1. Health Care Organizations
Chapter
Accounting for
Health Care Organizations

2. Health Care Organizations, such as Hospitals, Can be Structured as
For-Profit:
Proprietary
Not-for-Profit:
Voluntary
Governmental:
Public 1

3. 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 1

4. 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 1

5. 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. 1

6. GAAP for HCOs This guidance includes: using full accrual accounting
capitalizing long-lived assets
depreciating those capital assets

7. 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. 1

8. 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 1

9. 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) 1

10. 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) 1

11. 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. 1

12. 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

13. 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) 1

14. Expenses Use full accrual accounting
Bad debts is an expense (not a reduction of gross revenue, as it had been in the past)
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. 1

15. 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 1

16. 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. 1

17. Budgeting and Costs
All hospitals use comprehensive budgets for managerial purposes
Only governmental hospitals record budgets in the fund accounts. 1

18. Taxation and Regulation
Tax-exempt HCOs must conform to IRS regulations
Intermediate sanctions –
Loss of tax-exempt status
Fines & penalties
Limitation of services allowed to be provided
License granting or renewal 1

19. Charity Services For Hospitals
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:
Policies for providing services
Value of care provided 1