Accounting for Health Care Providers | Not for Profit Accounting

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oh and welcome to the session this is Professor for hat and this session we're going to be looking at introduction to accounting for healthcare providers sometimes it's called Hospital accounting or medical accounting but that's the overall topic this topic is covered in the government and government and not-for-profit accounting course it's also covered on the CPA exam the far suction as always please connect with me only then YouTube is really would need to subscribe they have over 1,500 plus accounting auditing and tax lecture this is my Instagram account I'm

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bundle which is the four-part exam and it has unlimited access simply put once you sign up you have access and fill your pass which is very very good an excellent feature because Becker does not only help you with your CPA exam also help you with your accounting accounting courses so if you're studying for you if you're studying now it's not a bad idea to supplement your studies with a course with Becker CPA Review now let's talk about health coverage the

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first thing we need to define is a term called and then the D coverage and what is that in what's this indemnity coverages basically I'll tell you a story my grandmother came to this country in the ninth my grandparents came to this country in the 1950s ok so they lived here you know for several decades before I came and I came I immigrated into this country in the early 1990s and I always remembered my grandmother talking about how great this country is and I asked her why she would

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say she you know she's old she's an old lady should say because the health coverage is great she loved working she worked she and many in the manufacturing industry and they had health coverage and as far as she's concerned anything that happened to her medically or to her family which is they had six kids and more than that they believe seven kids typical Catholic family seven kids they were covered she didn't have to pay premiums shouldn't have to pay the deductible once something happened she call to the doctor and the doctor would

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treat her okay so this is what indemnity coverages basically your covered anything covered basically unlimited coverage so we would build patient for services provided bill means the health care provider they will build the patient for the service provided in the insurance company will pay and this was this was the insurance I would say up until the 1990s actually when I came to this country and think about this system think about if we have indemnity system and then the D coverage what does that

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mean it means the insurance company will pay your bill don't worry about it you have no premium you have no deductible and guess what the doctor at the other side is thinking the same thing guess what if what about I try to build a client as much as possible so you go in for you for the back pain the doctor will check your neck will check your back will check your leg will check everything why because if they can bill you the insurance company will cover it so this system has no incentive to control cost by doctors or hospitals

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because you know if you need an x-ray they will give you an x-ray if you need MRI they will give you an MRI whether it's you really need it or not but they will try to provide it to you also the patients they had no deductible they did not have to pay any premium and their work therefore they there was no incentive to control cost and what do you think happened well as a result the cost of insurance went up so the premium you'd premium now the company said we can no longer afford to pay the insurance by ourselves now you have to pay you have to put up some money this

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is why worth the premium came in like my grandmother would not know what a premium is okay luckily she would not know god bless her soul no she's you know she left us long time ago but the point is she would not understand the concept of a premium or the concept of a deductible because the insurance was indemnity coverage basically you're good to go okay then what happened obviously the insurance company the doctors and the hospital they needed to find a solution also inflation went up that's why the cost went up and other reasons but that's is one of the reasons because the coverage was unlimited there was no

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incentive to control cost therefore we introduce a new coverage called capitation coverage in capitation basically is prepaid okay so what is capitation coverage okay capitation fee is a prepaid fee so basically the insurance company they'll go into a contract with the hospital or whether doctor or any healthcare provider in exchange for a prepaid fee so simply put the insurance company will pay your doctor a fee okay that fee could be monthly bi-weekly weekly it doesn't

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matter so they pay a fee whether you go to do that to that doctor or not okay so what does that mean it means the doctor is getting paid because there is an insurance contract between them and the insurance company that they're gonna be paid that fee now when you go to the doctor they don't pay that doctor again this is basically the doctor is being paid so here what happened is in a sense under capitation feasible to think from an incentive perspective now the doctor does not have incentive to treat you in a sense that they're getting paid regardless but that's we're not gonna go

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there but the point is just to show you what the incentive is okay now the doctor they will try to give you the minimum amount of services because your insurance is a capitation insurance they're getting paid whether they incur that additional cost or or not so the first thing we need to understand is the difference between the capitation coverage and indemnity coverage so make sure you know the difference between those two and how they're being billed because we're going to talk about how we do accounting for them now let's talk about the revenue for doctors and hospitals we'll do doctors and hospitals against the revenue well patients but

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that's not really that much the revenue comes from third-party reimbursement and who reimburse doctors and hospitals or health care providers okay three parties Medicare which is a federal program so it's the federal government Uncle Sam this program is mainly exists to serve the elderly and the retirees and the disabled if they qualify Medicaid Medicaid is for the state program and the Medicaid is for low-income who cannot afford health insurance if we're talking about the welfare system so basically you cannot

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afford to have insurance for your kids for your family you go and you apply for this state and the third party is the big one is the insurance company if the insurance company they might have in them many insurers and them any coverage capitation coverage and most of the time most insurance now is hybrid for some services its indemnity for some services its capitation they they they they limit you to a certain amount so let's take a look at the mechanics how a third-party reimbursement work okay so the third

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party paid the health coverage provider based on a contractual rate okay and this rate is based on the illness for example if you wanna do a hope open-heart surgery they may charge you know $300,000 and if you want to remove a ward they may charge you you know $3,000 so depending on the illness let's work an example to see how this work at some point in my life I had my appendix removed okay and what I did is I received the bill from the hospital for three thousand eight hundred and fifty so the hospital

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will bill you now I was like whoa how am I gonna pay this and specifically I had my appendix removed right right after I graduated from college so I was right out of college so I was like 22 years old so what happened is I called the doctor the doctor said you have yet you you we do have health insurance for you we're gonna build the we're gonna build the we're gonna build the hospital and the hospital we're gonna build the insured your insurance company and they will pay then what happened is I received from my from my insurance company I believe us Blue Cross Blue

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Shield something called a OB explanation of benefit and in that benefit they said they're gonna pay the doctor $2000 I was like oh my god until that I paid the doctor $2,000 it means I'm still responsible for 1850 and back then I mean would put parking in the early in the 1999 which is it's like I did not that money was worth a lot it's still worth a lot today the point is I'm right out of college I was still having I was still paying my credit card that let alone my student

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loan and now I have to come up with 1850 the difference well I called the doctor and the doctor said no you're not gonna have to pay the 1850 although we build you this is what we would have charged you but based on our agreement with the insurance company the insurance company will pay us two thousand and basically this amount you don't have to worry about it it was like great it's like are you sure because you know my belt shows I have to pay one thousand eight hundred fifty my explanation of benefit it's basically it says this is yes that's what you are responsible for but that's

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it once they pay us two thousand that's the agreement between us the doctor and the insurance company so this is how it works so this is called the contractual adjustment so it's the difference between the amount billed to third party and the amount collected the third party okay so so they although they billed you for thirty eight fifty but they would accept two thousand from the insurance company now if you did not have insurance they would build you for three thousand eight hundred and fifty you might be saying but that's not fair why would they build me if I don't have insurance think about it the insurance company they might have

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one thousand appendix removed for that month across the whole country right so they'll give them a discount they're not going to give you a discount if you're on your by yourself now the you know hospitals they do have a lot they do a lot of charity but that's beside the point okay so contractual adjustment is recognized for in denne denne coverage only so if you have in then any coverage this is where we have the contractual adjustment this is when we have a contractual adjustment okay so remember with your health insurance coverage some

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of the coverage could be in that many coverage some of it could be capitation so your policy could have for certain illness you are covered for for others you are limited so on and so forth so for for example for the appendix I guess how many times you're going to remove your appendix right not not many times okay so this is how it works and let's just say state basically we'll take a look at the journal entries to see how this all fits together so and then any revenues you would recognize the revenue when the service is provided so the so the health insurance company did not be

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health insurance the health care provider we'll recognize the revenue and the services provided when is the surface provided actually when he woke up from the from the operation right this is when these services provided no net of the contractual adjustment so they would record the revenue and the gross amount okay therefore the contractual adjustment must be shown on the balance sheet and on the income statement so let me show you what we mean by this so when when that third party when the doctor billed

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me they they billed me okay 3850 actually that's called third party receiver because they basically built the insurance company but they also sent me a bill but really it's a third party receivable not patient receivable this is a third party receivable so they inhabit receivable and they credit revenue and this is how we record the revenue and receivable for the indemnity coverage okay we build a third party therefore with them at a third party receivable third party revenue now we record the contractual adjustment we're

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going to debit the revenue contractual adjustment which is a contra revenue account contra to this one okay so 3850 - 2000 is what is 1850 what's what's left okay then they will credit an allowance of 2000 also this is a contra account this is contracted e receivable this is contracted receivable okay so the only cash that that that the health insurance would would be paid as $2000

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so they will debit cash when they receive the cash and they will credit the allowance for contractual adjust they will debit the allowance for contractual adjustment this account is gone when they get the money and they will credit the third party receivable for 3850 so this is the entry that we make when you receive the cash so this is we bill at gross we record the contractual adjustment then we receive the cash so this is how it works let's take a look at another example during

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the week the hospital bills three million dollars the third party ensures for services provided the patient who had who have indemnity insurance coverage remember this is indemnity have to record the dead grouse the hospital anticipate that third-party insurance company to pay the amount billed but at a discount of 40% so basically the agreement between them and the insurance company is they'll pay 40% of the gross film well let's how would they record this entry in hospital they will debit third party receive oh three million dollar they will create a third party revenue

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three million dollars this is the various revenue expected from their expected from various insurance company then they would record the contractual agreement well if they're going to pay only they're gonna pay 60% that can have to get take 40% off 40% off this times 40% will give us 1.2 million therefore we debit revenue we debit revenue contractual adjustment 1.2 million we credit allowance for contractual adjustment 1.2 million okay

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let's take a look during the week the hospital bills $1,000,000 directly to patients for services provided for these four though to those patients so here's the difference the difference here is we are billing there is no insurance involved here we are billing the patients themselves the hospital anticipate 65% of the patient charges are likely to be in collectable and that's that's a high in collectible but that's that that's that's typically in a hospital so how would the how would the hospital record this entry okay

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we're gonna also record the pet gross which is the gross as 1 million so no debit patient receivable this is different than third they're both receivable but this is third-party receivable a million credit patient revenue a million then we have to record that debt expense which is a very high bad debt expense we debit 650,000 credit allowance for doubtful accounts six hundred and fifty thousand you would say that's a lot yes it is a lot and that's typical in a hospital situation okay now

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let's talk about capitation fear Evan when do we recognize the capitation fee revenue pretty straightforward you recognize it when the cash is received when the cash is received also the company might provide charity care and what is charity care somebody come in somebody picked them up and they don't have no health insurance coverage they have no job don't not homeless but they don't have any SS under that situation the hospital would say I'm gonna provide this as a charity care because they don't expect to receive any money from them actually in

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the u.s. if you showed up in the emergency room they have to take you they have no option like like in other countries I'm not going to name any countries but in some countries they don't have to I'll just you know just since you're listening the doesn't matter for example my my I come from Lebanon and Lebanon emergency room they don't take you if you don't have money they will not accept you in the u.s. emergency room they have to accept you whether you have money or not okay so if the hospital thinks you cannot pay that

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money they would not recognize any revenue from the katka they would not recognize any revenue so let's take a look at this example the hospital received seven million dollar of capitation fees from insurance company with which it has contract during the year that provided services for which it billed nine million at standard rate so they build the customers not the customers the patient see as the customers yes but let's call them patients nine million dollar would it would have billed them nine million dollar for those services but based on the agreement between them and D and the

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insurance company they would receive seven million no do we report the nine million or do we report the seven million remember for capitation coverage we record things when cash is received therefore to receive seven million we only have seven million of revenue therefore we debit cash credit capitation revenue seven million which is a revenue account so we don't we don't have to go there and say our standard rate would have been nine million well maybe if there was no insurance you would have built the client nine million but we're talking about capitation revenue so be careful

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and the problem of capitation revenue it means record the couch don't worry about what the what they would have built on okay let's assume the hospital treated charity cases at a standard rate it would have billed them eighty five thousand so for the month they have they service you know so many people and as a result they would have have build them eighty five thousand they don't think they can get money from those people therefore it's considered the charity what journal entry do we make easy there's no journal entry no revenue

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recognized because if you don't think you're gonna get paid don't put the revenue and then take it out just right from the get-go no revenue is recognized okay let's look at more examples health care provider health care provider provided direct here services the patient will and them four hundred thousand this is direct care of which of which of this amount we receive 120 but as a consequence of bad debt and expect to collect a total of three hundred and thirty thousand so we we serviced four hundred thousand worth

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of we provide four hundred thousand worth of services we think we can collect three thirty and we already received 120 so what are the journal entries for something like this well we build the client four hundred thousand debit receivable credit revenue and we hope to to get every penny of it but we think we can only get three thirty therefore debit bad debt expense credit allowance you might be saying why don't we just debit receivable three thirty and credit revenue three thirty why why

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why debit bad debt expense this is an estimate this is how much you think you are not going to be able to collect you may collect more than three thirty you may collect less than three thirty which is different than charity charity care you're not gonna get anything you're not expecting anything you're expecting zero so that's why we report it at gross and write it down then when we receive the cash we debit cash and credit receivable just like any other entry we debit cash credit receivable let's take a look at another example healthcare provider

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provided direct care to patient covered by insurance now here the the the patients they're not paying themselves we're gonna be billing the third party who are members of various health plans for which for which at standard rate it will have cost us 650 however owing to contractual agreement with the payer it actually would actually gonna build them only 480 so if those individuals did not have health insurance we would love them 650 because they have health insurance we build them one-eighty okay how do we book the

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entries for contractual agreement okay I remember for contractual agreement we still have to build it at gross which is six hundred and fifty third party receivable third party revenue not patient receivable not patient receivable this is not patient receivable we're not expecting it from the patient would expect it from the third party the flow is a third party receivable then we record the contractual adjustment the contractual adjustment is one hundred and seventy thousand whatever the contra revenue without the contra receivable then one

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will receive the money we debit the cash we remove this receivable I will remove this receivable and we debit the cash and we credit these and we remove this receivable to sorry we move sorry this contra receivable and this receivable when we receive the cash okay the other two the revenues and the contra revenue will come in the income statement and there will be closed out provided a charity care for which we build them and we would have built them 82,000 what's

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the entry again no journal and no journal entry let's take a look at a capitation example healthcare provider provided capitation fees of 1.4 million from health care plan and provided services to member of those plan for route for which it would have built on points X we would build on one point six by with the capitation fees were only gonna get one point four we don't do anything until we receive the cash so once we receive the cash we never cash one point four we credit capitation

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revenue one point four basically clink up capitation fees are clean cup entries debit cash credit revenue okay versus versus the contractual agreement which we have to have two adjustments it two entries then receive the cash basically three entries let's take a look at indemnity revenue okay remember we recognize revenue when the service is provided no net to contractual agreement just basically the review just to kind of remind you

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if you have any questions about this topic please email me if you happen to visit my website for additional lectures please consider donating if you're studying for your CPA exam as always study hard it's worth it in the next session I will take a look at another topic which is cost reimbursement for Hospital good luck and study hard

Accounting for Health Care Providers | Not for Profit Accounting | CPA Exam FAR

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SENIOR PRESCRIPTION COVERAGE

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