Chapter 12CAccounting for

Health Care Organizations

Health Care Organizations, such as Hospitals, Can be Structured as

For-Profit:Proprietary

Not-for-Profit:Voluntary

Governmental:Public

Health Care Organizations (HCOs) Types of Services

Clinics and individual or group practices

Continuing care retirement communities

Health maintenance organizations (HMOs)

Home health agencies

Hospitals

Nursing homes

Rehabilitation centers

GAAP for a HCO Depends Upon its Organizational Structure

For-Profit:Proprietary

Not-for-Profit:Voluntary

Governmental:Public

AICPA Audit and Accounting Guide Health Care Organizations

FASB Guidance

GASB Guidance

GAAP for HCOs

Governmental health care organizations follow GASBS 34 and are considered special purpose governments that may be:

component units of another government, or

stand-alone governmental entities.

These governmental entities may be engaged either governmental or business-type activities or both.

GAAP for HCOs

This guidance includes:

using full accrual accounting

capitalizing long-lived assets

depreciating those capital assets

Financial Statements for HCOs

Balance Sheet

Statement of Operations

Statement of Changes in Net Assets

Statement of Cash Flows – could be either 3 or 4 sections depending on type of hospital.

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

Principle Sources of Revenue for a HCO

patient service revenue (cash) government (e.g., Medicare/Medicaid payments) third party payors (e.g., Blue Cross/Blue Shield) 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 (Cont’d)

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) - Medicaid

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. (Fee for Service)

Revenue (Cont’d)

Charity service to indigent patients for which payment is never expected is not recorded, but may be reported in the notes to the financial statements.

Operating income arises from ongoing major activities, such as service revenue

Nonoperating income arises from transactions such as investment income.

Revenue (Cont’d)

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

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, see relevant FASB or GASB statements for exact treatment)

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

o Use full accrual accounting

o Bad debts is an expense (not a reduction of gross revenue, as it had been in the past)

o Depreciation is recorded on capital assets

o Expenses can be reported by natural classification (e.g., line items such as salaries and supplies) or functional categories, such as inpatient services and fiscal and administrative services.

Expenses

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

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, 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.

Budgeting and Costs

All hospitals use comprehensive budgets for managerial purposes

Only governmental hospitals record budgets in the fund accounts.

Tax-exempt HCOs must conform to IRS regulationsIntermediate sanctions –

Loss of tax-exempt statusFines & penaltiesLimitation of services allowed to be providedLicense granting or renewal

Taxation and Regulation

The hospital should not make any journal entries related to Charitable hospital work or supplies.

This following charitable information should be disclosed in the notes:

1) Policies for providing services

2) Value of care provided

Charity Services For Hospitals