Accounting Government and Non-

Profit Organization
Week 4
Accounting For Health care Providers
 Health Care Organizations
(HCOs)
Types of Services:
 Clinics and individual (or group) practices

 Continuing care retirement communities (CCRC)

 Health maintenance organizations (HMOs)

 Home health agencies, e.g., hospice

 Hospitals

 Nursing homes

 Rehabilitation centers

© 2016 John Wiley & Sons, Inc.

All rights reserved.
 Health Care Organizations
(e.g. hospital)
Structures
I: II: III:
For-Profit: Not-for-Profit: Governmental:
Proprietary Voluntary Public
 Examples of Health Care
Organizations
I) For-profit:
– Hospital Corporation of America, Tenet, and HealthSouth
II) Not-for-Profit:
– Montefiore Medical Center-Moses Campus
– Memorial Hermann Healthcare system
III) Governmental:
– Bellevue Hospital Center
– M.D. Anderson Cancer Center
 Accounting Issues that differ
depending upon the
Organizational Structure
– reporting entity
– contributions
– financial statement display
– cash flows
– deposits and investments (i.e., see GASB Statement No.
31, SFAS No. 115, and SFAS No. 124)
– operating leases
– compensated absences
– Debt refunding; risks and uncertainties
– pensions and other post retirement benefits
 GAAP for HCOs
GOVERNMENTAL HCOs:
 Now follows GASB Statement No. 34
 Considered special purpose governments.
 May be accounted for as:
 A) a part of a governmental unit (i.e., as a special revenue, internal service, or enterprise
fund) OR
 B) as a stand-alone business-type activity that uses proprietary fund accounting principles.
ALL HCOs:
 Follow the AICPA industry audit guide, Health Care Organizations as Category (b) authority
after applying all appropriate FASB and GASB Statements.
 This guidance includes:
 Using full accrual accounting
 Capitalizing long-lived assets and depreciating those capital assets
 Fund Accounting
Used for:
1) Governmental HCOs
2) Internal Accounting purposes
HCOs’ Fund Accounting has:
 General Unrestricted Funds
 Reports financial resources and fixed assets.
 Donor-Restricted Funds (either temporarily and permanently
restricted):
 Specific Purpose Fund
 Plant Replacement and Expansion Fund
 Endowments
 Financial Statements for
HCOs
• Balance Sheet (Table 14-1A)
• Statement of Operations (Table 14-1B)
• Statement of Changes in Net Assets (Table 14-1C)
• Statement of Cash Flows (Table 14-1D)
 Equity of a HCO

 NPO — unrestricted net assets; temporarily restricted net assets;

and permanently restricted net assets.
 Governmental— unrestricted net assets; restricted net assets;
invested in Capital Assets, net of related debt.
 For-Profit — capital stock and retained earnings.
 Assets
 Current Assets (including receivables with related allowance
accounts for contractual adjustments and bad debts)
 Assets limited as to use (Restricted Assetss)— assets limited by
contracts or agreements with outside parties other than donors
or grantors, as well as limitations placed on assets by the Board
 Investments (at fair value, per FASB Statement Nos. 115 and 124
or GASB Statement No. 31, as applicable)
 Noncurrent assets (e.g., plant property and equipment)
 Revenue
• Patient service revenue is reported net of contractual adjustments
--(i.e., differences between gross charges and the amount to be paid by third party
payors).
• Prepaid health care plans that earn revenue from agreements to provide
service record revenue at the point agreements are made, not when services
are rendered.
• Payment often comes from third-party payors, Medicare or Blue Cross or
private insurance companies according to allowable costs or predetermined
(prospective) rates for services.
• Donated services and supplies are reported at their fair value, if material and
meet criteria.
• Charity services to indigent patients for which payment is never expected is
not recorded, but may be reported in the Notes to the Financial Statements.
 Revenues
• Revenues are categorized as:
 Unrestricted
 Patient care revenues
 Other revenues
 Temporarily restricted
 Permanently restricted
• Operating income :
- Arises from ongoing major activities, such as service revenue.
• Non-operating income:
- Arises from transactions peripheral or incidental to the delivery of health
care, such as investment income and unrestricted contributions.
 Principle Sources of Revenue
for a HCO
• Net assets released from restrictions used for operations
• Applies to non-governmental NFP HCOs
• Patient service revenue
• Premium revenue from capitation fees
• (i.e. fixed fees per person paid periodically regardless of services
provided)
• Resident service revenue (e.g., maintenance or rental fees)
• Other revenue (e.g., sales, fees, rental of facilities, investment income
and gains, unrestricted contributions)
 Example 1- Patient Care
Revenues
During a particular week a hospital records $400,000 in patient
charges. It estimates that 80% ($320,000) of the charges will be
billed to third-party payers who will, on average, negotiate discount
the invoiced amounts by 30% ($96,000). The remaining 20%
($80,000) of the hospital charges will be billed to patients who are
uninsured. Of this 20%, 60% ($48,000) will be uncollectible.
Entries:
To record one week’s patient revenues:
Patient account receivable $400,000
Patient revenues $400,000
 Example 1(cont’d)
Allowance for contractual adjustments:
Revenue from patient services--estimated contractual adjustments $96,000
Patient A/R—allowance for contractual adjustments $96,000

To establish allowance for bad debts:

Bad debt expense $48,000
Patient A/R—allowance for bad debts $48,000
 Example 2- Capitation Fee
Revenue
A physician group receives $300,000 in capitation fees from the Hartford
Insurance Company to provide comprehensive health care to members of the
company’s health plan. During the month it provides services for which it would
bill, at standard rates, $240,000. In addition, it refers patients to hospitals and
other health care providers for which it expects to be billed $18,000.
To record capitation fees:
Cash $300,000
Revenue from capitation fees $300,000

To record liability for patient referrals:

Patient referrals (expense) $18,000
Obligations for patient referrals $18,000
 Example 3- Charity Care
Question: A hospital values care provided to indigent patients at
$1,300,000, based on standard billing rates. However, it
anticipates collecting none for its services.
Answer: In this case, the hospital need not make any entry to record
the value of the charitable care. However, it should explain its
policies and report the total value of the care provided in notes to
the financial statements. (This information is also required on
Form 990).
 Expenses
 ALL reported within the unrestricted category.
 Use full accrual basis of accounting.
 Expenses classified by function or object (aka natural)
 Functional classification
 (e.g. inpatient services and fiscal and administrative
services)
 Object classification
 (e.g. line items such as salaries and supplies)
 Expenses (cont’d)
 Bad debts (FASB) is an expense (NOT a reduction of gross
revenue, as it had been in the past).
 Bad debts (GASB) is a reduction of gross revenue,
 Depreciation is recorded on capital assets and reported in the
General (or Unrestricted) Fund.
 Commitments and
Contingencies
– malpractice claims
– risk contracting
– third-party payor payments
– obligations to provide uncompensated care
– contractual agreements with physicians
– as well as others incurred in any business
 Example 1 – Malpractice
Claims
Issue: A hospital has been charged with negligence in the death of a patient. Although no claim has
yet been filed, past experience indicates that the hospital is almost certain to be sued.
Answer: The hospital would be required to charge an expense (a loss) in the period of the incident
only if it were able to make a reasonable estimate of the amount. If unable to estimate the
amount, it would be required to disclose the details of the incident. Assuming that the hospital
was able to estimate the amount of loss ($500,000), the following entry will be made:
To record the estimated cost of settling a potential claim:
Anticipated legal claims (expense) $500,000

Commitments and contingencies (liability) $500,000

Statements of Cash Flows
 Financing
 The health care industry requires capital investment in buildings
and equipment which often results in the need for long term debt
financing.
 Financing assistance may be available through governmental
financing authorities, such as the Health and Education Financing
Authority, without regard to the legal structure of the HCO.
 Financing agreements may include requirements to set aside
funds for repayments, in which case these are called Assets
Limited as to Use.
 Prepaid Healthcare Plans
• Health maintenance organizations (HMOs) and preferred provider
organizations (PPOs) function as brokers between the consumer (patient)
demanding the service and the providers of health care (hospitals and health
care professionals).

• Accounting issues relate to:

o Revenue recognition
o Accounting for risk contracts
 Continuing Care
Retirement Communities
CCRCs provide residential care in a facility, along with some level of
long-term medical care that is less intensive than hospital care.
Accounting issues related to:
• Entrance fees that include future health care
• The obligation to deliver future health services
• Periodic fees to cover operating costs
• Refundable advance fees
 Financial and Operational
Analysis
Decision makers evaluate HCO for different reasons:
 Managers are accountable for performance.
 Financial analysts determine the creditworthiness of organizations issuing
debt.
 Third-party payors determine appropriate payment for services.
 Patients assess quality of health care services, such as success rate of
certain procedures.
 HCO Performance Measures
These measures can be categorized by:
• Patient volume (e.g., occupancy rate or daily census and average
length of stay)
• Patient and payout mix (e.g., Medicare, commercial, private pay)
• Productivity and efficiency (e.g., personnel per patient, average
daily census)
• Debt covenant ratios
 Patient Protection and
Affordable Care Act
 The Patient Protection and Affordable Care Act (popularly known as the
Affordable Healthcare Act), on March 23, 2010 was signed into law by
President Obama.
 Trends include states covering more people through Medicaid, individual
insurance markets exist in many states, mergers and acquisitions have
increased significantly.
 FASB proposing changes that could affect financial reporting
 Require not-for-profits to report cash flow statements using direct method
 Change the three net asset categories to two
 Unrestricted
 With donor restrictions
 Not-for-profits expected to present statement of functional expenses
 HCOs-In Indonesia Perspective

Basic Principles
There are 2 categories of hospital in Indonesia
1. Private hospital with profit goals;
• Financial reporting refers to the SAK Umum or SAK ETAP
• If it listed on the Stock Exchange should also pay attention SE-02 / PM / 2002
about Guidelines for Presentation and Disclosure of Financial Statements in
Hospital Industry.
2. Hospitals manage by government or private with the purpose of not
seeking profit;
• Hospitals that is managed by government are BLUs;
– PP 23/2005 on the management of BLU
– PMK 76 of 2008 on BLU Financial Reporting
• Hospitals which privately managed are non-profit organizations -> PSAK 45
which refers to the General SAK or ETAP
 Primary Activities
• Hospital industry has some special characteristics such as:
1. Providing health services for the community, including medical
examination and care services, laboratory services, and
pharmacy.
2. Besides The organization of health services (Hospital) trying to
get cash inflows to cover the need to pay services of doctors and
other medical personnel, it is also cover the need of the use and
maintenance of laboratory and medical equipment, and other
needs, as well as having a social role that can be realized through
various programs established by management and in accordance
with government regulations.
3. The main sources of revenues include medical services, other
supporting services, and physician services.
 Industry Risk
The risks in the hospital industry are as follows:
• The risk of malpractice
– Medical world as well as other professions can not be separated from the
risk of practices that deviate or not in accordance with established
standards, thus it will harm the party who received the service. Doctors
can perform improper diagnoses, or give a drug that is less appropriate to
the needs of patients, even mistakes made intentionally because the
material demands (e.g. in the case of abortion). These can affect the level
of confidence in the company's performance
• Risk of Loss of Medical Personnel.
– Competition between hospitals (private) and the existence of old age
Benefit in the form of retirement for doctors who perform the duties as
doctors at Government Hospital, is another form of risk faced by company
management.
 Industry Risk (2)
• Government Policy Risk
– The degree of Government's attention towards improvement effort of
health services to the public has also been linked with the development of
the company's business. The possibility that may occur, the Government
through its regulations can provide the ease of the establishment of
Foreign Hospital (by foreign investors) as well as the use of foreign medical
services.
• Accounts Receivable Risk.
– Risks arising from the low collectibility of accounts receivable.
 Classes of Revenues
• Hospital revenues are classified broadly into three
major categories:
1. Patient service revenues
• Daily patient services (room, board and general nursing services)
• Other nursing services (operating room, recovery room, and labor
and delivery room nursing services)
• Other professional services (laboratories, radiology,
anesthesiology and physical therapy)
 Classes of Revenues (2)
• Hospital revenues are classified broadly into
three major categories:
2. Premium fees (or subscriber fee)
• Revenues from health management organization
(Jamsostek, Jamkesmas dan asuransi kesehatan) or other
agreement under which a hospital has agreed to provide
any necessary patient services for a specific fee – usually
per a member per month (pmpm) fee. Because these
fees are earned without regard to the patient services
actually provided, they should be reported separately
from patient service revenues.
 Classes of Revenues (3)
• Hospital revenues are classified broadly into
three major categories:
3. Other revenues
• Are those revenues that are derived from ongoing
activities other than patient care and service. Example (1)
student tuition and fees derived from nursing or other
schools a hospital operates and (2) miscellaneous sources
such as rentals of hospital plant, sales of scrap, cafetaria
sales, sales supplies to physicians and employees and fee
charged for copies of documents.
 Classes of Revenues(4)
• Note that, as with all revenues of government and non-
profit entities, revenues are reduced to the estimated
uncollectible amounts.
– Typical types of deductions from patient service revenues include:
• Charity services for patients who do not pay the established rate
because they are indigent;
• Policy discounts from member of groups (doctors, clergy, employees
or employees’ dependents) who receive allowance in accordance
with hospital policy;
• Contractual adjustments for patients’ bills that are paid to the
hospital by third-party payers at lower than established rates in
accordance with contracts between the hospital and third party
payers or with government regulations;
• Uncollectible accounts.
 Expense Classifications

• Hospital expenses are typically classified by such major

functions as:
– Nursing services;
– Other professional services;
– General services;
– Fiscal services;
– Administration services;
– Other service
• Each of those major classification may be sub classified further
according to organizational unit and object classification.
 Restricted Assets

• Government hospitals may have significant amounts of restricted

cash and investment. Some of these asset are restricted by third-
party, reimbursement agreements or other similar arrangements.
• Others are restricted to specific uses of donors or grantors.
• Additionally hospital sometimes dedicate a portion of
unrestricted resources for capital acquisitions based on an
internal management decision, often called board designation.
 Property Plant and
Equipment
• Hospital capital assets should be recorded at historical cost or at fair
value at donation and depreciated. If appropriate records have not
been maintained, the assets should be inventoried, appraised on the
basis of historical cost (net of accumulated depreciation) and
recorded.
• The basis of capital asset valuation should be disclosed, of course, as
should the depreciation policy.
• Assets used by the hospital may be owned outright, leased from or
made available by independent or related organizations, or provided
by a governmental agency.
• The nature of such relationship must be disclosed in the financial
statements and they should be accounted for and reported in
conformity with GAAP.
 THE CONCEPT OF BLU
• Government agencies established to provide services to the
public in the form of providing goods and / or services
• Without prioritizing profit seeking;
• Based on the principle of efficiency and productivity
 The Purpose of BLU

• Improve service to the community

• Provide flexibility in financial management based on
productivity and economic principles and good business
practices;
 The Benefit of BLU
• Can get subsidies from the government consisting of:
– Employee salary
– Operating costs
– Investment cost / capital
• BLU earnings can be used directly to finance BLUs that are
outlined in the Business Budget Plan.
• Hospital’s revenues not paid to treasury fund (kas Negara) but it’s
only reported to the Ministry of Finance;
• Can work together with third parties
 Standard Reporting of the
Hospital in Indonesia
Management Executant
Private Government
Profit Non-Profit
BLU
Orientation Orientation
PP 23 tahun 2005 about BLU
1. SAK Umum or SAK ETAP
management
2. SE/02/PM/2002 for listed company PSAK 45 (2010 revision)
PMK 76 tahun 2008 about financial
in BEI
reporting of BLU
 Accounting and Reporting
Guidelines for BLU
Hospitals
• Accounting Period
– a period of 1 (one) year, starting from 1 January to 31 December.
• Accounting System RS BLU consists of:
– a financial accounting system, which produces Financial Statements for
accountability, management, and transparency;
– a fixed asset accounting system, which produces reports of property, plant
and equipment for the purposes of fixed asset management; and
– cost accounting system, which generates unit cost information per unit
service, performance accountability or other information for managerial
purposes.
 Financial Accounting
System
• Financial accounting system of BLU Hospitals is designed
to provide at least:
– information on financial position accurately and timely;
– information on BLU's ability to obtain the economic resources
that occurred during a period;
– information on the source and use of funds during a period;
– information on budget execution accurately and timely; and
– information on compliance with laws and regulations.
 Financial Accounting
System (2)
• The financial accounting system of BLU Hospital has the following
characteristics:
• the accounting basis used by financial management of BLU
Hospitals is the accrual basis;
• the accounting system is implemented by a paired bookkeeping
system (sistem pembukuan berpasangan); and
• the accounting system of BLU hospital is prepared on the basis of
internal control principles in accordance with good business
practices.
 Financial Accounting
System (3)
• The BLU financial accounting system produces Financial
Statements in accordance with GAAP / BLU-specific industry
accounting standards
• In order to integrate BLU Financial Report with the Ministry of
State / Institution Finance Report, BLU Hospital develops a
financial accounting sub-system that produces Financial Reports
in accordance with SAP (Government Accounting Standards).
 Fixed Asset Accounting
System
• The BLU's fixed assets accounting system is at least capable of
generating:
– information on BLU's type, quantity, value, mutation, and condition of
fixed assets; and
– information on the type, quantity, value, mutation, and condition of fixed
assets does not belong to BLU but is in the management of BLU.
• In the implementation of a fixed asset accounting system, BLU
may use the state-owned goods accounting system (sistem
akuntansi barang milik negara) established by the Minister of
Finance.
 Cost Accounting System
• The BLU cost accounting system is at least capable of
generating:
– information on cost of goods sold;
– information on unit costs per unit of service; and information
on variant analysis (the difference between standard cost and
actual cost).
• Cost accounting system produces useful information in:
– planning and controlling BLU operational activities;
– decision making by the BLU Management; and
– calculation of BLU service tariff
 Financial Reporting of BLU
Hospitals
• In the framework of accountability for financial management
and service activities, BLU compiles and provide:
a. Financial statements; and
b. Performance Report.
• Financial Statements consist of:
a. Budget Realization Report and / or Operational Report;
b. Balance Sheet;
c. The statement of Cash Flows; and
d. Notes to the Financial Statements.
• The financial statements of business units organized by BLU are
consolidated in the Financial Statements
 Financial Reporting of BLU
Hospitals (2)
• In order to consolidate BLU Financial Statements with the
Ministry of State / Institution Finance Report, BLU submits
Financial Statements in accordance with SAP every semester and
year.
• Financial Statements consisting of LRAs, balance sheets, and
notes to the Financial Statements in accordance with SAP
enclosed with Financial Statements in accordance with IFRS /
specific industry accounting standards.
 Summary
 Health care accounting and auditing is complex.
 Complexity is due in large measure to “patient service revenue” being provided by third
party payors.
 Competency in managerial cost accounting is critical for managers of health care
providers.
 Health care organizations are distinguished from other types of organizations by several
unique revenues and expenses. These include:
 Fee for service patient care revenues
 Capitation fee revenues
 Charitable care.
 Malpractice claims.
 Retrospective insurance premiums
 Fiscal health of health care organizations can be evaluated using analytical tools, such as
financial ratios.
 Affordable Care Act and its impact .
© 2016 John Wiley & Sons, Inc.
All rights reserved.
 Review and Audit
• The BLU Financial Statement before it is submitted to the
reporting entity shall be reviewed by an internal examination unit
(satuan pemeriksaan intern).
• In the absence of an internal examination unit, reviews are made
by the internal control officers of state ministries / agencies.
• The review is conducted simultaneously with budget execution
and preparation of BLU Financial Report.
• The annual BLU Financial Report is audited by an external auditor.
 References
• Prof Andreas Bergmann and Robin Braun (2008). The Value Added of
IPSAS, PEMPAL Workshop Istanbul; February 25
• Caroline Aggestam Pontoppi and Isabelle Andernack (2016).
Intrepretation and Application of IPSAS. Wiley.
• Michael H. Granof, Saleha B. Khumawala. (2016). Government and Not-
for-Profit Accounting. 07. John Wiley & Sons. New Jersey. ISBN: 978-1-
118-98327-0.
•  Direktorat Penyusunan APBN, Direktorat Jenderal Anggaran,
Kementerian Keuangan. (2014). Pokok-Pokok Siklus APBN Di Indonesia
Penyusunan Konsep Kebijakan dan Kapasitas Fiskal Sebagai Langkah
Awal. 01. Kementerian Keuangan. Jakarta. ISBN: 978-602-17675-2-8.