Chapter 16 – Accounting for Health Care Organizations
CHAPTER 16: ACCOUNTING FOR HEALTH CARE ORGANIZATIONS
Chapter 16 – Accounting for Health Care Organizations
16-2
CHAPTER 16: ACCOUNTING FOR HEALTH CARE ORGANIZATIONS
16-1. Disagree. It is true that the FASB is the authoritative source for establishing accounting
and financial reporting standards for investor-owned and not-for-profit health care
organizations; however, there are some differences that do exist in the reporting
standards. A review of Illustration 16-2 shows that FASB modifies the standards for cash
16-2. The FASB requires not-for-profit health care entities to issue a statement of financial
position, statement of operations, and a statement of cash flows, as well as notes to the
financial statements. Additionally, information concerning changes in net assets is to be
included in a statement of changes in net assets, which may be combined with the
16-3. Health care organizations receive the majority of their revenue in the form of fees for
Chapter 16 – Accounting for Health Care Organizations
16-3
Ch. 16, Answers, Question 16-3 (Cont’d)
Patient service revenue are earned based on services provided to patients. Premium
16-4. Both FASB and GASB standards indicate that patient discounts, contractual adjustments,
and bad debts are considered contra-revenue accounts. Discounts and contractual
adjustments can be netted against gross patient revenue in arriving at net patient revenue.
The FASB does recommend that the Provision for Bad Debts be recognized as a separate
16-5. Performance indicators relate to the results of operations. An example of a performance
indicator is the excess of revenues and gains over expenses and losses. Items that would
be omitted from the performance indicator include: unrealized gains/losses on other than
trading debt securities, distributions/receipts from owners, and restricted contributions.
consent of McGraw-Hill Education.
Ch. 16, Answers (Cont’d)
16-6. Although there are several similarities in the presentation of the statements, some of the
differences in presentation are shown on the table below.
Item
Business-Type
Governmental
Presentation
Title
Statement of revenues,
expenses, and changes in
net position
Presentation of operating
and nonoperating
activities
GASB requires operating
and nonoperating activity
sections be displayed
Performance indicator
GASB does not require
such an indicator (however,
by construction a similar
type of measure would be
displayed)
Net asset/position
classifications
All operating activity is
presented on the statement
of revenues, expenses, and
changes in net position
Presentation of bad debts
Is recorded as a contra-
revenue account and netted
against the revenue account
for presentation.
General Problem Information: Operating statements
Learning Objective: 16-2
16-5
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Ch. 16, Answers (Cont’d)
16-7. a. If Tupper is a government hospital using business-type accounting (the most common
case), it would record the $50,000 contribution as nonexchange (generally
nonoperating) revenue by crediting the account Revenues—Gifts and Grants, the
debit would be to Cash. Since the pledge amount is not available, the time
requirement for recognition under GASB standards is not met. Therefore, the pledge
16-8. The FASB recognizes assets limited as to use as unrestricted assets whose use is limited
by contract or agreements with outside parties, or by the governing body. Restrictions
imposed on assets by donors or grantors are not included in the definition of assets
limited as to use. The GASB defines restricted assets as those with restrictions such that
16-9. Premium revenue is the revenue that a health care entity receives for prepaid health plans
such as HMOs and PPOs. A health care entity recognizes premium revenue as patient
Chapter 16 – Accounting for Health Care Organizations
16-6
Ch. 16, Answers, 16-9 (Cont’d)
16-10. The Patient Protection and Affordable Care Act, also referred to as the Affordable Care
Act (ACA), is a public law intended to provide health insurance reform and improved
health care for Americans. The ACA has had an important impact on the financial
reporting and financial condition of health care entities. Several provisions of the act
16-11. There are many organizations mentioned in the text that compile benchmarking
databases. It is highly likely that the hospital is a member of at least some of the
organizations mentioned, and as a result, the board member would have little trouble
obtaining data to assist in his assessment of the hospital. Some of the organizations
16-7
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consent of McGraw-Hill Education.
Solutions to Cases
16-12. a. There are no precise guidelines discussed in the text or in Internal Revenue Service
announcements regarding the amount of charity care that must be provided in order to
retain tax-exempt status. The Burton-Hill Act of 1946 that made construction loans
available to hospitals did require that some level of care to indigent patients be
delivered; however, the act does not provide any minimum amounts of care.
determining if the hospitals have provided “sufficient” charity care to “fulfill their
obligations.” Note that this chart was prepared by a reporter and the numbers used
may be neither audited nor directly comparable across hospitals.
c. The audited annual financial statements of these three hospitals would be useful. The
amount of charity care and the hospitals’ policies should be disclosed in the notes to
16-8
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consent of McGraw-Hill Education.
Ch. 16, Solutions (Cont’d)
16-13. a. Students’ answers to part a will vary depending on their selection of hospitals. The
goal is to get students to look at Schedule H to see the kinds of information required
and then relate that information to organizations with which they are somewhat
familiar.
16-14. a. The primary purpose of the act is health insurance reform. Reforms required under
the act are intended to enhance the quality of health care by holding insurance
companies more accountable, lowering health care costs, and guaranteeing more
health care choices.
b. The act contains numerous provisions. Some of the major coverage provisions of the
Chapter 16 – Accounting for Health Care Organizations
16-9
Ch. 16, Solutions, Case 16-14 (Cont’d)
d. The reasons why students see the purchase of insurance as controversial should
generate a good discussion, given that students tend to be younger and healthier than
16-15. a. The purpose of Hospital Compare is to provide consumers with information about the
quality of care for hospitals and other types of health care providers. Information on
the site can help the consumer make more informed decisions about where he/she
gets health care. Additionally, the public nature of the information encourages
hospitals and other listed providers to improve the quality of the care they provide.
Chapter 16 – Accounting for Health Care Organizations
16-10
Ch. 16, Solutions, Case 16-15 (Cont’d)
16-16 a. Students’ answers to part a will vary depending on the hospital they select. The
objective is to get students to review the financial condition of a hospital in line with
ratios and statistics widely cited in the health care industry. The benchmark data are
sourced from “HFMA Key Hospital Financial Statistics and Ratio Medians December
2016,” which compares median statistics from three sources: Truven Health
16-17. 1. a. 6. c.
3. c. 8. b.
5. d. 10. c.
General Problem Information: Various
16-11
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Ch. 16, Solutions (Cont’d)
16-18.
2. c. 7. e.
4. e. 9. e.
5. d. 10. d.
General Problem Information: Revenue classifications
16-19.
2. ACCOUNTS AND NOTES RECEIVABLE 965,000
3. PROVISION FOR BAD DEBTS 45,000
ALLOWANCE FOR UNCOLLECTIBLE RECEIVABLES 45,000
5. CASH 1,500,000
CONTRIBUTIONS—WITH DONOR RESTRICTIONS 1,500,000
16-12
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Ch. 16, Solutions, Exercise 16-19 (Cont’d)
7. EQUIPMENT 837,000
CASH 837,000
1. CASH—BOND REPAYMENT 500,000
CASH 500,000
2. The journal entry is the same for the government facility.
3. The journal entry is the same for the government facility. The Provision for Bad
16-13
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consent of McGraw-Hill Education.
Ch. 16, Solutions, Exercise 16-19 (Cont’d)
5. CASH 1,500,000
6. INVESTMENTS 32,000
REVENUES—CHANGES IN FAIR VALUE OF
7. EQUIPMENT 837,000
CASH 837,000
(Note at the end of the reporting period the government facility would adjust
16-14
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Ch. 16, Solutions (Cont’d)
16-20.
2. N Operating performance relates to net assets without donor
restrictions.
4. Y
6. N “Below the line items” such as discontinued operations and
7. Y A transfer of cash is not the same as a transfer of equity, which
would be excluded from the performance indicator.
9. Y
10. Y
General Problem Information: Performance indicators
16-21. a. EVANSTON GENERAL HOSPITAL
1. ACCOUNTS AND NOTES RECEIVABLE 8,222,000
16-15
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2. GENERAL EXPENSES 265,000
3. CASH 5,365,000
5. CASH 965,000
OTHER REVENUES 965,000
6. ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS 3,250
ACCOUNTS AND NOTES RECEIVABLE 3,250
PROVISION FOR BAD DEBTS 1,170