How Medical Debt Forgiveness Benefits Hospitals
The only problem now is convincing the federal government.
Haile says Tennessee officials have been negotiating with the U.S. Treasury and the Internal Revenue Service since 2011 but have yet to receive a firm commitment on any sort of debt relief that doesn't end up hurting the consumer.
"They count debt relief as a source of income and a taxable event for the consumer and so it becomes one of the things the hospital has to be very careful about," he says. "If the hospitals forgive the debt then you have the IRS pursuing you and you can't extinguish that debt in personal bankruptcy. It's the worst of all possible worlds."
Haile says Tennessee officials worked out a tentative agreement with the federal government that would allow hospitals to forgive any debts above 10% of the adjusted gross income without a tax penalty for the consumer.
For example, if a person earns $35,000 a year and has medical debts of $20,000, the federal government would permit debt forgiveness on any amount above $3,500. However, that $3,500 would be considered taxable income, and Haile says that could create "enormous problems" for struggling consumers. He says hospitals and their professional trade associations must pressure the federal government for a solution.
"This is an issue which is a bit of a sleeper issue and for understandable reasons. It's somewhat smaller than other issues like the [Disproportionate Share Payments to hospitals.] But there is a real opportunity here. This is something you don't need Congressional action on, or even a rule change. You just need an opinion letter," he says.
"It strikes me that there is a lot of room here to get the IRS into a comfortable place that supports where hospitals want to go, which is to get people enrolled."
John Commins is a senior editor with HealthLeaders Media.
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