Calculate Net Patient Service Revenue. Recall the ...

Overview

Upon completion of this lesson, candidates should be able to:

Recall the financial statements of a not-for-profit hospital.

Recall the financial statements of a governmental hospital.

Calculate Net Patient Service Revenue.

This lesson describes basic accounting and financial reporting for healthcare organizations. This lesson contains supplemental documents: University of North Carolina Hospitals at Chapel Hill Statement of Net Position (June 2015)

Study Guide

1. Unique Reporting Features for Not-for-Profit Hospitals 1. Hospitals Modify the Overall Format of the Statement of Activities-- To include an operating section and a nonoperating section. The general outline of the statement is: + Operating Revenues - Operating Expenses = Operating Income +/-Nonoperating Gains & Losses = Change in Net Assets + Beginning Net Assets = Ending Net Assets 2. Operating Section--Several unique items of revenue are included in the operating section: +Net Patient Service Revenues -Provision for Bad Debts =Net Patient Service Revenues less Provision for Bad Debts +Other Operating Revenues +Premium Revenues (e.g., Capitation Fees) =Total Operating Revenue

2. Patient Service Revenues 1. Patient Service Revenues--These are gross charges for direct patient care. They include such things as room charges, doctors' fees, medicines, bandages, etc.; ancillary revenues--which are revenues for patient-related services such as radiology, pathology, laboratory work, and so on--are also part of patient services revenues.

2. Charity Care--When patients enter the hospital, the charity cases are immediately identified and eliminated from the patient service revenue calculations. The amount of revenue as "donated" to charity cases is separately tracked and disclosed in the notes.

3. As paying patients begin to receive services, the charges for those services are recorded in gross (e.g., for the full amount). Patient services revenues are reduced by contractual allowances (price reductions allowed to third party payers such as insurance companies, Medicare, Medicaid, etc.), policy discounts, and administrative adjustments to determine Net Patient Service Revenues. Net Patient Service Revenue is the first line in the Statement of Activity. Gross Patient Service Revenues and Contractual Adjustments are displayed in the notes. +Gross Patient Service Revenues (including Ancillary Revenues) -Charitable Services =Patient Service Revenue -Less Contractual Adjustments =Net Patient Service Revenue (first line in Statement Activities)

Example

Daily charges for a semiprivate room are $110. However, the hospital has an agreement with an HMO to accept $70 as full payment for the room. The hospital records Patient Service Revenue of $110, records a Contractual Allowance of $40, and reports Net Patient Service Revenues of $70 on the financial statements.

4. Note that FASB ASC 954-605-45-4 requires the financial statement

presentation of the provision for bad debts associated with patient

service revenue. A provision for bad debts must be presented on a

separate line as a deduction from net patient service revenue; that

is, as a contra?revenue account rather than as an expense.

Moreover, the healthcare entity must disclose net patient revenues

for each major payor source (e.g., third-party payor and self-pay).

Bad debt expense related to receivables other than patient service

revenue continues to be presented as an operating expense.

5. Example presentation in the statement of operations:

Patient service revenue (net of contractual allowances and $ 90,000

discounts)

Provision for bad debts

(8,000)

Net patient service revenue less provision for bad debts

81,000

Premium revenue

20,000

Other revenue

12,000

Total revenue

$113,000

3. Other Revenue and Support

1. Other operating revenues and support include revenues from items

related to the main operations of the hospital, but not directly

related to patient care. Other operating revenues and support

include:

1. Gift shop sales

2. Parking garage receipts

3. Cafeteria sales

4. Tuition from classes offered by the hospital

5. FMV of donated materials and supplies

6. Restricted contributions

7. Research grants

Example

Bay City Hospital recorded the following revenues:

Delivery room charges (only $15,000 is expected to be $20,000

collected due to agreements with third-party

providers)

Cafeteria sales

$3,000

Research grants

$10,000

Radiology charges

$2,000

Nursing fees

$12,000

Gift of medicines used for direct patient care

$1,000

Bay City reports: Net Patient Service Revenues of $29,000 (15,000 +2,000 +12,000) and Other Operating Revenues of $14,000 (3,000 +10,000 +1,000).

Note Categorization of hospital revenue as Patient Service Revenue, Other Operating Revenue, or Nonoperating Gains has been a consistent area of emphasis on the exam. It is important to know how individual contributions and revenues fit into these categories. Less emphasis has been placed on the expense categories.

4. Premium Revenues (Capitation Fee Revenues) 1. Capitation fees are payments made to healthcare providers for comprehensive client coverage provided for a fixed fee (e.g., HMOs).

Capitation fee revenues should be recognized during the period covered and estimated obligations related to patient care for this period should be accrued. Capitation fees are shown as a separate line item in the operating section of the statement and may be disclosed as Premium Revenues. 5. Operating Expenses 1. Operating expenses include virtually all costs associated with running a hospital, including depreciation, bad debt expense (except for bad debt related to patient service revenue) and losses on disposal of fixed assets. Expenses can be reported by natural categories (salary, supplies, rent, etc.) or by functional categories (inpatient services, ancillary services, administrative, etc.). However, if the NFP healthcare entity chooses to report expenses using natural expense categories (salary, supplies, rent, etc.) in its income statement, then it must disclose functional classifications in the notes to the financial statements; accordingly, functional classifications are most commonly used in the income statement. Functional expenses are based on full cost allocation. Unlike most not-for-profit organizations, nongovernmental not-for-profit healthcare organizations may report depreciation, interest, and bad debt expense, along with functional categories. Following not-forprofit financial reporting guidelines, the NFP healthcare entity must separately disclose program services from supporting activities as the example that follows shows:

1. Program services--Inpatient services, outpatient procedures, home health services, research, teaching

2. Supporting activities--Management, administrative, fiscal 6. Nonoperating Revenue and Gains/Losses

1. This category includes most unrestricted bequests and cash donations, most donated services, and unrestricted earnings on investments, including endowment income.

Example

Belpark Hospital received the following contributions: Contributions restricted for cancer research Unrestricted bequest Record-keeping services donated by current employees (these services would have been purchased) Bandages and ointments contributed by a supplier Government grant to fund research on birth defects

$50,000 $25,000 $10,000

$5,000 $20,000

Belpark reports Other Operating Revenue of $75,000 (50,000 +5,000 +20,000) and Nonoperating Gains of $35,000 (25,000 +10,000).

7. Contributions Other than Cash--To properly report these donations, you must carefully evaluate the type and purpose of the contributions: 1. Materials--When goods and supplies normally purchased by the organization are donated, the items are recorded as inventory or as an expense, as appropriate, and the contribution is reported as Other Operating Revenue. 2. Services--Donated services may only be recorded if: (1) a nonfinancial asset is enhanced or (2) special skills are required and the service is provided by someone possessing those skills and the services would have otherwise have been purchased by the

organization. If the service can be recognized, then it is necessary to look at the purpose of the service in order to report it:

1. If the service relates to the main operating mission of the hospital (e.g., a doctor donates a surgical procedure), record it as an operating expense and as Other Operating Revenue

2. If the service is of a support or administrative nature (e.g., a bookkeeper volunteers to enter transactions), record it as an operating expense and a Nonoperating Gain.

8. Statement Format--Not-for-Profit Healthcare Entity--The following format is commonly used to report hospital/healthcare entity activities. The statement of operations should include a performance indicator, such as operating income, revenues over expenses, and so on. Note disclosure must indicate the policies adopted by the entity to determine what is and what is not included in the performance indicator. The following must be reported separately from (underneath) that performance indicator: 1. Equity transfers involving other entities that control the reporting entity, are controlled by the reporting entity, or are under the common control of the reporting entity 2. Receipt of restricted contributions 3. Contributions of (and assets released from donor restrictions related to) long-lived assets 4. Unrealized gains and losses on investments not restricted by donors or by law, except for those investments classified as trading securities 5. Investment returns restricted by donors or by law

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