Chapter 14Health Care Providers

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St. Luke’s Episcopal Health System

Learning Objectives • Understand different organizational forms for providing health

care services.

• Know the authoritative accounting literature that governs health care entities.

• Understand accounting and reporting issues for healthcare providers such as accounting for:

o Revenues and expenseso Fee for service revenueso Capitation revenueso Bad debts and charity careo Malpractice claimso “Retrospective” insurance premiums

• Journalize transactions and prepare the basic financial statements for not-for-profit health care providers.

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Health Care Organizations (HCOs)

Types of Services:

• Clinics and individual (or group) practices

• Continuing care retirement communities (CCRC)

• Health maintenance organizations (HMOs)

• Home health agencies, e.g., hospice

• Hospitals

• Nursing homes

• Rehabilitation centers

Classification of Health Care Organizations

• Investor-Owned Health Care Enterprises• Not-for-Profit, Business-Oriented Organizations• Governmental Health Care Organizations• Not-for-Profit, Nonbusiness-Oriented Organizations

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Health Care Organizations (e.g. hospital)Structures

I:For-Profit:Proprietary

II:Not-for-Profit:Voluntary

III:Governmental:

Public

Examples of Health Care Organizations

I) For-profit: • HealthSouth

II) Not-for-Profit: • St. Luke’s Health System • Memorial Hermann Healthcare

system

III) Governmental: • M.D. Anderson Cancer Center G

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Accounting Issues that differ depending upon the Organizational Structure (Government v/s NFP HCO)

• reporting entity• contributions• financial statement display• cash flows• deposits and investments (i.e., see GASB Statement No. 31, SFAS No. 115, and SFAS No. 124)• operating leases• compensated absences• Debt refunding; risks and uncertainties• pensions and other post retirement benefits

GAAP for HCOsGOVERNMENTAL HCOs:

• Now follows GASB Statement No. 34• Considered special purpose governments.• May be accounted for as:

A) a part of a governmental unit (i.e., as a special revenue, internal service, or enterprise fund) OR

B) as a stand-alone business-type activity that uses proprietary fund accounting principles.

ALL HCOs:

• Follow the AICPA industry audit guide, Health Care Organizations as Category (b) authority after applying all appropriate FASB and GASB Statements.

• This guidance includes: o Using full accrual accounting o Capitalizing long-lived assets and Depreciating those capital

assets

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Used for:1) Governmental HCOs2) Internal Accounting purposes

HCOs’ Fund Accounting has:• General Unrestricted Funds

--Reports financial resources and fixed assets.

• Donor-Restricted Funds (either temporarily and permanently restricted):

o Specific Purpose Fundo Plant Replacement and Expansion Fundo Endowments

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Fund Accounting

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Financial Statements for HCOs

• Balance Sheet (Table 14-1A)

• Statement of Activities (Table 14-1B)

• Statement of Changes in Net Assets (Table 14-1C)

• Statement of Cash Flows (Table 14-1D)

Equity of a HCO

• NPO — unrestricted net assets; temporarily restricted net assets; and permanently restricted net assets.

• Governmental— unrestricted net assets; restricted net assets; invested in Capital Assets, net of related debt.

• For-Profit — capital stock and retained earnings.

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Statements of Cash Flows NFP and For-Profit HCO Governmental HCO

Authority SFAS No. 95 GASB Statement No. 9

Activities Operating Investing Financing

Operating Investing Noncapital financing Capital and related financing

Interest paid and received

Operating, except restricted net asset income (financing)

Investing

PPE Acquisition Investing Capital and related financing

Unrestricted gifts Operating Noncapital financing

Reconciliation schedule

Net assets to operating activities

Operating income(loss) to operating activities

Assets• Current Assets (including receivables with related

allowance accounts for contractual adjustments and bad debts)

• Assets limited as to use — assets limited by contracts or agreements with outside parties other than donors or grantors, as well as limitations placed on assets by the Board.

• Investments (at fair value, per FASB Statement Nos. 115 and 124 or GASB Statement No. 31, as applicable)

• Noncurrent assets (e.g., plant property and equipment) G

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Revenues• Revenues are categorized as:oUnrestricted

Patient care revenuesOther revenues

oTemporarily restrictedoPermanently restricted

• Operating income :- Arises from ongoing major activities, such as service

revenue.• Non-operating income:

- Arises from transactions peripheral or incidental to the delivery of health care, such as investment income and unrestricted contributions.

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Principle Sources of Revenue for a HCO• Net assets released from restrictions used for

operations --Applies to non-governmental NFP HCOs

• Patient service revenue• Premium revenue from capitation fees

--(i.e. fixed fees per person paid periodically regardless of services provided)

• Resident service revenue (e.g., maintenance or rental fees)

• Other revenue (e.g., sales, fees, rental of facilities, investment income and gains, unrestricted contributions)

Revenue• Patient service revenue is reported net of contractual adjustments

--(i.e., differences between gross charges and the amount to be paid by third party payors).

• Prepaid health care plans that earn revenue from agreements to provide service record revenue at the point agreements are made, not when services are rendered.

• Payment often comes from third-party payors, Medicare or Blue Cross or private insurance companies according to allowable costs or predetermined (prospective) rates for services.

• Donated services and supplies are reported at their fair value, if material and meet criteria.

• Charity services to indigent patients for which payment is never expected is not recorded, but may be reported in the Notes to the Financial Statements.

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Example 1- Patient Care RevenuesDuring a particular week a hospital records $400,000 in patient

charges. It estimates that 80% (320,000) of the charges will be billed to third-party payers who will, on average, discount the invoiced amounts by 30% (96,000). The remaining 20% (80,000) of the hospital charges will be billed to patients who are uninsured. Of this 20%, 60% (48,000) will be uncollectible.

Entries:To record one week’s patient revenues:

Patient account receivable $400,000 Patient revenues

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Example 1(cont’d)

Allowance for contractual adjustments:Revenue from patient services— --estimated contractual adjustments $96,000

Patient A/R—allowance for contractual adjustments $96,000

To establish allowance for bad debts:Bad debt expense $48,000

Patient A/R—allowance for bad debts $48,000

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Example 2- Capitation Fee Revenue A physician group receives $300,000 in capitation fees from the

Hartford Insurance Company to provide comprehensive health care to members of the company’s health plan. During the month it provides services for which it would bill, at standard rates, $240,000. In addition, it refers patients to hospitals and other health care providers for which it expects to be billed $18,000.

Entries:To record capitation fees:Cash $300,000

Revenue from capitation fees $300,000

To record liability for patient referrals:Patient referrals (expense) $18,000

Obligations for patient referrals $18,000

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Example 3- Charity CareQuestion: A hospital values care provided to indigent

patients at $300,000, based on standard billing rates. However, it anticipates collecting none for its services.

Answer: In this case, the hospital need not make any entry to record the value of the charitable care. However, it should explain its policies and report the total value of the care provided in notes to the financial statements. (This information is also required on Form 990).

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• ALL reported within the unrestricted category.

• Use full accrual basis of accounting.

• Expenses classified by function or object (aka natural) o Functional classification

(e.g. inpatient services and fiscal and administrative services)

o Object classification (e.g. line items such as salaries and supplies)

Expenses

Expenses (cont’d)

• Bad debts (FASB) is an expense (NOT a reduction of gross revenue, as it had been in the past).

• Bad debts (GASB) is a reduction of gross revenue,

• Depreciation is recorded on capital assets and reported in the General (or Unrestricted) Fund.

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• malpractice claims

• risk contracting

• third-party payor payments

• obligations to provide uncompensated care

• contractual agreements with physicians

• as well as others incurred in any business

Commitments and Contingencies

Example 1 – Malpractice ClaimsIssue: A hospital has been charged with negligence in the death of

a patient. Although no claim has yet been filed, past experience indicates that the hospital is almost certain to be sued.

Answer: The hospital would be required to charge an expense (a loss) in the period of the incident only if it were able to make a reasonable estimate of the amount. If unable to estimate the amount, it would be required to disclose the details of the incident. Assuming that the hospital was able to estimate the amount of loss ($500,000), the following entry will be made:

To record the estimated cost of settling a potential claim:

Anticipated legal claims (expense) $500,000 Commitments and contingencies (liability) $500,000

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Financing

• The health care industry requires capital investment in buildings and equipment which often results in the need for long term debt financing.

• Financing assistance may be available through governmental financing authorities, such as the Health and Education Financing Authority, without regard to the legal structure of the HCO.

• Financing agreements may include requirements to set aside funds for repayments, in which case these are called Assets Limited as to Use.

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Diagnosis-related Groups

• In 1983, Medicare (the largest purchaser of hospital services) began a system of prospective payment to providers based on DRGs.

• Average payments for each of approx. 511 DRGs are determined at the federal level and made to providers no matter what the actual cost of treatment.

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• Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) function as brokers between the consumer (patient) demanding the service and the providers of health care (hospitals and health care professionals).

• Accounting issues relate to:o Revenue recognitiono Accounting for risk contracts

Prepaid Healthcare Plans

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CCRCs provide residential care in a facility, along with some level of long-term medical care that is less intensive than hospital care.

Accounting issues related to:• Entrance fees that include future health care• The obligation to deliver future health services• Periodic fees to cover operating costs• Refundable advance fees

Continuing Care Retirement Communities - FYI

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Decision makers evaluate HCO for different reasons:• Managers are accountable for performance.• Financial analysts determine the creditworthiness of

organizations issuing debt.• Third-party payors determine appropriate payment

for services.• Patients assess quality of health care services,

such as success rate of certain procedures.

Financial and Operational Analysis

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These measures can be categorized by:

• Patient volume (e.g., occupancy rate or daily census and average length of stay)

• Patient and payout mix (e.g., Medicare, commercial, private pay)

• Productivity and efficiency (e.g., personnel per average daily census)

• Debt covenant ratios

HCO Performance Measures

Affordable Healthcare Act• The Patient Protection and Affordable Care Act (popularly known as the

Affordable Healthcare Act), on March 23, 2010 was signed into law by President Obama.

• The law puts in place comprehensive health insurance reforms that will roll out over four years and beyond with most changes taking place by 2014.

• Changes to note:o 50% discount for name-brand drugs in the Medicare "donut hole"o Expanded coverage for young adultso Small business tax creditso Pre-Existing Condition Insurance Plans

• Reforms already in effect:o States to cover more people on Medicaid, o provide small business health insurance tax credits, o provide free preventive care, o allow young adults to stay on their parent’s plan until they turn 26 years of age, o expand healthcare coverage for early retirees and o make information available online via an easy-to-use website (HealthCare.gov)

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Summary• Health care accounting and auditing is complex.• Complexity is due in large measure to “patient service revenue”

being provided by third party payors. • Competency in managerial cost accounting is critical for

managers of health care providers.• Health care organizations are distinguished from other types of

organizations by several unique revenues and expenses. These include: o Fee for service patient care revenueso Capitation fee revenueso Charitable care.o Malpractice claims. o Retrospective insurance premiums

• Fiscal health of health care organizations can be evaluated using analytical tools, such as financial ratios.

• Affordable Care Act and its impact.

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