accounting for health care organizations
DESCRIPTION
17. Chapter. Accounting for Health Care Organizations. Learning Objectives. After studying Chapter 17, you should be able to: Identify the different organizational forms, and related authoritative accounting literature for health care organizations. - PowerPoint PPT PresentationTRANSCRIPT
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McGraw-Hill © 2007 The McGraw-Hill Companies, Inc. All rights reserved.
Accounting for Health Care Organizations
Ch
apter
17
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Learning Objectives
After studying Chapter 17, you should be able to: Identify the different organizational forms, and
related authoritative accounting literature for health care organizations.
Describe financial reporting for health care organizations.
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Explain unique accounting and measurement issues in health care organizations, including accounting for revenues, assets, expenses, and liabilities.
Journalize transactions and prepare the basic financial statements for not-for-profit and governmental health care organizations.
Learning Objectives (Cont’d)
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Learning Objectives (Cont’d)
Describe other accounting issues in the health care industry:
Budgeting and costs.Auditing.Taxation and regulation.Prepaid health care services.Continuing care retirement communities.
Explain financial and operational analysis of health care organizations.
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Health Care Organizations, Such As Hospitals, Can be Structured As
For-Profit:Proprietary
Not-for-Profit:BusinessOriented
Governmental:Public
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Health Care Organizations (HCOs)— Types of Services
Clinics and individual or group practices Continuing care retirement communities (CCRCs) Health maintenance organizations (HMOs) Home health agencies Hospitals Nursing homes Rehabilitation centers Parent companies than oversee health care
services
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GAAP for a HCO Depends Upon Its Organizational Structure
For-Profit:Proprietary
Not-for-Profit:BusinessOriented
Governmental:Public
FASBGuidance
GASBGuidance
AICPA Audit and Accounting GuideHealth Care Organizations
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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 in either governmental or business-type activities or both
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GAAP for HCOs
Not-for-profit (NPO) health care organizations report using SFAS No. 117
All health care organizations also follow the AICPA Audit and Accounting Guides, as category (b) authority after appropriate FASB and GASB Statements which are category (a) authority
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Optional Fund Accounting—For NPOs and Business-type Governmental HCOs
HCOs may choose to use fund accounting for internal purposes
The following funds are used for internal purposes:
General Unrestricted Funds
Donor-Restricted Funds:
Specific Purpose Fund
Plant Replacement and Expansion Fund
Endowment
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Accounting Issues that Differ Depending Upon Organizational Structure
Reporting entity Contributions Financial statement displays Cash flows Deposits and investments Compensated absences Debt refunding; risks and uncertainties Pensions and other post retirement
benefits
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Financial Statements for HCOs
Balance sheet or statement of net assets (see Ill. 17-3)
Statement of operations (see Ill. 17-4)
Statement of changes in net assets (see Ill. 17-4)
Statement of cash flows (see Ill. 17-5 and 17-6)
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Equity Reported on the Balance Sheet
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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Excess of revenues over expenses
Excess of revenues and gains over expenses and losses
Earned income
Performance earnings
For the Operating Statement of NPOs Report a Performance Indicator, Such As:
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Performance Indicator (Cont’d)
Include in the performance indicator — investment income, realized gains and losses, unrealized gains and losses on trading securities
Do not include in the performance indicator (among others)—transactions with owners, receipt of restricted contributions, restricted investment income
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Principle Sources of Revenue for a HCO
Patient service revenue Government (e.g., Medicare/Medicaid) Third party payors (e.g., BC/BS) 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., auxiliary services, investment income, unrestricted contributions)
Net assets released from restrictions (for NPOs)
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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)
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
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Revenue (Cont’d)
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
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Revenue (Cont’d)
Government organizations must report operating and nonoperating activities, NPOs may optionally report
Operating income, which arises from ongoing major activities, such as service revenue
Nonoperating income, which arises from transactions peripheral or incidental to the delivery of health care, such as investment income and unrestricted contributions
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Revenue (Cont’d)
NPOs report donated services and supplies at their fair value, if material and criteria are met
NPOs and governmental organizations report donated noncash assets at their fair value
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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 of NPOs 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) Noncurrent assets (e.g., plant, property and
equipment)
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Use full accrual accounting Bad debts
An expense for not-for-profit and for-profit organizations
A reduction of gross revenue for governmental organizations
Depreciation is recorded on capital assets 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
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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
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Budgeting and Costs
All health care organizations should use comprehensive budgets for managerial purposes
Only governmental health care organizations using governmental funds record budgets in the fund accounts (see Chapter 3)
Costing of services has become more important due to diagnosis-related groups (DRGs), which classify Medicare in-patients for prospective payments
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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 approximately 511 DRGs are determined at the federal level and made to providers regardless of the provider’s actual cost of treatment
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Particular auditing issues facing HCOs relate to:
Contingencies
Third-party payors
Related entities
Restructuring
Health care fraud and illegal acts
Application of the Single Audit Act Amendments of 1996 and OMB Circular A-133
Auditing
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Tax-exempt HCOs must conform to IRC sections and IRS regulations Intermediate sanctions Unrelated business income
The IRS also investigates: Physician recruiting incentives Joint operating agreements Private activity bonds Independent contractor vs. employee status Distribution of assets of NPOs that restructure
Taxation and Regulation
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Health maintenance organizations (HMOs) and preferred provider organizations (PPOs) function as brokers between the patient demanding the service and the providers of the service (hospitals and health care professionals)
Accounting issues relate to: Revenue recognition Accounting for risk contracts to cover when premium
revenue does not cover agreed-upon costs
Prepaid Healthcare Plans
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Continuing Care Retirement Communities (CCRCs)
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 servicesPeriodic fees to cover operating costsRefundable advance fees
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Decision makers evaluate HCOs for different reasons: Managers are accountable for performance Financial analysts determine the creditworthiness of
organizations issuing debt Third-party payors determine appropriate payment
for service Patients assess quality of health care
services, such as success rate of certain procedures
Financial and OperationalAnalysis of HCOs
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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 Can Be Categorized By
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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
END