Report Receivables As If Your Life Depends On It
Report Receivables As If Your Life Depends On It
Picture yourself on a fishing trip at a remote lake with friends. After a successful day of fishing and a few beers you begin to filet your catch. The knife slips and cuts the artery in your wrist. Your friends spring into action, try to stop the profuse bleeding and check the map and the GPS for the nearest hospital. A hair-raising ride ends at the doors of the emergency room where you are horrified to see "CLOSED" posted on the door.
As a pregnant teen, you haven't told anyone because you are ashamed. A new resident of the city, when the unbearable pain starts you take the bus to the place you thought you remembered seeing a hospital. As you get off the bus, you collapse as you read "CLOSED" on the door of the building.
We expect hospitals to be there, open and ready to treat us whenever, wherever, and whoever we are. But for that to happen, hospitals need to remain a going concern. Given the increased public scrutiny and evaluation of the financing of our health care system, consistent and understandable reporting is crucial for boards of trustees, policy makers and financiers.
Accounts receivable are among the biggest assets on a hospital's balance sheet. Their timing, valuation and presentation are tailored to represent the transactions unique to a hospital's business. Revenue and accounts receivable must be matched and be reported in the same time period. Hospitals prepare the patient's bill according to charges for the services rendered, whether in an inpatient or an outpatient setting. That is the starting point. Depending upon who is paying the bill, it is adjusted at the time of final billing (or when the payer is determined) to reflect any contractual allowance or deductions applicable to the payer. Thus, revenue and receivables are reported at the amount the payer has an obligation to pay.
While the concept is simple, the application is rather complex. A chart of accounts suggesting over 36 categories of accounts receivable and 56 revenue categories is commonly used. Contractual allowances demanded by Medicare, Medicaid, HMOs and various insurance companies differ. The patient specific allowance is applied to the bill based on an analysis of the payer's expected payment required by the contract, regulation, past history or in the case of the financially strapped states the best information at the time. A receivables contra account is adjusted by the same amount as the revenue contra account to reflect the amount of the allowance.
The financial reporting goal is to report receivables at net realizable value. A challenge to that goal is identifying the timing and valuation of non-payments. Where traditional business has bad debts reported as an expense, hospitals have bad debts and charity carecare they expect to provide without payment. The accounting difficulty arises in securing the information to make a determination whether the account is collectible and whether it is bad debt or charity. "Many providers do not assess the creditworthiness of patients nor require upfront cash payment prior to providing care" according to HFMA. Charity accounts should be written off to the charity care contra receivable and contra revenue accounts as soon as a determination is made. If the account is partial charity, partial self pay, it should be classified as charity and any payments received are classified as revenues related to charity care. Current pronouncements require charity care to be removed from revenue and bad debts to be reported as an operating expense.
The hospital's decision to forgo the revenue associated with charity care and the related accounting treatment result in the absence of charity care in the balance sheet or statement of operations. However, charity care is an important component of many hospital's missions and needs to be disclosed for the reader to get the full picture of the institution. Disclosure of the amount of charity care provided should be in a footnote to the financial statements with the amount valued at cost, not charges. Footnote disclosure should also include the policies for determination of an account as charity, how cost was determined, the volume of charity care and any receipts from organizations supporting the hospital's charity care efforts. Receipts from other organizations to offset charity care should be reported as other income.
For a reader to evaluate a hospital's financial position and be able to use ratios effectively, the financial statements are prepared to reflect net realizable value of the accounts receivable. The corresponding revenue presentation is net of allowances but does not include bad debts nor charity care and the footnotes hold the key to policies and practices for charity care.
The American Institute of Certified Public Accountants (AICPA) has addressed these issues in their publication, Audit and Accounting Guide, Health Care Organizations and the AICPA's Audit and Accounting Guide, Not-for-Profit Organizations. Using General Accepted Accounting Principles (GAAP) as a basis, the healthcare industry also has a supplemental standard setting body, the Healthcare Financial Management Association (HFMA) Principles and Practices Board that provides guidance through 20 Statements when GAAP guidance doesn't exist.
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