Quiz 12: Accounting for Hospitals and Other Health Care Providers

Business

Describe the accounting treatment by hospitals and health care organizations for each of the following: a. Charity care. b. Bad debts. c. Contractual adjustments.

Free

Essay

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.

Q 2

Describe the accounting treatment by hospitals and health care organizations for property, plant, and equipment acquisitions using each of the following: a. Unrestricted resources. b. Temporarily restricted resources.

Free

Essay

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.

Q 3

For each of the following items, indicate where it would appear in the Statement of Operations for a private not-for-profit hospital: 1. The premium from a capitation agreement, whereby a hospital agrees to provide services under a prearranged fixed amount. 2. Contractual adjustments for Medicare and Medicaid. 3. Customary charges for charity care. 4. Depreciation expense. 5. Interest expense. 6. Provision for bad debts. 7. Unrestricted investment income. 8. Purchases of equipment.

Free

Essay

1. Premium revenue is recorded in Unrestricted Revenues. 2. Contractual adjustments for Medicare and Medicaid are deducted from patient service revenue and are, therefore, included in Net Patient Service Revenue in Unrestricted Revenues. 3. Charges for charity care are not recorded. 4. Depreciation expense is recorded in Operating Expenses. 5. Interest expense is recorded in Operating Expenses. 6. Bad debt expense is recorded in Operating Expenses. 7. Unrestricted investment income is recorded in Other Income. 8. Equipment is a fixed asset and therefore, does not appear on the Statement of Operations.

Q 4

Briefly describe the following items related to financial reporting by ( a ) private not-for-profit health care entities; ( b ) government-owned health care entities; and ( c ) commercial health care entites: (1) Source of Category A and B GAAP. (2) Equity account titles. (3) Required financial statements.

Essay

Q 5

With regard to accounting for private not-for-profit health care entities, do the following: a. Outline the accounting required, under FASB guidance, for a(n): (1) Endowment gift received in cash. (2) Pledge received in one year, unrestricted as to purpose but restricted for use in the following year. (3) Pledge received in one year, restricted as to purpose other than acquisition of fixed assets, which is fulfilled in the following year. b. List those items required to be reported "outside" the performance indicator in the Statement of Operations.

Essay

Q 6

During 2015, the following transactions were recorded by the Baton Rouge Community Hospital, a private sector not-for-profit institution. 1. Gross charges for patient services, all charged to Patient Accounts Receivable, amounted to $1,700,000. Contractual adjustments with thirdparty payers amounted to $450,000. 2. Charity services, not included in transaction 1, would amount to $97,000, had billings been made at gross amounts. 3. Other revenues, received in cash, were parking lot, $20,000; cafeteria, $15,000; gift shop, $5,000. 4. Cash gifts for cancer research amounted to $20,000 for the year. During the year, $35,000 was expended for cancer research technicians salaries (Debit Operating Expense-Salaries and Benefits). 5. Mortgage bond payments amounted to $50,000 for principal and $33,000 for interest. Assume unrestricted resources are used. 6. During the year, the hospital received, in cash, unrestricted contributions of $40,000 and unrestricted income of $60,000 from endowment investments. (It is the hospital's practice to treat unrestricted gifts as nonoperating income.) 7. New equipment, costing $140,000, was acquired, using donor-restricted cash that was on hand at the beginning of the year. Baton Rouge's policy is to record all equipment in the unrestricted net asset class. 8. An old piece of lab equipment that originally cost $50,000 and that had an undepreciated cost of $10,000 was sold for $8,000 cash. 9. At the end of 2015, pledges received in the amount of $120,000 are intended to be paid and used for unrestricted purposes in 2016. 10. Cash contributions were received as follows: temporarily restricted for purposes other than plant, $40,000; temporarily restricted for plant acquisition, $30,000. 11. Bills totaling $200,000 were received for the following items: 12. Depreciation of plant and equipment amounted to $180,000. 13. Cash payments on vouchers payable amounted to $175,000. Another $800,000 was expended on wages and benefits. Cash collections of patient accounts receivable amounted to $1,080,000. 14. Closing entries were prepared. a. Record the transactions in the general journal of the Baton Rouge Community Hospital. b. Prepare, in good form, a Statement of Operations for the Baton Rouge Community Hospital for the year ended December 31, 2015.

Essay

Q 7

Record the following transactions on the books of Hope Hospital, which follows FASB and AICPA standards. The year is 2015. 1. Hope received $27,000 in cash from pledges made in the previous year that were unrestricted as to purpose but intended to be expended in 2015. 2. Hope received $86,000 in pledges that indicated the money was to be paid in 2016 and used in that year for any purpose desired by the board. 3. Hope expended $37,000 for nursing training, using $35,000 of temporarily restricted resources that had been given in 2014 for that purpose. 4. Hope received $40,000, restricted by the donor for cancer research. The funds were not expended in 2015. 5. Hope received $175,000 in cash. The board decided to invest the funds for future plant expansion.

Essay

Q 8

Joseph's Hospital began operations in December 2014 and had patient service revenues totaling $950,000 (based on customary rates) for the month. Of this, $103,000 is billed to patients, representing their insurance deductibles and copayments. The balance is billed to third-party payers, including insurance companies and government health care agencies. St. Joseph estimates that 20 percent of these third-party payer charges will be deducted by contractual adjustment. The Hospital's fiscal year ends on December 31. Required: 1. Prepare the journal entries for December 2014. Assume that 15 percent of the amounts billed to patients will be uncollectible. 2. Prepare the journal entries for 2015 assuming the following: a. $82,000 is collected from the patients and $9,000 is written off. b. Actual contractual adjustments total $171,000. The remaining receivable from third-party payers is collected. 3. The actual contractual adjustments differed from the amount initially estimated by the hospital. Briefly describe the type of accounting change this represents and the appropriate accounting treatment.

Essay

Q 9

As of January 1, 2015, the trial balance for Haven Hospital was as follows: During the fiscal year ended December 31, 2015, the following transactions occurred: 1. Patient service revenue amounted to $21,130,000, all recorded on account. Contractual adjustments were recorded in the amount of $4,350,000. Bad debts are estimated to be $612,000. Cash was received on account in the amount of $17,600,000. 2. Other revenue (cafeteria, parking lot, etc.) amounted to $2,530,000, all received in cash. 3. Patient accounts in the amount of $430,000 were written off. 4. Unrestricted gifts and bequests were received in cash in the amount of $326,000. Unrestricted income on investments of endowment funds amounted to $400,000. (It is the hospital's practice to treat unrestricted gifts as nonoperating revenue.) 5. Investment income on board designated funds, which is limited by board policy to provide renewals and replacements, amounted to $120,000 and was received in cash. Do not increase board designated net assets at this stage but close out the revenue account to board designated net assets in entry 19. 6. Investment income, restricted for current restricted purposes, was received in cash in the amount of $300,000. Investment income, required by donor agreement to be added to endowment balances, was received in cash in the amount of $200,000. 7. Cash contributions were received in the following amounts: $1,802,000 for current restricted purposes; $2,450,000 for future plant expansion; and $1,050,000 required by the donor to be invested permanently in an endowment. 8. Pledges receivable in the amount of $2,100,000 were received in cash. These pledges were on hand at the beginning of the year (reflected in temporarily restricted net assets, for purposes of time) and were unrestricted as to purpose. In addition, pledges for endowment purposes were collected in the amount of $450,000. 9. $1,600,000 in temporarily restricted net assets was expended, as the donors stipulated, for cancer research. Debit Operating Expense-Salaries and Benefits, $1,400,000; and Operating Expense-Supplies, $200,000. (Assume the supplies were purchased with cash and used in the same year.) 10. $2,200,000 in temporarily restricted net assets was expended for equipment, as provided for by the donor. The policy of Haven Hospital is to record all property, plant, and equipment as unrestricted. 11. In addition, $600,000 was received in pledges for temporarily restricted purposes. It was decided that the allowance for contributions was sufficient. 12. Supplies were purchased in the amount of $750,000, on account. 13. Operating expenses (in addition to those already recorded in entries 1 and 9) for the year included: depreciation of $600,000; supplies used of $690,000; and salaries and benefits of $21,325,000 (paid in cash). In addition the following expenses were recorded through Accounts Payable: utilities of $515,000 and insurance of $320,000. 14. Accounts payable were paid in the amount of $1,767,000. 15. Current installments of long-term debt were paid in the amount of $200,000. The portion to be paid next year is $300,000. Interest was paid in the amount of $176,000 and is reported as an operating expense. 16. Investments, carried at a basis of $4,000,000, were sold for $4,050,000. The $50,000 gain is considered to be temporarily restricted. 17. Cash in the amount of $6,530,000 was invested. Of that amount, $120,000 was from Cash-Assets Whose Use Is Limited and is designated by the board for renewals and replacements (see entry 5). 18. A reading of the financial press indicated that investments increased in market value by $800,000. Of that amount, $250,000 was in investments designated by the board for renewals and replacements, $350,000 is required by donors to be added to endowment balances, and the remainder is unrestricted. 19. Closing entries were prepared. Required: a. Using the Excel template provided, prepare journal entries for each of the previous transactions. b. Prepare a Statement of Operations for Haven Hospital for the year ended December 31, 2015. c. Prepare a Statement of Changes in Net Assets for Haven Hospital for the year ended December 31, 2015. d. Prepare a Statement of Financial Position for Haven Hospital as of December 31, 2015. e. Prepare a Statement of Cash Flows for Haven Hospital for the year ended December 31, 2015, using the indirect method.

Essay

Q 10

Presented below are account balances for Monterey Hospital. In addition, cash transactions for the year ended December 31, 2015, are summarized in the T-account. Required: Using the information above and the Excel template provided, prepare: a. A Statement of Operations and a Statement of Changes in Net Assets for the year ended December 31, 2015. b. Statements of Cash Flow assuming: 1. Monterey Hospital is a private not-for-profit. 2. Monterey Hospital is a government-owned hospital.

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