Uncompensated Care
Although we could discuss the current hospital situation for days now that the financial news has been made public, I am going to allow the new Chairman and the new Board some time to formulate their plan on dealing with the situation.
In the meantime, we will try to answer some other questions about different but related topics.
Last year, there was increased focus from the Healthcare Financial Management Association (HFMA) on uncompensated care and much attention was focused on the controversial issue of Medicare shortfalls and the roles these shortfalls play in accounting for the community benefits a hospital provides.
One issue of significant importance relates to revenue recognition. The HFMA believes hospitals should recognize revenue for patient services only when they can reasonably expect to collect payment. But this is not always the way accountants make the assumptions.
Gary Taylor, a healthcare facilities analyst with Banc of America Securities in a research report released last December stated that "aggressive revenue recognition", and not the uninsured, is really to blame for the alarming rise of hospital bad debt.
Modern Healthcare has covered this topic in recent issues as well.
The percentage of bad debt that all hospitals have reported in the past few years has risen at an alarming rate. In Taylor’s report, he states that comparing the rise in bad debt with other data on the growth of he uninsured doesn't match up.
Taylor also disagrees with the hospital’s recurring argument that "they are the victims of a societal issue". He doesn’t believe their arguments of the rising number of uninsured or the fact that all hospitals must treat emergency patients regardless of their ability to pay correlates with the actual data.
He gave examples that ambulance companies in particular will tell you that there is basically no significant increase in the number of uninsured patient volumes in the last few years.
Taylor believes the rise in reported bad debt by hospitals has to do with the fact that many hospitals inflate their revenue. They do this by aggressively raising the prices of everything. Hospitals still use a charge-based system rather than a cost-based system. In Taylor’s report, the growth in gross charges is in excess of 15% annually. This will naturally push your collection ratio down.
"As most now acknowledge, hospital charges have little basis in reality, but inflating them does appear to make a difference in the accounting. On average, Taylor says, hospital companies are booking three times more net revenue for patients without insurance than patients with insurance, and revenue that can't be collected eventually becomes bad debt-a write-off. It's an accounting game."
The American Institute of Certified Public Accountants will possibly recommend changes related to hospital revenue recognition standards sometime this year.
This will be of some help but it still makes everyone question the numbers that are presented.
In the meantime, we will try to answer some other questions about different but related topics.
Last year, there was increased focus from the Healthcare Financial Management Association (HFMA) on uncompensated care and much attention was focused on the controversial issue of Medicare shortfalls and the roles these shortfalls play in accounting for the community benefits a hospital provides.
One issue of significant importance relates to revenue recognition. The HFMA believes hospitals should recognize revenue for patient services only when they can reasonably expect to collect payment. But this is not always the way accountants make the assumptions.
Gary Taylor, a healthcare facilities analyst with Banc of America Securities in a research report released last December stated that "aggressive revenue recognition", and not the uninsured, is really to blame for the alarming rise of hospital bad debt.
Modern Healthcare has covered this topic in recent issues as well.
The percentage of bad debt that all hospitals have reported in the past few years has risen at an alarming rate. In Taylor’s report, he states that comparing the rise in bad debt with other data on the growth of he uninsured doesn't match up.
Taylor also disagrees with the hospital’s recurring argument that "they are the victims of a societal issue". He doesn’t believe their arguments of the rising number of uninsured or the fact that all hospitals must treat emergency patients regardless of their ability to pay correlates with the actual data.
He gave examples that ambulance companies in particular will tell you that there is basically no significant increase in the number of uninsured patient volumes in the last few years.
Taylor believes the rise in reported bad debt by hospitals has to do with the fact that many hospitals inflate their revenue. They do this by aggressively raising the prices of everything. Hospitals still use a charge-based system rather than a cost-based system. In Taylor’s report, the growth in gross charges is in excess of 15% annually. This will naturally push your collection ratio down.
"As most now acknowledge, hospital charges have little basis in reality, but inflating them does appear to make a difference in the accounting. On average, Taylor says, hospital companies are booking three times more net revenue for patients without insurance than patients with insurance, and revenue that can't be collected eventually becomes bad debt-a write-off. It's an accounting game."
The American Institute of Certified Public Accountants will possibly recommend changes related to hospital revenue recognition standards sometime this year.
This will be of some help but it still makes everyone question the numbers that are presented.
The bottom line for accounting is:
**If you don’t believe it is collectable, don’t count it as revenue.
The odds of collecting the full charges from uninsured patients are extremely slim. Coming up a with a realistic collection percentage is the issue and this is where many hospitals err on the accounting side for various reasons. It results in their bottom line appearing different than reality.
The problem arises when budgets make these assumptions with over-inflated numbers because they will eventually spend more than they can collect.
Labels: budget, hospital, uncompensated care
posted by Anonymous at 5:50 AM
15 Comments:
I can see from my own insurance statements that hospitals and doctors bill for a great deal more than they are actually reimbursed. The difference is often striking: a procedure might be billed for several hundred dollars and the hospital or doctor settles for less than one hundred dollars...or less.
You have pointed out how hospitals can overstate bad debt. How do doctors typically book receivables? At the billed amount or at some discounted "expected" amount? At what price point do doctors write off bad debt as an offset to profits?
There are basically two types of accounting practices.
Physicians use the cash-basis accounting.
In this type, companies record expenses in financial accounts when the cash is actually laid out, and they book revenue when they actually collect the cash.
The second type is accrual accounting.
It records revenue when the actual transaction is completed such as the completion of work on a specified job or contract.
They may not receive the cash until much later.
The company records revenue when it earns it, even if the customer hasn't paid yet.
Expenses are handled in the same way.
The company records any expenses when they're incurred, even if it hasn't paid for the supplies yet.
The accounting method a business uses can have a major impact on the total revenue the business reports as well as on the expenses that it subtracts from the revenue to get the bottom line.
Thanks for the accounting lesson, but I still would like to know what numbers doctors use to declare losses on unpaid bills? The full "sticker price" that no one pays or something else?
I believe HB answered your question. On a true cash basis, there is no bad debt expense, revenue is recongnized and "booked" only if it is received.
There is an accounting principle that governs this "aggressive" revenue recognition, and should have covered what has transpired at FMH. One of the first things any accountant learns: The principle of conservatism.
For example, if you reasonably expect to realize between 40 and 50% of an account, it should be recorded at 40%. If in fact you do recieve 50%, then you recognize the excess as a gain -- not to be done the other way around.
For example, if you reasonably expect to realize between 40 and 50% of an account, it should be recorded at 40%. If in fact you do recieve 50%, then you recognize the excess as a gain -- not to be done the other way around.
I agree, however at the time the budget was proposed did the CFO/CEO know that the Bush administration would cut Medicare reimbursements to hospitals from 50% to 30%?
It's easy to start pointing fingers, but the hospital business seems like a difficult one to manage, especially if the net is 4 cents on a dollar and the government then changes the revenue game midstream.
Should CFO's/CEO's need to purchase a crystal ball for their desk or a dart board for their walls? Possibly both?
If you are talking about needing to adjust the 2007 budget, I agree with you. However, you can't blame the problems with the 2006 financials on what the Bush Administration announced for 2007. And I don't think the need to now adjust the 2007 budget is the reason the former CFO "resigned".
The word has come out. Although a layoff will be used as a last resort at FMH, it will more than likely happen within the next 90 days.
If a Doctor charges $80.00 for an office visit, knowing he is going to be reimbursed $40.00, where is the difference going to be shown. In any business you have to have some sort of balance sheet for accounting purposes. Why would it be necessary to charge the full $80.00 in the 1st. place if you were only going to show the $40.00 income. Is it not true at the end of the tax year you can write off
expenses and also uncollected revenue against the total revenue collected? If the laws that covers gambling allow gamblers to offset their winnings by their losses, I'm sure that Physicians and businesses have the means to cover uncollected fees for their services by way of tax adjustments. I believe that I have read several articles on this blog, where HB was complaining that his revenue was going to be cut due to changes in Medicare and Insurance payments. I see no difference in his business and the hospital, except he has the authority to deny service to those that cannot meet the standards of payment that he deems acceptable. The hospital on the other hand does not have this luxury of being able to pick and choose their patients, as they have to accept any and all.
Things are not always what they seem, A stopped clock is right twice a day!
As an uninsured individual, I can only say I surely hope someone soon revamps the medical system and we get universal health care.
From someone looking in from the outside, I know a lot of people like me who performed professional services contracts for anywhere from six months to two years in tenture, and now we have retired with no retirement, etc.
My IRA had to be used to emergency surgery. My support to keep our hospital was exactly because I was uninsured (though my husband is through his own business of two).
Please let's pray they join together up "thar" in WA and get something done. We felt when the new Medicare/Medicaid laws came out, this program wasn't good for the Srs. And then, didn't the AARP lose some memberships because they recommended this program?
Simply a normal joe's thoughts.
anonymous,
First off, charges are higher than those collected because it is the only way you can negotiate with the insurance companies on fees. They will not tell you what they will pay and each one is different. If charges are not higher than what you know they will pay, you have no bargaining tool.
Physicians cannot write off the difference as you stated. There is no tax benefit or anything else on this difference and absolutely no way to recover the writeoffs.
What we can collect is all there is and unlike the hospital, there is no government subsidies for charity care, DISH payments, or any other tax exempt benefit.
It is watched by the accountant and the practice to determine if your "writeoffs" are in line with the rest of the physician practices.
There is a huge difference in the two accounting methods that hospitals and offices use as described earlier.
Hospitals do negotiate with the insurance companies in a very similar way and actually are more successful because they have no competition in Floyd County.
Their writeoffs from insurance companies is far better than physicians.
HB, your wrote: "there is no government subsidies for charity care,"
I guess it depends on your definition of "charity" but taxpayer supported Medicare and Medicaid programs pump enormous amounts of money into the healthcare system (doctors included) that wouldn't be there otherwise.
On an accrual basis, if the gross charge is $80 and you know that you will receive $40 from an insurer, then the difference is expensed as a "contractual write-off". If a patient owes $200 from their deductible and never pays it - that is a bad debt.
A lot of doctors offices, labs, radiology, hospitals, and ER physicians offices will discount your final bill after insurance payments. Or if you don't have insurance if you pay the bill in full by 20% if you call them. This has saved me, alot of money. I recommend you try your dentist too. Just a suggesting.
If a patient owes $200 from copays and does not pay, they will eventually get sent to collections. It is "bad debt" but there is no deduction or tax break of any kind.
On a cash accounting basis, it is never recognized as either revenue or expense.
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