Essentially, the FASB guidelines, ASU 2011-07, stated that while health care providers are required to treat patients because they lack the ability to assess patients’ credit risk – indeed other words, health care providers with emergency services – then they will classify their bad debts in a different way.
Jim Grigg, CPA, Partner and National Head of Healthcare Audit Practices at Crowe Horwath LLP, explains the five most important aspects of FASB guidelines that hospital and healthcare system finance executives should understand.
1. Classification of bad debts. Bad debts related to patient service revenues were previously shown in hospitals’ income statements as operating expenses. Now bad debt will be displayed as a reduction of gross patient service revenue to get net patient service revenue. (For for-profit healthcare providers, this guideline applies to fiscal years that began after December 15, 2011; for not-for-profit providers, the effective date is fiscal years that end after on December 15, 2012, but may be adopted early.)
Essentially, healthcare providers are changing where bad debts are reported in the income statement.
2. Suppliers who are affected. The guidelines involve a relatively simple change, but they may not impact all health care providers. Mr. Grigg says the key wording in the guidelines is whether a provider can “assess the credit risk” of patients. Providers who must accept patients regardless of their ability to pay are affected by this directive.
“When this came out a year ago, every healthcare provider that has bad debt – outpatient surgery centers, rehab hospitals, MRI centers, acute care hospitals – the initial thought was that Bad debts are no longer an operating expense, ”Mr. Grigg said. . “This is not true. This is the first pitfall.”
For example, most CHWs, rehabilitation hospitals and other outpatient care providers do not have emergency services. They have the ability to assess their patients’ credit risk before performing any procedures. Therefore, since a significant portion of their patient service revenue is based on the provider’s assessment of the patient’s ability to pay, this guideline does not apply to them. These vendors should always record bad debts as operating expenses.
3. What about health systems with ambulatory facilities? Mr Grigg says there is a technical problem that the guidelines do not cover. For example, if a hospital or health system owns and operates a CHW, how should CFOs and other financial executives record bad debts in the financial statements?
In separate subsidiary returns, acute care hospitals should report bad debts associated with patient service revenue as a deduction from patient service revenue, according to the new guidelines. CSAs, on the other hand, would typically keep bad debts as an operating expense, assuming they can assess credit risk.
In health systems consolidated income statements or at the parent company level, determining how to report bad debts would be “an accounting policy choice”. “If healthcare systems are to publish consolidated financial statements, they can decide whether or not they want to display bad debts as compensation for income. [for hospitals] or as an operating expense [for ASCs]”Mr. Grigg said.” This should be disclosed in the footnotes. “
4. The ramifications. If hospitals, CHWs and other health care providers incorrectly report bad debts in the next few years, there could be adverse consequences.
“The ramifications [of not following the guidance] are that astute lenders would question your financial acumen, ”says Grigg. “Second, it would affect comparability. If you have a chain of CHWs and you take these guidelines when you shouldn’t, then all of a sudden you have less operating expenses than other CHWs in the industry. This will sound strange and could create benchmarking issues. “
5. Ways to approach orientation. Mr. Grigg says there are three main steps hospital finance executives should take to ensure their income statements are up to date with bad debt guidelines.
• Evaluate your methodologies to determine if gross patient service revenues, contractual allowances, charitable care, and bad debts can be tracked by the payer for disclosure.
• Prepare amended financial statements and disclosures for initial internal assessment as soon as possible.
• Identify internal / external reporting metrics affected by the changes and discuss these guidelines with supervisors, rating agencies and other regulators.
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