of policy, and information reported must be based on application of policies; silent on disposition of presumptive charity.


Reporting on managerial decisions to provide free or discounted services to patients meeting certain criteria; presumptive charity is generally includable; auditors cannot establish policy for the hospital — they can only report on whether the policy has been followed.


The differences in the definitions and other above attributes also create some documentation challenges. For example, under GAAP the hospital may provide a calculation supporting its level of uncompensated care. If the amount is consistent with the auditors’ expectations based on other analytical procedures, no additional work or documentation may be required. Even if individual accounts are reviewed, they would not likely influence the reported amount.

Similarly, the IRS calculations are prepared on an aggregate basis. As noted above, reporting under the IRS will use different methods for cost finding and may include physician services or other items, depending on the way the organization is established from a tax perspective.

Medicare has much more specific requirements, and as noted, claimed amounts are subject to audit. Current requirements include the ability to provide patient-level detail for all charity care and write-offs occurring during the cost reporting period, regardless of the date services were rendered. Professional component charges and other non-hospital services are excluded from the calculation. Also, for amounts claimed as charity care, hospitals need to report insured and uninsured patient activity separately, including any payments received on the accounts. Providers should be able to reconcile information between the various users (Medicare, IRS, GAAP) since, due to the timing of the original information and the definitions used, the source information may change.

There are differences associated with reporting uncompensated care costs under Medicare, IRS, and GAAP. These differences can raise questions of consistency across providers and the ultimate reliability of this information as a basis of payment. Although hospitals may be subjected to the same instructions, there is no specific guidance related to how the underlying data is derived and reported. For example, any adjustment of charge data down to cost is a function of the hospital’s cost structure and philosophy regarding pricing strategy.

For IRS and GAAP purposes, where hospitals have wide latitude to determine the cost finding used, consistency in the reported data is unlikely. The most significant contribution to potential inconsistencies is the simple fact that each hospital has the ability to establish its own FAP, determine write-off procedures, and control the timing and amount of uncompensated care recorded during any fiscal period. These policies and procedures can be influenced by the governance structure (mission, vision, values, etc.), the location, patient demographics, type of hospital, and even competitive (marketplace) factors.

These differences may impact other operational and strategic considerations:

  • How would managed care payers use this information (e.g., might they lower payment levels by factoring in what hospitals are “willing to accept”)?
  • Does the level of uncompensated care impact any lease transactions or terms involving governmental or “quasi-governmental” hospital operations?
  • How does a hospital’s level of reported uncompensated care costs impact transactions in healthcare consolidations?
  • Would patients choose a particular organization given the level of reported uncompensated care?

Hospitals should carefully evaluate the methods used to calculate and report uncompensated care, as the results can impact their organization’s financial, operational, strategic, and public perception outcomes. Action items include:

  • Provide education to hospital governance regarding the significance and implications of uncompensated care policies and reporting.
  • Obtain competitor and peer group publicly available information such as cost reports, tax returns, and financial statements to assess and benchmark your organization’s relative uncompensated care positions to address public perception concerns.
  • Prepare a reconciliation of all reported uncompensated care amounts between the different locations where this information is reported. This should be done for at least a three-year rolling period, depending on the cost report, tax reporting, and financial statement status.
  • Document your understanding of reporting differences and CMS auditing approaches applied to reported uncompensated care amounts and claims for Medicare bad debt reimbursement to prepare for the separate audits of these important reimbursement areas.

If you have questions related to calculating and reporting uncompensated care, contact a PYA executive below at (800) 270-9629.

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