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Chapter 14
Health Care Providers
St. Luke’s Episcopal
Health System
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Learning Objectives
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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:
– Revenues and expenses
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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.
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Health Care Organizations (HCOs)
Types of Services:
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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
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Health Care Organizations (e.g. hospital)
Structures
I:
For-Profit:
Proprietary
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II:
Not-for-Profit:
Voluntary
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III:
Governmental:
Public
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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
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Accounting Issues that differ depending upon the
Organizational Structure (Government v/s NFP HCO)
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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, 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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GAAP for HCOs
GOVERNMENTAL HCOs:
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Now follows GASB Statement No. 34
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Considered special purpose governments.
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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:
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Follow the AICPA industry audit guide, Health Care Organizations as Category
(b) authority after applying all appropriate FASB and GASB Statements.
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This guidance includes:
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Using full accrual accounting
o
Capitalizing long-lived assets and Depreciating those capital assets
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Fund Accounting
Used for:
1) Governmental HCOs
2) Internal Accounting purposes
HCOs’ Fund Accounting has:

General Unrestricted Funds
-Reports financial resources and fixed assets.
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Donor-Restricted Funds (either temporarily and permanently
restricted):
- Specific Purpose Fund
- Plant Replacement and Expansion Fund
- Endowments
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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)
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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.
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Statements of Cash Flows
NFP and For-Profit HCO
Authority SFAS No. 95
Governmental HCO
GASB Statement No. 9
Activities Operating
Investing
Financing
Interest paid and
received
PPE Acquisition
Unrestricted gifts
Operating
Investing
Noncapital financing
Capital and related
financing
Operating, except restricted net Investing
asset income (financing)
Investing
Capital and related
financing
Operating
Noncapital financing
Reconciliation Net assets to operating
schedule activities
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Operating income(loss) to
operating activities
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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)
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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.
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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)
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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 Revenues
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.
Entries:
To record one week’s patient revenues:
Patient account receivable
$400,000
Patient revenues
$400,000
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Example 1(cont’d)
Allowance for contractual adjustments:
Revenue from patient services—
--estimated contractual adjustments
Patient A/R—allowance for
contractual adjustments
$96,000
$96,000
To establish allowance for bad debts:
Bad debt expense
$48,000
Patient A/R—allowance for bad debts
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$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
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$18,000
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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.
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Expenses
 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)
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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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Commitments and Contingencies
 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
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Example 1 – Malpractice Claims
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.
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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Prepaid Healthcare Plans
 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
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Continuing Care
Retirement Communities FYI
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
The
fees that include future health care
obligation to deliver future health services
Periodic
fees to cover operating costs
Refundable
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Financial & Operating
Analysis
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Financial and Operational Analysis
Decision makers evaluate HCO for different
reasons:
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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.
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HCO Performance Measures
These measures can be categorized by:
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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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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.
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