How Medical Debt Forgiveness Benefits Hospitals

A tax expert describes how forgiving medical debts that a healthcare provider will more than likely never collect has an "incredibly low cost, generating very high return" for hospitals.

Working with cash-strapped patients to restructure or forgive their medical debts could provide an excellent return on investment for hospitals that probably aren't going to recover the money anyway, one analyst says.

The biggest hurdle, however, is getting the federal government to agree with the idea, says Brian Haile, senior vice president of Health Care Policy at the Parsippany, NJ-based Jackson Hewitt Tax Service.

Haile says focus groups in Tennessee have that found low-income people with huge medical debts say they would be less likely to pay premiums for health insurance under programs such as the Affordable Care Act as long as they are paying older medical debts.

"If they were close to filing for personal bankruptcies, they already had protections against catastrophic medical events and they knew that," Haile says. "In order to make the insurance have significant value for that household you have to remove the underlying medical debt. Otherwise the family looks at the very real possibility that if someone was hospitalized unexpectedly they would, under [the Emergency Medical Treatment and Active Labor Act] get the care they need and then declare bankruptcy."

Haile says some Tennessee families with huge medical debts were trying to pay off those debts as best they could while still struggling with other pressing issues such as buying food, paying rent, and keeping the lights on.

"These families were working very hard to get their lives back together and they were making some very difficult economic decisions," he says.

"Realistically a lot of hospitals and providers are at best going to collect pennies on the dollar. Is there a way to convert that account receivables that will never be received into something that has real value for hospitals in the form of qualified health plan enrollment to make sure that the next time the individual shows up at the facility they are in a commercial plan that pays commercial rates and from which the facility is going to have a realistic prospect of receiving reimbursement?"

Haile says forgiving debts on money that more than likely will never be collected will benefit hospitals in several ways.

"It's a pretty easy case to make. Hospitals have the ability to target this relief to people who sustain enrollment in qualified health plans. It is not like they are writing off all debt. They can limit it to the folks with whom they induce real behavior change. In that sense it is highly efficient," he says.

"No. 2 is there is just a public relations win with this. And thirdly, in terms of how hospitals spend resources, this has incredibly low cost generating very high return. You don't see this kind of thing very much. Because you are working with clients who already incurred debt with you, it is highly likely that they are going to have medical utilization going forward."

"It's a win, win, win all the way around. The hospital is going to have nice PR. You are going to burnish the brand. You are going to help people in terms of being insured, and hopefully there will be some revenue for the hospital because the next time the person shows up they won't be uninsured."

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."