Quiz 12: Accounting for Hospitals and Other Health Care Providers

Business

Hospital charity care is, generally understood as a cost not recovered by hospital for the services rendered to an individual who are most likely, not insured or who are indigent. However, Bad debts are those where hospital rendered required service to an individual anticipating to realize the cost of such services rendered but do not realize to receive payment of such cost. Contractual adjustments are those that the hospital does not charge patients as per agreement previously entered into with other Medicare insurance companies and other such organization. However, all the above three are treated differently by hospitals while accounting for such accounting treatment is illustrated below. a) Charity care is a process cautiously scrutinized and is generally computed annually based on and considering hospital's full established rates and depending upon facility rendered and the charity care process adopted to evaluate. However, charity care costs are predetermined and hospitals never expect payment for such services rendered to the patient for determining that he or she is unable to pay. Charity care is usually determined by patient's inability to pay by scrutinizing cautiously about patient's source of income, assets that patent holds and type insurance that the patient holds. Therefore, accounting treatment by hospitals and health care organizations for Charity care is such that revenue generated from services rendered by the hospital does not include the value of charity care provided and hence no longer a reported item in the external financial statements but shall be disclosed in the notes to financial statements furnishing details such as Management's policy in providing charity care and the level of charity care provided. And thus, hospitals will account for charity care internally and as a deduction from gross revenue. (Gross revenue includes value of charity care) b) Bad debts can be identified as a service rendered by the hospital in anticipation of receiving payment but did not receive the payment which is also known as uncompensated care. Hospital generally, identifies patient unable to pay depending upon various factors. However, if hospital errs in identifying such patients, bad debt is bound to take place with indigent and uninsured or under-insured patients. Therefore, bad debts shall be considered as component of hospitals cost of care incurred due to medically indigent and uninsured or under-insured patients. Bad debts shall be accounted as expense and shown separately or included under administrative and other adjustment account. c) Contractual adjustment can be defined as the difference of amount arising out of the charges for the services rendered to the patient and the charges insurance company is willing to pay. And that is the amount that the hospital has agreed to charge. Therefore, contractual adjustment is a part of patient's bill and the hospital has to charge according to billing agreements hospital has entered into and has to write off such balance. However, contractual adjustments are more common and beneficial concerning all in one way or other. Thus, contractual adjustment is simply an arrangement among hospital, patient and the insurance company and amounts as agreed among them (the service provider, the patient and the insurance company) to reduce such amount applicable from the medical bill since the patient has such contract with the insurance company and insurance company with the hospital. Therefore, accounting of contractual adjustment shall be carried out by deducting such adjusted amount from gross patient service revenue and shown in a separate line in tax returns for claiming exemption.

Unrestricted resources are those that can be utilized for any purpose. They are called unrestricted because their usage is not restricted to specific purpose or project. However, the donor can only determine to designate the resource as restricted or unrestricted. Most nonprofit prefer unrestricted resource since they can discreetly put the resource to use as no donor imposed restriction exist. a) Unrestricted resources : The accounting treatment by hospitals and health care organization therefore, is such that the unrestricted resource can be used in acquiring any kind of property, plant and equipment (PPE) they find fit and necessary to achieve its mission, discretely since no restriction is tagged to such resource. And this PPE will be classified and shown as asset of the non- profit in its financial statement. b) Temporarily restricted resource are such resources where it carries restrictions imposed by the donor for utilization of resource to a specific purpose within the scheduled or specific time period, which is usually one year, the resource is intended to be used. The accounting treatment of temporarily restricted resource is such that once the intended purpose is met, the amount used for such purpose can be accounted and the balance if any, can be transferred to unrestricted resources. However, the accounting standards require nonprofits reports contributed income in two categories viz., Donors' restricted resource and Donors' unrestricted resource. Theses classification will enable nonprofit to define the difference between those two to record, report and to manage utilization of resource effectively.

There will be generally three types of accounts, categorically found in the financial statement of operation of not for profit health care organization. They are, 1) Operating revenues, 2) Operating expenses and 3) Other income. However, every event and transaction, that comes up during the course of operation for not for profit health care organization, will affect these three categorically classified accounts. In the given situation, how transaction and events will have effect on these three classified accounts are exhibited here under. It may be note that the Transaction number of the given situation is marked and effect is marked as "X" in the case there is an effect and otherwise left blank implying that the transaction has no effect on any of these three classified accounts. It is as under. img