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 healthcareorganizations.

This lesson contains supplemental documents:

University of North Carolina Hospitals at Chapel Hill Statement of NetPosition (June 2015)

Study Guide

1. Unique Reporting Features for Not-for-Profit Hospitals1. Hospitals Modify the Overall Format of the Statement of Activities—

To include an operating section and a nonoperating section. Thegeneral 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 inthe 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 Revenues1. 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 revenuesfor patient-related services such as radiology, pathology, laboratorywork, and so on—are also part of patient services revenues.

2. Charity Care—When patients enter the hospital, the charity cases areimmediately identified and eliminated from the patient servicerevenue calculations. The amount of revenue as "donated" tocharity cases is separately tracked and disclosed in the notes.

3. As paying patients begin to receive services, the charges for thoseservices are recorded in gross (e.g., for the full amount). Patientservices revenues are reduced by contractual allowances (pricereductions allowed to third party payers such as insurancecompanies, Medicare, Medicaid, etc.), policy discounts, andadministrative adjustments to determine Net Patient ServiceRevenues. Net Patient Service Revenue is the first line in theStatement of Activity. Gross Patient Service Revenues andContractual 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, thehospital has an agreement with an HMO to accept $70 as fullpayment for the room. The hospital records Patient ServiceRevenue of $110, records a Contractual Allowance of $40, andreports Net Patient Service Revenues of $70 on the financialstatements.

4. Note that FASB ASC 954-605-45-4 requires the financial statementpresentation of the provision for bad debts associated with patientservice revenue. A provision for bad debts must be presented on aseparate line as a deduction from net patient service revenue; thatis, as a contra–revenue account rather than as an expense.Moreover, the healthcare entity must disclose net patient revenuesfor each major payor source (e.g., third-party payor and self-pay).Bad debt expense related to receivables other than patient servicerevenue continues to be presented as an operating expense.

5. Example presentation in the statement of operations:Patient service revenue (net of contractual allowances anddiscounts)

$ 90,000

Provision for bad debts (8,000)Net patient service revenue less provision for bad debts 81,000Premium revenue 20,000Other revenue 12,000Total revenue $113,000

3. Other Revenue and Support1. Other operating revenues and support include revenues from items

related to the main operations of the hospital, but not directlyrelated to patient care. Other operating revenues and supportinclude:

1. Gift shop sales2. Parking garage receipts3. Cafeteria sales4. Tuition from classes offered by the hospital5. FMV of donated materials and supplies6. Restricted contributions

7. Research grants

Example

Bay City Hospital recorded the following revenues:Delivery room charges (only $15,000 is expected to becollected due to agreements with third-partyproviders)

$20,000

Cafeteria sales $3,000Research grants $10,000Radiology charges $2,000Nursing fees $12,000Gift 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).

NoteCategorization of hospital revenue as Patient ServiceRevenue, Other Operating Revenue, or Nonoperating Gainshas been a consistent area of emphasis on the exam. It isimportant to know how individual contributions andrevenues fit into these categories. Less emphasis has beenplaced 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 periodcovered and estimated obligations related to patient care for thisperiod should be accrued. Capitation fees are shown as a separateline item in the operating section of the statement and may bedisclosed as Premium Revenues.

5. Operating Expenses1. 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 losseson disposal of fixed assets. Expenses can be reported by naturalcategories (salary, supplies, rent, etc.) or by functional categories(inpatient services, ancillary services, administrative, etc.). However,if the NFP healthcare entity chooses to report expenses usingnatural expense categories (salary, supplies, rent, etc.) in its incomestatement, then it must disclose functional classifications in thenotes to the financial statements; accordingly, functionalclassifications are most commonly used in the income statement.Functional expenses are based on full cost allocation. Unlike mostnot-for-profit organizations, nongovernmental not-for-profithealthcare organizations may report depreciation, interest, and baddebt expense, along with functional categories. Following not-for-profit financial reporting guidelines, the NFP healthcare entity mustseparately disclose program services from supporting activities asthe example that follows shows:

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

2. Supporting activities—Management, administrative, fiscal6. Nonoperating Revenue and Gains/Losses

1. This category includes most unrestricted bequests and cashdonations, most donated services, and unrestricted earnings oninvestments, including endowment income.

Example

Belpark Hospital received the following contributions:Contributions restricted for cancer research $50,000Unrestricted bequest $25,000Record-keeping services donated by current employees(these services would have been purchased)

$10,000

Bandages and ointments contributed by a supplier $5,000Government grant to fund research on birth defects $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, youmust carefully evaluate the type and purpose of the contributions:

1. Materials—When goods and supplies normally purchased by theorganization are donated, the items are recorded as inventory or asan expense, as appropriate, and the contribution is reported asOther Operating Revenue.

2. Services—Donated services may only be recorded if: (1) anonfinancial asset is enhanced or (2) special skills are required andthe service is provided by someone possessing those skills and theservices would have otherwise have been purchased by the

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

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

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

8. Statement Format—Not-for-Profit Healthcare Entity—The followingformat 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. Notedisclosure must indicate the policies adopted by the entity to determinewhat is and what is not included in the performance indicator. Thefollowing must be reported separately from (underneath) thatperformance indicator:

1. Equity transfers involving other entities that control the reportingentity, are controlled by the reporting entity, or are under thecommon control of the reporting entity

2. Receipt of restricted contributions3. Contributions of (and assets released from donor restrictions related

to) long-lived assets4. Unrealized gains and losses on investments not restricted by donors

or by law, except for those investments classified as tradingsecurities

5. Investment returns restricted by donors or by law

9. Reporting for Governmental Hospitals—Governmental hospitals aresubject to the accounting and reporting requirements for governmentalproprietary funds that are discussed in the earlier lessons in the "Stateand Local Governments" section. The financial statements of agovernmental healthcare entity include:

1. Statement of Net Position (net position has three categories: (1) netinvestment in capital assets, (2) restricted, and (3) unrestricted)

2. Statement of Revenues, Expenses, and Changes in Net Position3. Statement of Cash Flows (with four categories of cash flows as

prescribed by the Governmental Accounting Standards Board)

Questions

Question 1

A nonprofit, private hospital should report its health care receivables at netrealizable value on the balance sheet.  Which of the following allowanceswould be deducted from the hospital’s gross receivables from health careservices to determine their net realizable value?

I. Allowance for uncollectible accounts.II. Allowance for contractual adjustments.III. Allowance for employee discounts.

I and III.I, II, and III.I and II.II and III.

Question 2

Which of the following statements is(are) correct about charity careprovided by a nonprofit,

nongovernmental hospital?

I. Charity care represents health care services that are provided but arenever expected to result in cash flows.

II. Bad debts expense should include a provision for charity care.

I only.II only.I and II.Neither I nor II.

Question 3

Which of the following financial statements of a private, nonprofit hospitalreports the changes in unrestricted, temporarily restricted, and permanentlyrestricted net assets for a time period?

Balance sheet Statement of operations

Yes YesYes NoNo YesNo No

Question 4

Elizabeth Hospital, a nonprofit hospital affiliated with a religious group,should prepare which of the following financial statements?

Statement of changes

in net assetsStatement of operations

Yes NoNo YesYes Yes

Statement of changes

in net assetsStatement of operations

No No

Question 5

Russell Hospital, a nonprofit hospital affiliated with a private university,provided $250,000 of charity care for patients during the year endedDecember 31, year 1. The hospital should report this charity care

As net patient service revenue of $250,000 on the statement ofoperations.As net patient service revenue of $250,000 and as an operating expense of$250,000 on the statement of operations.As accounts receivable of $250,000 on the balance sheet at December 31,year 1.Only in the notes to the financial statements for year 1.

Question 6

Terry, an auditor, is performing test work for a not‐for‐profit hospital. Listedbelow are components of the statement of operations.

Revenue relating to charity care $100,000Bad debt provision 70,000Net assets released from restrictions 50,000used for operations  Other revenue 80,000Net patient service revenue (includes revenue related to charitycare)

500,000

What amount would be reported as total revenues, gains, and other supporton the statement of operations?

$530,000$460,000$580,000$630,000

Question 7

On the statement of operations for a nonprofit, nongovernmental hospital,which of the items below is included in the amount reported for “revenueand gains over expenses and losses” (the performance indicator)?

I. Unrealized loss on other than trading securities.  The securities areincluded in unrestricted net assets.

II. Contribution received from a donor which cannot be used until next year.

I only.II only.I and II.Neither I nor II.

Question 8

The statement of operations for a private, nonprofit hospital should includea performance indicator which indicates the results of operations for aperiod. Which of the following items would be included in a hospital’sperformance indicator reported on the statement of operations?

I.Proceeds from sales of cafeteria meals and guest trays to employees,medical staff, and visitors.

II. Net assets released from restrictions used for operating expenses.I only.I and II.II only.Neither I nor II.

Question 9

In April year 1, Delta Hospital purchased medicines from FieldPharmaceutical Co. at a cost of $5,000. However, Field notified Delta that theinvoice was being canceled and that the medicines were being donated toDelta. Delta should record this donation of medicines as

A memorandum entry only.A $5,000 credit to nonoperating expenses.A $5,000 credit to operating expenses.Other operating revenue of $5,000.

Question 10

Hospital, Inc., a not‐for‐profit organization with no governmental affiliation,reported the following in its accounts for the current year ended December31:

Gross patient service revenue from all services provided at theestablished billing rates of the hospital (note that this figureincludes charity care of $25,000)

$775,000

Provision for bad debts 15,000Difference between established billing rates and fees negotiatedwith third‐party payors (contractual adjustments)

70,000

What amount would the hospital report as net patient service revenue in itsstatement of operations for the current year ended December 31?

$665,000$690,000$705,000$735,000

Question 11

Unrealized gains on investments which are permanently restricted as to useby donors are reported by a private, nonprofit hospital on the

Statement of operations.Statement of cash flows.Statement of changes in net assets.Statement of operations and statement of cash flows.

Question 12

Which of the following should normally be considered ongoing or centraltransactions for a not‐for‐profit hospital?

I. Room and board fees from patients.II. Recovery room fees.

Neither I nor II.

Both I and II.II only.I only.

Question 13

Nickels Hospital, a nonprofit hospital affiliated with a religious group,reported the following information for the year ended December 31, year 1:

•     Gross patient service revenue at the hospital’s full establishedrates

$860,000

•     Bad debts expense 10,000•     Contractual adjustments with third‐party payors 100,000•     Allowance for discounts to hospital employees 35,000

On the hospital’s statement of operations for the year ended December 31,year 1, what amount should be reported as net patient service revenue?

$725,000$760,000$715,000$815,000

Question 14

The governing board of Smithson Hospital, a nonprofit hospital affiliatedwith a religious organization, acquired 100 BMI Company bonds for $103,000on June 30, year 1. The bonds pay interest on June 30 and December 30. OnDecember 31, year 1, interest of $3,000 was received from BMI, and the fairvalue of the BMI bonds was $105,000. The governing board acquired the BMI

bonds with cash which was unrestricted, and it classified the bonds astrading securities at December 31, year 1, since it intends to sell all of thebonds in January year 2. As a result of the investment in BMI bonds, whatamount should be included in revenue, gains, and other support on thestatement of operations for the year ended December 31, year 1?

$0$3,000$2,000$5,000