Health Care Accounting (#294)
/In this podcast episode, we discuss health care accounting. Key points made are noted below.
Overview of the Health Care Industry
Despite health care being one of the largest industries in the world, there isn’t that much accounting that’s specific to it. Other industries get a lot more attention in the accounting standards. To keep things focused, I’m going to only mention accounting issues that are specific to health care. But first, when I’m talking about health care, this includes a lot more than hospitals. It also includes health care clinics, rehabilitation centers, hospice care, laboratories, nursing homes, and individual practitioners. In the United States alone, we’re talking about roughly 17 million people in this industry.
The Nature of the Organization
The basis for a lot of the accounting for health care begins with the type of organization. The first type is an investor-owned business, and it’s supposed to earn a profit. The second type is the not-for-profit, which doesn’t have any ownership interests, and it gets by mostly from the fees it charges. It’s usually exempt from federal income taxes. If the business is organized as a nonprofit, then it’s accounted for under the nonprofit accounting rules, which I’ll get to in another episode. And a final version is a health care entity that’s run by the local government, in which case governmental accounting rules apply. I talked about governmental accounting back in episodes 274 through 277.
Health Care Billings
So, our first issue is billings to the insurance company. They can be really complex, which increases the risk of an incorrect invoice that won’t get paid. There are a couple of underlying problems. One is that the physician might not have documented a procedure correctly, so the wrong procedure is billed. Or, the person coding information into an invoice uses the wrong code to classify a billed item. For example, some insurers require that a classification code be included from a standard list, such as the World Health Organization’s ICD list, which is short for the International Statistical Classification of Diseases and Related Health Problems. This list contains more than 16,000 codes, so the billing clerk could easily screw up and include the wrong code. Whatever the reason might be, you either don’t get paid or get paid the wrong amount. So obviously, some cross-checking is needed before these invoices go out.
Health Care Payment Plans
Now, let’s flip that around. What kind of payment plans does the insurance company use to pay the health care providers? There are a bunch of variations, and each individual health care provider might end up being paid under more than one of these variations – or all of them. For example, they could use a fee for service, so a physician provides a specific service, and gets paid a specific amount for it. Or, payments could be per diem, which is a flat rate per day of care, no matter what level of service is provided. Or, payments could be episodic, where payments are based on the type of patient condition or the treatment being provided.
Then we have capitation payments, which are a fixed amount paid at the beginning of the month in exchange for a commitment to provide services during that month, even if the patient never shows up. And finally, we have risk-based pricing, where the provider agrees to provide certain services in exchange for a negotiated price, which is designed to control costs.
I won’t get into the logic behind each of these payment schemes, but consider the impact on the accounting department that’s receiving the payments. It needs to track payments under as many as five different systems, and probably needs to report internally on the profits derived from each one – which could get pretty time-consuming.
Health Care Receivable Valuation
And on top of that, consider the receivable valuation problems, because the health care provider is routinely not getting paid the full amount of what it bills. Instead, the insurance company might pay a lower rate, and then the residual might get billed to the patient, and who knows if that’s going to get paid. Or, the insurance company rejects the argument that a medical procedure was even necessary, and refuses to pay it at all. Or, the insurer could claim that a service was provided based on an improper referral, and – again – refuses to pay.
And it gets worse. The federal government could conduct an audit, and decides that a payment was improper. If so, the health care provider has to pay it back to the government.
Because these non-payment numbers can be quite large, the accountant has to take a best guess at a loss reserve, and then keep updating it over time.
Health Care Billings on Behalf of Others
But we’re not done yet with billings. A health care provider might be in an agency relationship, where it issues billings on behalf of physicians, collects the receivables, and then passes along the receipts to the physicians. This just adds another layer of work to the collections process.
In short, it would safe to say that billing and collections for a health care provider is somewhere between annoying and infuriating. Working in this area would probably not be considered fulfilling.
Prepaid Health Care Services
And then we have prepaid health care services. A provider of these services might be contractually required to provide services to patients for a period of months into the future, such as when it’s being paid capitation fees. If so, it has to accrue an estimated expense for the services that will be provided in those future periods. The estimate is usually based on historical experience.
Medical Malpractice Claims
Another liability is medical malpractice claims. This includes the cost to litigate claims, as well as the amount of any settlements. Some of that is covered by insurance, but some of it might be paid directly. The health care provider should accrue a liability when an incident arises that could trigger a claim, and then adjust the amount of the accrual based on the latest information about each claim. And, the accrual can include the cost of probable unreported incidents. In other words, if you’re pretty sure a lawsuit is coming, even if you haven’t yet been notified, then accrue an estimate of what it will cost.
Retirement Community Medical Services
So, let’s switch over to retirement communities that offer medical services. In some cases, they charge residents a single up-front fee in exchange for future services, usually until the person dies. In these cases, the business has to analyze its obligation to provide services once a year or so, and then recognize a liability for this amount. This one can get pretty complicated, because the analysis has to include actuarial assumptions, and estimates of future expenditures, and the facility’s historical experience. And on top of that, a separate analysis should be made for each type of contract that the company offers to its residents.
Of course, these retirement communities also provide ongoing monthly services for a fee, such as rent in order to live there, and meal service, and parking fees. These are billed monthly and collected without too much trouble, so this is a rare case where revenue is recognized right away, with maybe a small loss reserve that’s easy to calculate.