Deck 16: Accounting for Health Care Organizations

Question 1

Since the FASB sets the standards for both not-for-profit health care entities and investor-owned entities, the financial reporting requirements are the same for these two entities. Do you agree with this statement? Why or why not?

Answer 1

Financial Accounting Standards Board (FASB):
Financial accounting standards board (FASB) is an independent board establishing reporting standards respect to public, private, and non-profit organizations. This standard board mainly follows generally accepted accounting principles (GAAP).
Determine whether the Person X agrees with the statement:
The Financial Accounting Standards Board (FASB) establishes the entire accounting and financial reporting standards mainly for the not-for-profit health care and investor-owned organizations. However, the financial reporting needs for both the organization are not the same. Therefore, Person X has disagreed with the statement.
It is because there are few differences formed on the financial reporting requirements for both the not-for-profit health care and investor-owned organizations. Here, Financial Accounting Standards Board (FASB) has made various changes in the standards of cash flows, deposits with financial institutions, operating lease, and investments. Some of the reasons for the difference in financial reporting requirements for both entities are as follows:
• The Not for Profit (NFP) organization does not separate investments into trading, available-for-sale, and held-to maturity categories like investor-owned organizations executes.
• The Financial Accounting Standards Board (FASB) provides a guideline to the Not for Profit (NFP) organization on reporting non-exchange resource received in operating statement and statement of cash flows.

Question 2

What are the required financial statements for ( a ) a not-for-profit health care entity and ( b ) a governmental health care entity reporting only business-type activities?

Answer 2

Accounting for health care organizations
Governmental heath care units and hospitals are treated as legally distinct government entities that are part of different government or unrelated government units. Guidelines issued by GASB are applicable to government or profit oriented activities. Audit and accounting guidelines issued by AICPA is considered secondary which is after statements issued by GASB and FASB. Health care organizations comprises of hospitals, home health agencies, clinics, medical group practices, nursing homes etc.Governmental Accounting Standards Board (GASB) regulates accounting and financial reporting standard for all state and local government, public school, public colleges and universities. GASB also suggested that AICPA college guide could be used by public colleges and universities till the time governmental reporting models are not available.
Financial Accounting Standard Board (FASB) has jurisdiction to regulate accounting and financial reporting standards for private colleges, private universities, and profit business providing higher education.
a.Financial statements to be prepared by not for profit health care entity
Not for profit health care entities need to prepare following financial statements: -
• Statement of financial position
• Statement of operations or statement of revenues, expenses and changes in net assets
• Statement of cash flows
• Statement of changes in equity (net assets) - Assets are classified as unrestricted, temporarily restricted and permanently restricted in the statement. Capital stock and retained earnings are shown separately in the shareholders' equity section. Statement of changes in equity may be combined with statement of operations.
Notes to financial statements also need to be provided for better understanding and clarity of users.
b.Financial statements to be prepared by a governmental health care entity reporting only business types activities
Governmental health care units reporting only busines types activities need to prepare following financial statements: -
• Statement of financial position or statement of net assets
• Statement of operations or statement of revenues, expenses and changes in net assets
• Statement of cash flows
Notes to financial statements also need to be provided for better understanding and clarity of users.

Question 3

How do the accounting treatments for charity services, patient discounts, contractual adjustments, and provision for bad debts differ in terms of their effects on patient service revenues and related receivables? What, if any, differences exist in the accounting or reporting treatment under the FASB and GASB standards?

Answer 3

Financial Accounting Standards Board (FASB):
Financial accounting standards board (FASB) is an independent board establishing reporting standards respect to public, private, and non-profit organizations. This standard board mainly follows generally accepted accounting principles (GAAP).
Government Accounting Standards Board (GASB):
Government accounting standards board (GASB) is an independent board that establishes reporting standards for the local and state government. This standard board mainly follows generally accepted accounting principles (GAAP).
Following are the ways in which accounting treatments for few services differ in terms of their effects on patient service revenues and related receivables:
• As per the Financial accounting standards board (FASB), Accounting Standard Code (ASC) 954-605-45 specifies that certain service like the patient discounts, contractual adjustments, and provision for bad debts are constituted as a contra account.
• The contractual adjustments and patient discounts are netted against the gross patient revenue for determining at net patient revenue.
• The provision for bad debts is disclosed as an adjustment towards the patient service revenue in the operating statement.
• The charity service is not reported in the statement of operations. However, it is disclosed as notes to the financial statements.
Following are the differences that exist in the accounting or reporting treatment under the FASB and GASB standards:
• The changes in Financial accounting standards board (FASB) have modified the treatments for bad debts. This change is even applicable for Not for Profit (NFP) and government organizations.
• The Financial accounting standards board (FASB) states that a separate line on the operating statement has made for provision for bad debts. However, the provision for bad debt treatments will differs as per the Government accounting standards board (GASB).

Question 4

What is an example of a performance indicator and to what would it compare in investor-owned financial reporting?

Question 5

Discuss some of the presentation differences between the operating statements of not-for-profit and business-type governmental health care entities.

Question 6

Tupper Memorial Hospital received from a donor a $50,000 contribution and a $50,000 pledge payable in one year. The donor required that the funds be used for heart research. Explain differences in accounting for the donor's contribution and pledge if Tupper is ( a ) a government hospital and ( b ) a not-for-profit hospital.

Question 7

What are assets limited as to use and how do they differ from restricted assets?

Question 8

What is premium revenue, and when is it recognized? Discuss the recognition of revenue relative to the revenue recognition and matching concepts in accounting.

Question 9

What is the Patient Protection Affordability Act, and what impact has it had on NFP hospitals' financial reporting and tax filing?

Question 10

A board member of an NFP hospital has asked you what resources are available to help him in assessing the financial and operational performance of the hospital. Where would you direct him to obtain benchmarking data to help him with his assessment?

Question 11

Charity Care. The local newspaper of a large urban area printed a story titled "Charity Care by Hospitals Stirs Debate." The story quotes one legislator who wants "to ensure that the state's not-for-profit hospitals are fulfilling their obligation; that is to provide charity care at least equal to the tax exemption they receive as a not-for-profit entity." The following table is provided:

Question 12

Research Case-Determining Community Benefit. The Internal Revenue Service (IRS) initiated a study of not-for-profit hospitals in 2006. One purpose of the study was to help the IRS better understand the community benefit provided by not-for-profit hospitals. Community benefit is a critical factor in the determination of whether a hospital is granted 501(c)(3) status, which may result in significant savings in income and other taxes. The final report on the project was issued in February 2009 and combined with the Affordable Care Act, resulted in new reporting requirements for not-for-profit hospitals. The reporting is required under IRC Section 501(r) and is accomplished by completing Schedule H of Form 990.
Required
a. Using the IRS Web site (www.irs.gov), examine the executive summary and final report of the IRS Exempt Organizations Hospital Study. How many hospitals participated in the study? What types of information related to community benefit did the IRS request from the hospitals surveyed?
What two primary demographics were used to summarize the data, and what categories were used in each demographic? Why do you believe these demographics were selected?
b. Select a not-for-profit hospital located in your region or state and locate its most recent Form 990 using Guidestar (www.guidestar.org). Using the information found on Schedule H, answer the following questions. (Note: You can register, at no cost, to access Form 990s available through Guidestar.)
1. What were the hospital's total revenues? Total expenses?
2. What was the total cost of community benefit reported by the hospital? How much of that amount was for uncompensated care (referred to as Total Financial Assistance and Means-Tested Government Programs)? Identify the other types of community benefit provided by the hospital and the associated costs.
3. Compute the percentage of community benefit to total revenue and total expenses. How does your hospital compare to hospitals of similar size in the IRS study?
c. How do you think the new IRS requirements will affect future accounting and financial reporting for not-for-profit hospitals? Give examples to support your discussion.

Question 13

Patient Protection and Affordability Act. In 2010, Congress passed and the President signed into law the Patient Protection and Affordability Act. The act provides for sweeping changes to health care and has been extremely controversial. To learn more about this act, go to www.healthcare.gov to answer the following questions.
Required
a. What is (are) the purpose(s) of the act?
b. How long has it taken to implement the act? For individuals covered by the act, what are some of the major coverage provisions?
c. In addition to cost, one of the most controversial provisions of the act relates to the purchase of health insurance. What is the Insurance Marketplace, does it allow for the purchase of government health insurance, and can you purchase insurance at any time? Why do you believe purchasing insurance is controversial?

Question 14

Internet Case-Evaluating the Quality of Health Care. The U.S. Department of Health and Human Services maintains the Web site www.hospitalcompare. hhs.gov, which provides an array of measures that report on individual hospitals and other types of health care providers. Access the Web site for help in completing this case.
Required
a. What is the purpose of the Hospital Compare site?
b. The site allows you to find a hospital and assess how it compares to state and/or federal statistics. There are several categories of measures including: general information; survey of patients' experiences; timely and effective care; readmissions, complications, and deaths; use of medical imaging; Medicare payment; and number of Medicare patients. Enter information to locate a hospital of interest to you. Once the hospital is located complete the following.
1. Compare and evaluate the survey of patients' experiences relative to state and federal statistics. 2. Compare and evaluate timely and effective care for emergency department care relative to state (if available) and federal statistics.
3. Compare and evaluate under readmission, complications, and deaths the 30-day outcome information relative to state (if available) and federal statistics.
4. Overall how would you rate the hospital you selected? Explain your rating.
c. Explain how such factors as patient mix, occupancy rate, average length of stay, payor mix (i.e., Medicare, Medicaid, third-party insurers, self-pay, and charity care), and the hospital's financial condition may affect the quality of care.

Question 15

Multiple Choice. Choose the best answer.
1. The AICPA Audit and Accounting Guide Health Care Entities is considered category b authoritative guidance that can be used by which of the following?
a. A business-type government hospital.
b. A not-for-profit hospital.
c. A for-profit hospital.
d. All of the above.
2. A not-for-profit hospital would present all of the following financial statements, except a:
a. Balance sheet or statement of financial position.
b. Statement of functional expenses.
c. Statement of operations. d. Statement of cash flows.
3. Which of the following is a true statement regarding a performance indicator ?
a. All health care organizations are required to report a performance indicator.
b. Only governmental health care organizations are required to report a performance indicator.
c. The purpose of reporting a performance indicator is to make it easier to compare the results of operations of not-for-profit health care organizations to those of for-profit health care organizations. d. The purpose of reporting a performance indicator is to assist in evaluating the efficiency and effectiveness of a health care organization's operating activities.
4. Fees received by a hospital for a "healthy heart" workshop offered to patients should be reported as:
a. Patient service revenue.
b. Administrative service revenue.
c. Other revenue. d. Nonoperating gains.
5. Which of the following is an example of an asset limited as to use?
a. Real estate donated to build a clinic for the homeless.
b. Contributed cash that the board is considering setting aside for self-insurance.
c. Investments bequeathed to the health care organization where the income is to be used to fund operating costs for a cancer clinic.
d. Funds from a sale of bonds that are required by covenant to be used to build a new hospital.
6. Why are health care organizations motivated to track the actual costs of services?
a. Both GASB and FASB require it.
b. They must report their actual expenses, so that third-party payors will reimburse them.
c. Third-party payors contract with the organization to reimburse a set amount, and the organization risks a loss if costs are greater than the amount reimbursed.
d. Any amount not reimbursed by a third-party payor or paid by the patient must be included in the amount reported as charity care.
7. The controller for Bloomingfield Regional Hospital estimated that the uncollectible patient accounts have increase by $152,000. The controller's journal entry included a debit to Bad Debt Expense and a credit to Allowance for Uncollectible Receivables. Based on this, Bloomingfield Regional Hospital is
a. An investor-owned health care organization.
b. A nongovernmental not-for-profit health care organization.
c. A governmental not-for-profit health care organization.
d. Properly recording the estimate for uncollectible accounts under the FASB and GASB standards.
8. Wellness Psychiatric Clinic received a large contribution from the family of a former patient. The contribution came with a request that the funds be used or invested to support any activities that the clinic felt would be best. On this not-for-profit clinic's statement of cash flows, this contribution would be reported in which section?
a. Noncapital financing activities.
b. Operating activities.
c. Financing activities.
d. Investing activities.
9. The Patient Protection and Affordability Act, passed in 2010,
a. Is unlikely to impact accounting and financial reporting for health care organizations.
b. May or may not impact Form 990 filings for 501(c)(3) health care organizations.
c. Requires health care organizations to implement new cost accounting systems where each service related to a medical procedure is tracked and submitted for payment separately.
d. Could impact the security and integrity of a health organization's accounting information system.
10. Which of the following would be most useful for evaluating the financial profitability of a not-for-profit health care organization?
a. Current ratio.
b. Debt-to-capitalization.
c. Excess margin.
d. Debt services coverage.

Question 16

Revenue Classifications. Caring Community Hospital, a not-for-profit hospital, recorded the following transactions.

Question 17

Various Unrelated Transactions. Following are several unrelated transactions involving a hospital.
1. The hospital has a contractual agreement with a lender requiring that $500,000 in cash be set aside to meet its future debt payment.
2. The hospital accrued $1,500,000 in patient service revenues. Charity services of $415,000 were also provided. Contractual adjustments total $535,000.
3. An increase of $45,000 was recorded for bad debts.
4. General services of $100,000 were donated by technicians. Normally, the hospital would have purchased these specialized services.
5. An endowment contribution of $1,500,000 was received.
6. Investments held by the hospital increased in fair value by $32,000.
7. The hospital purchased $837,000 in equipment with resources that had been contributed in prior years for such a purchase.
Required
a. Prepare journal entries to record the foregoing transactions, assuming the hospital is a not-for-profit facility.
b. Prepare journal entries to record the foregoing transactions, assuming the hospital is a business-type government facility.

Question 18

Performance Indicator. The Kyle Sports Medicine facility is a not-for-profit health care facility that is trying to determine what transaction information should be included in its calculation of the performance indicator it uses to report its results of operations. Indicate whether each of the following transactions being considered should be included in the operating performance indicator by circling Y for yes or N for no.

Question 19

Revenue and Related Transactions. During its current fiscal year, Evanston General Hospital, a not-for-profit health care organization, had the following revenue-related transactions (amounts summarized for the year).
1. Services provided to inpatients and outpatients amounted to $9,600,000, of which $450,000 was for charity care, $928,000 was paid by uninsured patients, and $8,222,000 was billed to Medicare, Medicaid, and insurance companies.
2. Donated pharmaceuticals and medical supplies valued at $265,000 were received and utilized as general expenses.
3. Medicare, Medicaid, and third-party payors (insurance companies) approved and paid $5,365,000 of the $8,222,000 billed by the hospital during the year (see transaction 1).
4. An unconditional contribution of $5,000,000 was received in cash from a donor to construct a new facility for care of Alzheimers patients. The full amount is expendable for that purpose. No activity occurred on this project during the current year.
5. A total of $965,000 was received from the following activities/sources: cafeteria and gift shop sales, $710,000; medical seminars, 125,000; unrestricted transfers from the Evanston General Hospital Foundation, $75,000; and fees for medical transcripts, $55,000.
6. Uncollectible accounts totaling $3,250 were written off. The allowance for uncollectible receivables was increased by $1,170.
Required
a. Record the preceding transactions in general journal form.
b. Prepare the unrestricted revenues, gains, and other support section of Evanston General Hospital's statement of operations for the current year, following the format in Illustration 16-4.
c. On which statement would restricted contributions be reported? Explain.

Question 20

Governmental Hospital. During 2017, the following selected events and transactions were recorded by Milos County Hospital.

Required
a. Show in general journal form the entries that should be made for each of the transactions and the closing entries in accordance with the standards for a governmental health care entity that follows proprietary fund accounting, as discussed in this chapter and Chapter 7.
b. Using the available information, calculate the net patient service revenue that would be reported on the statement of revenues, expenses, and changes in net position.

Question 21

Financial Statements-Not-for-Profit Hospital. The following is the pre-closing trial balance for Christina Rehabilitation Hospital as of September 30, 2017.

Required
a. Prepare a statement of operations and a statement of changes in net assets for the year ended September 30, 2017. Not included on the trial balance is the fact that $1,010 has been released from temporary purpose restrictions.
b. Prepare a balance sheet as of September 30, 2017. The pledges and investments are both long-term. Not included on the trial balance is the fact that $15,000 of bonds will be due in 2018 and must be reclassified on the balance sheet.

Question 22

Not-for-Profit Hospital. The Edwards Lake Community Hospital balance sheet as of December 31, 2016, follows.

Required
a. Record in general journal form the effect of the following transactions during the fiscal year ended December 31, 2017, assuming that Edwards Lake Community Hospital is a not-for-profit hospital.

Question 23

Not-for-profit Statements of Operations and Changes in Net Assets. You have recently started work as the controller for a small community hospital. The financial statements for the just completed fiscal year have been provided for your review.


Required
After reviewing the statement you realize that it is not in the proper FASB format. To help your staff correct the statements, make a list of all of the modifications or corrections that should be made to the statement, so that it can be presented in the proper format.