Health Care 101: Introduction to Accounting and … Health Care 101: Introduction to Accounting and Reporting for Health Care Entities Jay D. Adkisson, CPA American Institute of CPAs

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Health Care 101: Introduction to Accounting and Reporting for Health Care Entities

Jay D. Adkisson, CPA

American Institute of CPAs®\

Speaker Bio – Jay Adkisson

Jay D. Adkisson is a health care audit partner located in RSM’s Chicago office. Jay has over 26 years of experience focused on serving health care organizations, including hospitals and health systems, senior living organizations, and specialty providers.

Jay provides training on audit and accounting topics specific to the health care industry both internally and externally. Jay has served on the planning committee for the AICPA’s National HealthCare Conference, is a past member of the AICPA Healthcare Industry Expert Panel and Health Care Industry Revenue Recognition Task Force.

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Disclaimer

The views expressed in this session are the views of the presenter and do not necessarily represent positions of the Financial Accounting Standards Board, AICPA or any other authoritative entity.


Outline

ApplicabilityReporting EntityBasic Financial StatementsGovernmental Health Care Entities Revenue in the Health Care EnvironmentCharity Care and Bad DebtContributions and Net Assets Estimated Third-Party Payor SettlementsInvestments – Not-for-Profit EntitiesTax-Exempt FinancingCommitments and Contingencies Malpractice ClaimsFinancial Ratios and Performance Indicators

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ASC Section 954 – Health Care Entities

The FASB Accounting Standards Codification (ASC) is the single source of GAAP for nongovernmental entitiesAccounting Standard Updates (ASUs) amend the ASC; ASUs are not GAAP on their ownHealth Care Entities are subject to ASC 954 which contains incremental guidance applicable to health care organizations, defined as:• Entities whose principal operations consist of providing or

agreeing to provide health care services and derive all or almost all of their revenues from the sale of goods and services

• And entities whose primary activities are planning, organization and oversight of such entities, such as parent or holding companies of health care providers

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ASC Section 954 – Health Care Entities

Examples include• Hospitals and Health Systems• Nursing Homes• Home Health • Hospice• Physician practices• Urgent care• Lab• Ambulatory Surgery Centers• Imaging • Rehabilitation facilities• HMO’s

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Reporting Entity

Providers have many unique business and organizational models. Hospitals, for example, can be organized into a number of different models including:

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Health systems which are made up of a network of health care provider facilities and/or health-related subsidiaries

Integrated delivery systems represent a network of facilities. However, these facilities provide a coordinated continuum of care to a defined population and may be held clinically and fiscally accountable for outcomes and health status. Integrated delivery systems represent the convergence of the health plan and provider sectors

Community hospitals are generally single, independent facilities that may provide a broad range of services or specialize in treating particular conditions

Academic medical centers are multi-faceted organizations that include a medical school, teaching hospital, satellite clinics, research facilities, and faculty practice plans


Reporting Entity (continued)

Many different ownership models exist, some of which may be complex. An organization’s tax designation is linked with its ownership type. In 2009, there were 5,815 registered hospitals in the U.S., of which, 17% were investor owned (generally taxable), while 83% operated under tax-exempt status (including both government and community owned facilities).

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For-profit organizations• Objective is to maximize profit for

investors• May be public corporation or privately

held• May provide some charity services to the

public• Includes major hospital chains (e.g. HCA,

Tenet, Community Health Systems, etc.)

Not-for-profit organizations• Granted tax-exempt status by the

government to issue tax-exempt debt and receive tax-deductible donations

• Provide some level of charity services to the public

• Currently represent approximately 83% of U.S. hospitals

• May be sponsored by different types of organizations, for example the Catholic Church

Government-owned organizations• May be funded by either federal or state

dollars• Includes Veterans Administration (VA), Tri-

Care (active military), and state hospitals

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Not-for-profit organizations• Granted tax-exempt status by the

government to issue tax-exempt debt and receive tax-deductible donations

• Provide some level of charity services to the public

• Currently represent approximately 83% of U.S. hospitals

• May be sponsored by different types of organizations, for example the Catholic Church

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Networks among health care entities, both vertical and horizontal, are being formed continually and new organizational structures are being developed. The dynamics of change in the health care industry and their impact on evolving organizational structures must be considered in defining the reporting entity. The reporting and disclosure requirements of nongovernmental health care entities are summarized as follows:

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Circumstances RequirementThe entity owns a majority of a for-profit entity's voting stock or has a controlling general partnership interest.

Consolidate unless control does not rest with the majority owner (for instance, if the other [membership] entity is in bankruptcy or if other legal or contractual limitations are so severe that control does not rest with the sole corporate member).

The entity is the sole corporate member of a not-for-profit entity.

Consolidate unless control does not rest with the sole corporate member (for instance, if the other [membership] entity is in bankruptcy or if other legal or contractual limitations are so severe that control does not rest with the sole corporate member).

The entity controls another through a majority voting interest in the board and an economic interest exists.

Consolidate unless control does not rest with the holder of the majority voting interest.

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Circumstances RequirementThe reporting entity owns 50 percent or less of the common voting stock of an investee and can exercise significant influence over operating and financial policies.

The investment should be accounted for under the equity method in accordance with ASC 323, Investments—Equity Method and Joint Ventures, unless the entity has irrevocably elected fair value as the initial and subsequent measure under ASC 825-10.

The reporting entity has a noncontrolling interest that constitutes more than a minor interest in a for-profit real estate partnership, limited liability company, or similar entity.

The investment should be accounted for under the equity method in accordance with ASC 970-323 unless the entity has irrevocably elected fair value as the initial and subsequent measure under ASC 825-10. The reporting entity should apply the guidance in paragraphs 1–3 of ASC 970-810 to help determine whether its interests in for-profit partnerships, LLCs, and similar entities are controlling interests or noncontrolling interests. The reporting entity should apply the guidance in ASC 323-30 and ASC 272-10 to determine whether an LLC should be viewed as similar to a partnership, as opposed to a corporation, for purposes of determining whether noncontrolling interests in an LLC or a similar entity should be accounted for in accordance with ASC 970-323 or ASC 323.

If the reporting entity is an SEC registrant, the reporting entity must follow the guidance in ASC 323-30-S55-1 and S99-1.

There have been material transactions between the health care entity and the related entities. (This could be present in any of the foregoing circumstances.)

In the notes to the financial statements (a) disclose the existence and nature of the relationship and (b) describe and quantify the transactions.

An entity has control over another not-for-profit entity or has an economic interest in the other, but not both.

In the notes to the financial statements (a) disclose the existence and nature of the relationship and (b) describe and quantify the transactions. Consolidation is prohibited.

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Circumstances RequirementThe reporting entity controls a separate not-for-profit entity through a form other than majority ownership or voting interest and has an economic interest in that other entity.

Consolidation permitted but not required. If consolidated statements are not presented, the notes to the financial statements should disclose (a) the identification of the other entity and the nature of its relationship with the reporting entity, (b) summarized financial data of the other entity, and (c) the disclosures set forth in ASC 850,Related Party Disclosures.

The entity is a variable interest entity subject to the provisions of the “Variable Interest Entities” subsections of ASC 810-10.

Apply the guidance in “Variable Interest Entities” subsections of ASC 810-10, including its disclosure requirements

The reporting entity is a not-for-profit organization and is engaged in a leasing transaction with a special-purpose entity lessor.

The entity should consider whether it should consolidate the lessor in accordance with the guidance in ASC 450-20-60-16, 460-10-60-23, 958-810-25, 958-810-55, and 958-840-55; sections 5 and 25 of ASC 840-10; and sections 15 and 25 of ASC 840-40. The third criterion for consolidation in ASC 958-810-25-8 should be considered met if the majority owner (or owners) of the lessor is not an independent third party, regardless of the level of capital investment.

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ASU 2013-12 Public Business Entity

On December 23, 2013, the FASB and the Private Company Council issued the Private Company Decision-Making Framework: A Guide for Evaluating Financial Accounting and Reporting for Private Companies (the Guide)

ASU 2013-12 updated the ASC Master Glossary and was issued to assist with determining which entities are within the scope of the Guide, i.e. by identifying business entities that are excluded from the Guide

Not-for-Profit entities (topic 958) and employee benefit plans (Topics 960 through 965) are explicitly excluded from the Guide

Should minimize the complexity and inconsistency of having multiple definitions of, and diversity in practice as to what constitutes, a public and nonpublic entity within US GAAP

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ASU 2013-12 (continued)

Public Business Entity:• An entity that is required to file or furnish financial statements with the SEC, or required by the

1934 Act to file with another regulatory agency- A subsidiary of a public company is not considered a public business entity for purposes of

their standalone statements if not in a filing• Required to file financial statements with a regulatory agency (domestic or foreign) for the sale of

securities• Has issued, or is a conduit bond obligor fro, securities that are traded, quoted, or listed on and

exchange or an over-the counter market• Has one or more securities that are not subject to contractual restrictions on transfer, and it is

required by law, contract, or regulation to prepare US GAAP financial statements and make them publicly available on a periodic basis. An entity must meet both of these conditions to meet this criterion

A public vs. nonpublic distinction will no longer be made for NFPs in future standard setting - Instead, the FASB will consider factors such as user needs and NFP and employee benefit plan resources, on a standard-by-standard basis, when determining whether all, none, or only some NFPs or employee benefit plans will be eligible to apply financial accounting and reporting alternatives within US GAAP for private companies

The ASU does not affect existing guidance, but the language was started to be used in ASUs in 2014 and will be used going forward.

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Basic Financial Statements

Financial Statements of Not-for-Profit Health Care OrganizationsBalance Sheet• Similar to For-Profit entity for assets and liabilities• Classified balance sheet – current vs. long-term

Assets• Cash equivalents – Highly liquid with original maturity < 3 months• Patient accounts receivable – net realizable value• Inventory – Lower of cost or market, first in first out • Assets limited as to use –

- Investments/other assets restricted for either bond repayments, capital improvements, other (can be Board restricted)

• Investments are generally at fair value• Property and equipment• Interest in net assets of a Foundation (similar to equity method)• Deferred financing fees

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Basic Financial Statements (continued)

ASSETS CY PY

Current assets:Cash and cash equivalents $3,152,000 $3,535,000Accounts receivable - Net of allowance for doubtful accounts of $1,500,000 and $1,550,000 for CY and PY, respectively 3,325,000 3,532,000Inventory 614,000 580,000Prepaid expenses and other 237,000 223,000

Total current assets 7,328,000 7,870,000

Assets limited as to use 7,000,000 6,000,000

Investments 1,884,000 1,337,000

Property and equipment - Net 20,610,000 22,042,000

Other assets 620,000 618,000

TOTAL ASSETS $37,442,000 $37,867,000



Balance Sheet (continued) –Liabilities• Accounts payable and accrued expenses• Due to/from third parties – Cost report settlements• Incurred but not reported (IBNR) payables• Defined benefit pension plans and other postretirement benefits• Long-term debt – tax exempt financing

Equity• Stockholders’ equity (for-profit)• Net assets (non-profit)

- No retained earnings or paid in capital- Net assets broken down into unrestricted, temporarily restricted, and

permanently restricted• Unrestricted net assets similar to retained earnings• Temporarily restricted net assets – donor restricted for time or purpose• Permanently restricted net assets – donor restricted in perpetuity

- Endowments16

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Basic Financial Statements (continued)LIABILITIES AND NET ASSETS CY PY

Current liabilities:Current maturities of long-term debt $600,000 $567,000Accounts payable 1,022,000 1,453,000Accrued liabilities 1,023,000 1,297,000 Due to third-party payors 655,000 490,000

Total current liabilities 3,300,000 3,807,000

Long-term liabilities:Long-term debt, less current maturities 10,496,000 11,096,000Pension obligation 2,975,000 3,125,000Other 50,000 25,000

Total long-term liabilities 13,521,000 14,246,000

Total liabilities 16,821,000 18,053,000

Net assets:Unrestricted 20,206,000 19,422,000Temporarily restricted 287,000 265,000Permanently restricted 128,000 127,000

Total net assets 20,621,000 19,814,000

TOTAL LIABILITIES AND NET ASSETS $37,442,000 $37,867,000



Statement of Operations• Net patient service revenue• No cost of goods sold• Bad debt expense• Contribution income• Investment income• Natural vs. functional classification of expenses

Performance Indicator• Comparable to net income in a for-profit entity• Excludes: equity transfers, restricted contributions, contributions

of long-lived assets, unrealized gains and losses on other than trading securities (Similar to “Other Comprehensive Income” for profit entities)

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Basic Financial Statements (continued)CY PY

Revenue:Patient service revenue (net of contractual allowances and discounts) $25,114,000 $23,581,000Provision for bad debts (937,000) (794,000)

Net patient service revenue less provision for bad debts 24,177,000 22,787,000 Other operating revenue 855,000 884,000

Total revenue 25,032,000 23,671,000

Expenses:Salaries and wages 11,055,000 11,408,000 Fringe benefits 2,694,000 2,684,000 Supplies and other 8,349,000 7,561,000 Depreciation and amortization 2,125,000 2,036,000 Interest 650,000 680,000 Other 73,000 83,000

Total expenses 24,946,000 24,452,000

Income (loss) from operations 86,000 (781,000)

Nonoperating income (loss):Contributions 62,000 1,000 Investment income 161,000 476,000 Loss on disposal of equipment (14,000) 5,000

Total nonoperating income 209,000 482,000

Excess (deficiency) of revenue over expenses $295,000 ($299,000)



Statement of Changes in Net Assets• Revenue in excess of expenses• Net assets released from restrictions for property and equipment• Change in unrealized gains and losses (on other than trading

securities)• Temporarily or permanently restricted contributions• Contributions of long-lived assets• Investment income on temporarily or permanently restricted net

assets• Changes in interest of Foundation

Statement of Cash Flows• Few differences from a typical commercial enterprise

Notes to financial statements20

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Basic Financial Statements (continued)CY PY

Unrestricted net assets:Excess (deficiency) of revenue over expenses $295,000 ($299,000)Change in net unrealized gains (losses) on investments other than trading securities 415,000 (637,000) Net assets released from restrictions for capital additions 51,000 118,000

Increase (decrease) in unrestricted net assets 761,000 (818,000)

Temporarily restricted net assets:Contributions 79,000 91,000 Net assets released from restrictions (57,000) (145,000)

Increase (decrease) in temporarily restricted net assets 22,000 (54,000)

Increase in permanently restricted net assets - Contributions 1,000 1,000

Change in net assets 784,000 (871,000)

Net assets at beginning of year 19,422,000 20,293,000

Net assets at end of year 20,206,000 19,422,000


Governmental Health Care Entities

Public corporations and bodies corporate and politic; other governmental organizations with one or more of the following:• Election of officers or appointment (or approval) of controlling

majority if members of governing body by one or more state or local governments

• Potential for unilateral dissolution by a government with the net assets reverting to the government; or

• Power to enact and enforce a tax levy

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GASB 62 – Codification

Codification of pre-November 1989 Pronouncements

Pulls all accounting requirements (FASB, ARB, APB, etc.) through November 30,1989 into GASB

Single source of authoritative guidance for applicable governmental entities

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Governmental Health Care Entities –GASB 34 and Related Requirements

Management’s discussion and analysis (MD&A) before the basic financial statements as RSIStatement of revenues, expenses and changes in net assets that reports on changes in net assets, including permanent endowments; present all changes in net assetsInterfund transfers after non operating revenues and expensesRevenues by major source and separately identify revenue used as collateral for revenue bondsDistinguish between operating and nonoperating revenues and expenses and show intermediate total for operating revenueCapital and term and permanent endowment contributions separately reported as components of the statement of revenues, expenses and changes in net assetsSpecial and extraordinary items separately reported at bottom of statement of revenues expenses and changes in net assetsDirect method required for statement of cash flows

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Governmental Health Care Entities –GASB 34 and Related Requirements (continued)

Note disclosures Policy for defining operating revenues and expenses Policy for use of restricted resources Schedules of changes in capital assets and long-term

liabilities and short term debt activity Disaggregated information about accounts receivable and

payable (GASB 38)

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GASB 63 – Financial Reporting & Deferred Inflows and Outflows

Statement of net position should report all assets, deferred outflows of resources, liabilities, deferred inflows of resources, and net position.• Governments are encouraged to present the statement of net position

in a format that displays assets, plus deferred outflows of resources, less liabilities, less deferred inflows of resources, equals net position.

• A balance sheet format (assets plus deferred outflows of resources equals liabilities plus deferred inflows of resources, plus net position) may be used

Net Position – Residual of all elements presented in a statement of financial position• Use the caption “net position”• Presented in 3 types consistent with current guidance:

- Net investment in capital assets- Restricted (Distinguish major categories of restrictions)- Unrestricted

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Revenue in the Health Care Environment

The Revenue Cycle is a sequential process beginning with the patient entering the hospital environment and ending with the collection or write-off of the last dollar.

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Revenue Cycle

Thre

adPr

oces

s

Front-End Back-EndService & Coding

Patient Access Point of Service Patient Accounting

Scheduling Pre-Registration

Registration/Insurance

Verification

FinancialCounseling

ChargeCapture & Entry

Coding

BillingandClaimsProcessing

PaymentPosting

Remittanceand DenialManage-ment

Rebilling Collections AccountResolution


Revenue in the Health Care Environment (continued)

Recording Charges vs. Payments Received Health care charges typically billed at published prices – “Gross Charges” or “Usual & Customary” • A hospital’s internal price list is referred to as a “Chargemaster”

or CDMMost insurance plans do not pay gross chargesContra revenue accounts bring charges down to estimated amounts to be collected – “Contractual Allowance”Accounts receivable recorded at gross charges less contractual allowances

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Allowance for Contractual AdjustmentsTwo ways for calculating contractual allowances:• Write-down at time of billing – system programmed to take a discount when

bill is produced:- Less labor intensive- Accounts receivable from system is recorded at “net” – net realizable

value- More accurate if discounts/contractuals maintained appropriately- Requires contractual terms for each payer to be maintained and

updated in the system• Write-down at time of payment – manual process

- Labor intensive- Calculation to estimate allowance performed at least monthly- Based on percentage averages- Accounts receivable from system is recorded at “gross” with contra

account to get to net• Organizations will use a mix of “net” vs. “gross” 29



Patient comes into ER with a broken arm. A simple hospital bill might look like this:• Emergency room charge – Level II $ 300• Radiology – X-ray 250• Supplies 100Total (represents gross charges) $ 650

Assume patient was an Anthem Blue Cross patient. The Anthem contract provides for a 10% discount off of gross charges:• Gross patient service revenue $ 650• Less: Contractual allowance (65)Net patient service revenue $ 585

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Allowance for Bad DebtEstimate of accounts receivable that will not be collectedTypically based on past experienceCalculate estimates based on aging of accounts receivableHindsight analysis:• Provides “look back”• Based on net write-offs and estimate of remaining uncollectible

A/RAllowance for contractual adjustments and bad debts are generally the most significant and sensitive estimates for any health care organization

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Charity Care and Bad Debt

Charity Care vs. Bad Debt• In order to maintain “tax exempt” status, healthcare entities must

meet a “community need”• One way to show is through benefits provided to community• Charity care is defined as “Health care services that are

provided but that are never expected to result in cash flows.”• Charity care is provided to patients with a demonstrated inability

to pay• Entity establishes policy and criteria for considering charity care

based on its mission

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Charity Care and Bad Debt (continued)

Disclosures:• Management’s policy for providing charity care• Cost of providing charity care, including direct and indirect costs• Method used to identify costs• If applicable, funds received to offset/subsidize charity care

should be separately disclosed and not netted

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Bad debt is nonpayment from patients/others with the ability to payMajority of bad debt is from individuals – private pay/uninsured, co-pays, deductiblesDistinguishing between charity care and bad debt is not “black and white”• Bankruptcy• Exhaustion of collection efforts• Death – no estate• “Sliding fees” based on income levels/assets owned

Difference in Recording:• Charity care does not qualify for recognition as revenue –

recorded as “negative” revenue, not expense• Bad debt is an operating expense or contra revenue 34

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For health care entities that recognize significant amounts of patient service revenue at the time the services are rendered even though it does not assess the patient's ability to pay:

Presentation of bad debts in the statement of operations as a deduction from patient service revenue, net of contractual allowances and discounts

• Shown as separate line items on the face of the statement of operations• Not as an operating expense

Disclosures about policies for recognizing revenue and assessing bad debtsDisclosures of major payor sources of patient service revenueQualitative and Quantitative information about changes in the allowance for doubtful accounts

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Contributions and Net Assets

Contributions• ASC 958, Not-for-Profit Entities, defines a contribution as “an

unconditional transfer of cash or other assets to an entity or a settlement or cancellation of its liabilities in a voluntary nonreciprocal transfer by another entity acting other than as an owner”

• Recognize in the period received• Contributions due in future periods shall be reported as

temporarily restricted support discounted to present value• Contributed services shall be recognized if the services received

- Create or enhance non-financial assets- Require specialized skills that would need to be purchased if

not donated

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Contributions and Net Assets (continued)

Unconditional Promise to Give• Written or oral agreement to contribute cash or other assets• Must be sufficient evidence in the form of verifiable

documentation that a promise was made and received to be recognized

• Contribution revenue is recognized in the period the promise is made

Conditional Promises to Give • Specifies a future and uncertain event whose occurrence or

failure to occur gives the promisor a right of return• Not considered contributions until conditions are met• Contribution revenue is recognized in the period the conditions

are met

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Donor-Imposed Restrictions • Limits the use of contributed assets to specified purposes• Restriction may be temporary or permanent• Donor-restricted contributions that are not for capital, whose

restrictions are met within the same year as received, can be reported as contribution income in the financial statements as long as the entity discloses this policy in the financial statements

Multi-year pledges (unconditional promises to give)• Record at the net present value at the date the pledge is made• Discount adjusted annually using the original discount rate• Future collections are considered temporarily restricted

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Temporary restriction • Restricted by passage of time• Restricted for specific purposes

Permanent restriction • Resources must be maintained permanently (Endowments)• Expend all or part of the income, primarily based on donor’s

intentBoard designated restriction • Self imposed restriction ≠ true restriction• Funds should be recorded as unrestricted

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Estimated Third-Party Payor Settlements

The Medicare program, along with Medicaid and some commercial insurers, use an annual cost report to gather data and settle amounts for certain services that are cost-based and are reimbursed at tentative rates.Final settlements are determined after audit of the related annual cost reports. • Audits of Medicare cost reports are completed by fiscal

intermediaries (FI’s). • FI’s contract with Medicare to administer the program.

Management must estimate third-party payor settlements as there is a time period between the entities’ balance sheet date, the filing of the cost report, and the final settlement.

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Estimated Third-Party Payor Settlements(continued)

Provisions for estimated third-party payor settlements and adjustments are estimated in the period the related services are rendered and adjusted in future periods as final settlements are determined.

Changes in estimates are reflected as net patient service revenue in the year of change. Differences between final and estimated settlements reflected as net patient service revenue in the period of final settlement.

Separately report on the balance sheet amounts due from third-party payors for retroactive settlements or adjustments from patient accounts receivable.

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Estimated Third-Party Payor Settlements(continued)

Health Care Audit Guide recommended disclosures:• Settlement amounts due to and from each significant third party

payor• Summary of activity for each operating period

- Distinguish current and prior year settlements- Identify current year changes to prior year estimates

• Disclose status of third party settlement claimsCurrent vs. non current depending on expected timingNetting of payors only if right of setoff exists

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Investments - Not-for-Profit Entities

Many health care organizations have significant amounts of investments on their balance sheets.

Investments in equity securities with readily determinable fair values and all investments in debt securities are reported at fair value.

FASB ASC 820 defines fair value, establishes a framework for measuring fair value, and requires extensive disclosures about fair value measurements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

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Investments - Not-for-Profit Entities (continued)

Investment return, including realized and unrealized gains and losses are classified as follows:• Included in the performance indicator:

- Dividends and interest- Realized gains and losses- Unrealized gains and losses on trading securities

• Excluded from the performance indicator (other changes in net assets):

- Unrealized gains and losses on other than trading securities

Investment returns are reported as increases or decreases in unrestricted net assets unless their use is temporarily or permanently restricted by explicit donor stipulations or by law

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Individual investments whose fair value is less than cost must be evaluated for impairment: • Step 1 – Determine whether an investment is impaired• Step 2 – Evaluate whether an impairment is other than temporary• Step 3 – If the impairment is other than temporary recognize an

impairment loss for the difference between cost and current fair value

Factors to consider include:• Length of time and extent to which fair value has been below cost• Deterioration of the business prospects of the investee• Adverse conditions related to the industry or geographic area in

which the investee operates in• Recoveries or declines after the balance sheet date• Creditworthiness of the issuer

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The term “other than temporary” refers to situations where the decline lasts for more than a limited time, but is not necessarily permanent in nature.

Matter of professional judgment• A significant decline in fair value below cost.• A decline in fair value below cost for an extended period of time.• Debt securities – More likely than not that the entity will be

required to sell the security before recovery of its cost basis

Objective and verifiable evidence that market value will recover within a reasonable period of time and

The ability and intent to hold the investment for that reasonable period of time.

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Tax-Exempt FinancingInterest received by creditors on tax-exempt debt is exempt from federal and/or state income taxes – Tax exempt = lower rates.

Revenue bonds – Payable from certain specified revenues of an organization.

Revenue bonds may bear interest at fixed or variable rates.

Federal tax law determines whether the interest on obligations issued under state law is exempt from federal income tax.

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Tax-Exempt Financing (continued)Eligible Uses:• Debt proceeds used for property owned and/or used by

501(c)(3)’s within certain limits• Maturities of debt are tied to the economic life of property

financed• Can also be used to refinance previously issued tax-exempt

debt• Tests that were met at the time of financing must continue to be

met during the life of the tax-exempt bond issue

Covenants:• Minimum debt service coverage ratio• Days cash on hand• Annual capital expenditure limit• Limits on additional indebtedness

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Tax-Exempt Financing (continued)Parties to a tax-exempt financing transaction typically include:• Issuer – Financing authority or government unit acts as a pass-

through• Borrower• Purchaser (lender): Facilitated by investment bankers• Trustee as representative of the purchasers• Credit enhancer

Conduit debt – some public company disclosures applyPotential purchasers of tax-exempt debt:• Financial institutions• Institutional investors• Public markets

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Tax-Exempt Financing (continued)Fixed Rates• Interest rate fixed for the duration of the loan• Penalty for prepayment over a period of time• More expensive to issue – Buyers must get comfortable with the

risk• Rated by bond rating agencies on the Borrower’s credit• Unrated = higher rates

Variable Rates• Historically lower rates than fixed• Interest rates reset daily or weekly via remarketing by an agent• Credit enhancement, e.g. bank letter of credit is required to

facilitate the remarketing• Interest rate swap agreements (derivatives) used to synthetically

create fixed rate debt50

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Tax-Exempt Financing (continued)

Classification of Variable Rate Demand BondsTypically backed by LOCNon current classification due to LOC• Short term obligation expected to be refinanced over

long termImpacted by• Expiration date of LOC• Repayment terms under LOC

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Continuing Care Retirement Communities (CCRCs)

CCRCs provide residents with a diversity of residential, social, and health care services, in accordance with a resident service agreement.CCRCs may provide a variety of health care services, including nursing care, home health care, physician services, and other services in addition to the residential services and amenitiesThe fees charged to residents generally consist of three basic components (or a combination): • Advance fees• Periodic fees• Use fees

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CCRCs (continued)

Advance fees (one-time fee typically at the time of occupancy) are those paid by the resident as a condition of admission to the CCRC for future services and use of the facilitiesThe advance fees may be nonrefundable or refundable to the resident or resident’s estate, depending on the terms of the contract with the residentThe advance fee may be payment for an all-inclusive continuing-care contract that includes residential facilities, meals, and amenities, and also provide nursing care for little or no increase in periodic fees

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CCRCs (continued)Periodic fees, sometimes referred to as service or maintenance fees, generally paid monthly These periodic fees are generally fixed with periodic modification based on increases in operating costs or inflation factorsUse fees are those that may be charged to the resident based on personal preferences or usage by the resident for services not covered by the advance or periodic fees. A separate use fee could include parking, beauty and salon services, excess meal or other amenity services and other services specified in the resident agreement

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CCRCs (continued)Fully-refundable advance fees are accounted for and reported as liabilitiesGenerally, the source of money for the payment is from the proceeds of the advance fees collected by the CCRC from the next resident of the reoccupied unitWhen the resident contract stipulates that all or a portion of the refundable advance fees will be paid to current residents or their designees, only to the extent of the proceeds of reoccupancy of the unit, that portion should be accounted for as deferred revenueThe resulting deferred revenue should be amortized to income over future periods based on the remaining useful life of the facility (consistent with the method used for depreciation

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CCRCs (continued)Nonrefundable advance fees generally represent payment for future services and are accounted for as deferred revenueDeferred revenue from advance fees should be amortized to income over future periods based on the estimated life of the resident or the contract term, if shorterThe straight-line method is used to amortize deferred revenueUnamortized deferred revenue from nonrefundable advance fees should be recorded as revenue upon a resident’s death or termination of the contractThe CCRC should consider historical experience if available, or relevant available statistical data, when determining the remaining life of residents

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CCRCs (continued)The CCRC assumes a risk in estimating the cost of future services and use of facilitiesThe obligation of a CCRC to provide future services and the use of facilities to current residents should be calculated annually in order to determine whether a liability (FSO) should be reported in the financial statementsThe FSO should be the present value of future net cash flows, minus the balance of unamortized deferred revenue, plus depreciation of facilities to be chargedCash inflows primarily result from monthly fees, including anticipated increasesCash outflows primarily relate to operating expenses, including interest expense, and excluding general and administrative expenses, including anticipated increasesThe expected inflation rate, as well as other factors, is considered in determining the discount rateThe life expectancies that are used should be the same as those used to amortize deferred revenue

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Commitments and ContingenciesMay include:• Losses arising from litigation• Malpractice and related claims• Construction contract commitments• Contractual agreements with physicians and other service

providers• Minimum revenue guarantees for physicians• Liabilities related to pension plans• Operating lease commitments• Purchase commitments• Loan guarantees• Incurred but not reported claims (IBNR)

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Commitments and Contingencies(continued)

Contingencies often involve a high degree of uncertainty and may involve particularly sensitive estimates for any financial statement impact.

Determining the outcome of potential threatened litigation, claims, and assessments often involve the opinion of attornies.

ASC Topic 450, Contingencies, provides general guidance regarding gain and loss contingencies• Accrue a liability when its probable a loss has occurred and the

amount can be reasonably estimated• Disclosure when a reasonable estimate cannot be made

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Malpractice ClaimsTwo basic types of malpractice insurance:• Occurrence basis – Policy covers claims resulting from incidents

that occur during the policy term, regardless of when the claim is reported to the insurance carrier

• Claims-made – Policy covers only claims reported to the insurance carrier during the policy term, regardless of the date of the incident

Tail coverage is designed to cover malpractice claims incurred before, but reported after, cancellation or expiration of a claims-made policy.

Malpractice costs represent premiums paid for insurance plus any additional costs associated with litigating or settling claims in the period when the incidents giving rise to the claims occurred.

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Malpractice Claims (continued)If a health care organization has transferred the risk of loss to an appropriate third-party through purchase of an occurrence basis policy of sufficient limit, no additional expense may be required (deductible).

Subsequent insurance purchase (renewal or tail coverage) may limit the liability exposure as of the balance sheet date, but not reflect appropriate periodic expense.

In the case of self-insurance or a claims-made policy, additional liabilities are generally present.

Health care entities using a claims-made approach must recognize a liability for probable losses from incurred but not reported claims – An actuary may be engaged to estimate the malpractice liability.

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Malpractice Claims (continued)

ASU 2010-24 - Presentation of Insurance Claims and Related Recoveries

Report on gross basis and be consistent with subtopic 210-20Gross presentation more appropriately reflects the credit risk if insurer unable to pay full claimRecognize receivable when realization of claim for recovery deemed probable and measured at same amount as associated claim liability

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Financial Ratios and Performance Indicators

Profitability Ratios:• Operating margin (income or loss from operations / operating

revenue)• Total margin (revenue in excess of expenses / total operating

and nonoperating revenue)

Liquidity Ratios:• Current ratio (current assets / current liabilities)• Net days revenue in accounts receivable (Net A/R / (net patient

service revenue / 365))• Days cash on hand (unrestricted cash and investments / (total

expenses – depreciation & amortization / 365))

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Financial Ratios and Performance Indicators (continued)

Capital Structure Ratios:• Long-term debt to capitalization (long-term debt / (long-term

debt plus net assets)• Debt service coverage (excess of revenue over expenses plus

interest, depreciation, and amortization / debt principal payments plus interest expense)

Utilization and Other Indicators:• Revenue/expense per discharge• Revenue/expense per patient day or outpatient encounter• Average length of stay• Patient care expenses as a percentage of revenue• Occupancy rates• Full-time equivalents (FTE’s)• Contractual allowances, charity care, or bad debt expense as a

percentage of revenue64

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ResourcesAICPA Audit and Accounting Guide-Health Care Entities

Updated annuallyImproved user friendliness and clarity Reduce variability/diversity in practiceAddress recent and emerging issuesIncremental guidance specific to HC, not complete set of GAAP for HCOs, nonauthoritativeSpecific or prevalent to health care organizationsConsolidate audit guidance and governmental HCO guidance

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Other ResourcesFASB – Accounting Standards Codification (ASC)AICPA Audit and Accounting Guide Not-For-Profit OrganizationsIndustry Audit Risk Alerts (AICPA)AICPA Technical Hotline (877) 242-7212 (refer to AICPA website for information on how to submit a question)FASB website www.fasb.orgGASB website www.gasb.orgAICPA Health Care Expert PanelAmerican Hospital Association – web site www.aha.orgHFMA – web site www.hfma.orgEMMA: www.emma.msrb.orgEDGAR – www.sec.gov/edgar

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Questions or Comments?

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Thank You!

Jay D. Adkisson, PartnerRSM US [email protected]

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Documents

Health Care 101: Introduction to Accounting and … Health Care 101: Introduction to Accounting and Reporting for Health Care Entities Jay D. Adkisson, CPA American Institute of CPAs