Chapter 14
St. Luke’s Episcopal
Health System
Granof & Khumawala-6e Chapter 14
Health Care Providers
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Understand different organizational forms for providing health
care services.
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Know the authoritative accounting literature that governs health
care entities.
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•
Understand accounting and reporting issues for healthcare
providers such as accounting for:
o Revenues and expenses
o Fee for service revenues
o Capitation revenues
o Bad debts and charity care
o Malpractice claims
o “Retrospective” insurance premiums
Journalize transactions and prepare the basic financial
statements for not-for-profit health care providers.
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Learning Objectives
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Health Care Organizations (HCOs)
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Clinics and individual (or group) practices
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Continuing care retirement communities (CCRC)
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Health maintenance organizations (HMOs)
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Home health agencies, e.g., hospice
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Hospitals
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Nursing homes
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Rehabilitation centers
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Types of Services:
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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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Classification of Health Care Organizations
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Health Care Organizations (e.g. hospital)
Structures
II:
Not-for-Profit:
Voluntary
III:
Governmental:
Public
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I:
For-Profit:
Proprietary
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Examples of Health Care Organizations
II) Not-for-Profit:
• St. Luke’s Health System
• Memorial Hermann Healthcare
system
III) Governmental:
• M.D. Anderson Cancer Center
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I) For-profit:
• HealthSouth
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•
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reporting entity
contributions
•
•
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financial statement display
cash flows
deposits and investments (i.e., see
GASB Statement No. 31, SFAS No. 115,
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and SFAS No. 124)
operating leases
compensated absences
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Debt refunding; risks and uncertainties
pensions and other post retirement benefits
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Accounting Issues that differ depending upon the
Organizational Structure (Government v/s NFP HCO)
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GAAP for HCOs
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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GOVERNMENTAL HCOs:
• Now follows GASB Statement No. 34
• Considered special purpose governments.
• May be accounted for as:
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Fund Accounting
Used for:
1) Governmental HCOs
HCOs’ Fund Accounting has:
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General Unrestricted Funds
--Reports financial resources and fixed assets.
•
Donor-Restricted Funds (either temporarily and
permanently restricted):
o
Specific Purpose Fund
o
Plant Replacement and Expansion Fund
o
Endowments
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2) Internal Accounting purposes
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Financial Statements for HCOs
• Balance Sheet (Table 14-1A)
• Statement of Activities (Table 14-1B)
(Table 14-1C)
• Statement of Cash Flows (Table 14-1D)
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• Statement of Changes in Net Assets
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• 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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Equity of a HCO
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Statements of Cash Flows
Governmental HCO
Authority SFAS No. 95
GASB Statement No. 9
Activities Operating
Investing
Financing
Operating
Investing
Noncapital financing
Capital and related
financing
Investing
Interest paid and Operating, except restricted
received net asset income (financing)
PPE Acquisition Investing
Capital and related
financing
Unrestricted gifts Operating
Noncapital financing
Reconciliation Net assets to operating
schedule activities
Operating income(loss)
to operating activities
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NFP and For-Profit HCO
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• 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)
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Assets
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Revenues
• Revenues are categorized as:
o Unrestricted
o Temporarily restricted
o 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.
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Patient care revenues
Other revenues
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Principle Sources of Revenue for a HCO
• 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)
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• Net assets released from restrictions used for
operations
--Applies to non-governmental NFP HCOs
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Revenue
• 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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• 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.
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Example 1- Patient Care Revenues
Entries:
To record one week’s patient revenues:
Patient account receivable
$400,000
Patient revenues
$400,000
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During 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.
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Example 1(cont’d)
Allowance for 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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Revenue from patient services—
--estimated contractual adjustments
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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
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Example 2- Capitation Fee Revenue
$18,000
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Question: 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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Example 3- Charity Care
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ALL reported within the unrestricted category.
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Use full accrual basis of accounting.
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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)
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Expenses
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Bad debts (FASB) is an expense (NOT a reduction
of gross revenue, as it had been in the past).
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Bad debts (GASB) is a reduction of gross revenue,
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Depreciation is recorded on capital assets and
reported in the General (or Unrestricted) Fund.
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Expenses (cont’d)
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Commitments and Contingencies
• malpractice claims
• risk contracting
• obligations to provide uncompensated care
• contractual agreements with physicians
• as well as others incurred in any business
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• third-party payor payments
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Example 1 – Malpractice Claims
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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Issue: 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.
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• 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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Financing
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Diagnosis-related Groups
• 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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• In 1983, Medicare (the largest purchaser of
hospital services) began a system of prospective
payment to providers based on DRGs.
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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).
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Accounting issues relate to:
o Revenue recognition
o Accounting for risk contracts
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Prepaid Healthcare Plans
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Continuing Care
Retirement Communities - FYI
Accounting issues related to:
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Entrance fees that include future health care
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The obligation to deliver future health services
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Periodic fees to cover operating costs
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Refundable advance fees
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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.
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Decision makers evaluate HCO for different reasons:
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Managers are accountable for performance.
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Financial analysts determine the creditworthiness of
organizations issuing debt.
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Third-party payors determine appropriate payment
for services.
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Patients assess quality of health care services,
such as success rate of certain procedures.
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Financial and Operational Analysis
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HCO Performance Measures
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Patient volume (e.g., occupancy rate or daily
census and average length of stay)
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Patient and payout mix (e.g., Medicare,
commercial, private pay)
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Productivity and efficiency (e.g., personnel per
average daily census)
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Debt covenant ratios
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These measures can be categorized by:
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Affordable Healthcare Act
• Changes to note:
o
o
o
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50% discount for name-brand drugs in the Medicare "donut hole"
Expanded coverage for young adults
Small business tax credits
Pre-Existing Condition Insurance Plans
• Reforms already in effect:
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o
o
o
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States to cover more people on Medicaid,
provide small business health insurance tax credits,
provide free preventive care,
allow young adults to stay on their parent’s plan until they turn 26 years of age,
expand healthcare coverage for early retirees and
make information available online via an easy-to-use website (HealthCare.gov)
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• 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.
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• 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
o
o
o
o
Fee for service patient care revenues
Capitation fee revenues
Charitable care.
Malpractice claims.
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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Summary
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