chapter 14

Chapter 14 Granof-5e 1

Chapter 14Health Care Providers

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:

– Revenues and expenses– Fee for service revenues– Capitation revenues– Bad debts and charity care– Malpractice claims– “Retrospective” insurance premiums

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


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

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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

Chapter 14 Granof-5e


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


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


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): - Specific Purpose Fund - Plant Replacement and Expansion Fund - Endowments


Fund Accounting


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)

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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.



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

Governmental HCO Example

M.D. Anderson Cancer Center


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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)



Revenues Revenues are categorized as:

– Unrestricted• Patient care revenues• Other revenues

– Temporarily restricted– Permanently 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.


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.


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

$400,000


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


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


Example 3- Charity Care

Question: A hospital values care provided to indigent patients at $300,000, based on standard billing rates. However, it anticipates collecting none of 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.


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.



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.



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:-Revenue recognition-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 relate to:Entrance fees that include future health careThe obligation to deliver future health services

Periodic fees to cover operating costs

Refundable advance fees

Continuing Care Retirement Communities FYI


Financial & Operating Analysis



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


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

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Concluding Comments 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.


chapter 14

Documents

fund accounting granof

health care services

health care entities

d granof

net assets table

accounting issues

proprietary fund accounting

hconpo unrestricted