Trying to manage a hospital revenue stream is easier said than done, and with a multitude of payors and federal and state regulations to monitor, it's no wonder a hospital's revenue cycle and financial statements can sometimes be peppered with errors. Jim Grigg, CPA, partner and national healthcare assurance practice leader at Crowe Horwath, shares five of the most common accounting errors hospitals make and what they can do to avoid them.
1. Misstating allowances in the revenue cycle. When a hospital provides services to a patient, the standard charges attached to each procedure or supply are entered into the financial accounting system. Third-party payors such as Medicare or commercial insurers only pay a portion of the hospital's set charge, and the difference between the charge and the amount collected is the receivable, Mr. Grigg explains. Several years ago, many third-party payor contracts were written as a percentage arrangement (i.e., a commercial payor would pay 60 percent of charges for a certain procedure). More recently, however, payors have developed their own fee schedules that vary across the board, and estimating allowances to offset the receivables has become a lot more complex. "Hospitals are recording revenue on a daily basis as patients receive care, but if they're only getting a percentage of that revenue from payors, estimating the allowance on every patient procedure and every day a patient is in the hospital is tremendously complex," Mr. Grigg says. Consequently, this sometimes becomes a large estimate that is often misstated and can have a large impact on earnings.
Solution: Find and implement a revenue cycle tool that allows the hospital to track precisely the billing, payments received, allowances and all other financial data historically by payor. This allows hospitals to look back over a period of time and see exactly how much they are receiving for every dollar they are charging by payor. "That data allows the CFO of a hospital to much more precisely estimate those allowances, and hospitals need that hard data to make estimates," Mr. Grigg says.
2. Failing to remain current with new accounting pronouncements. Hospital CFOs and controllers that do not stay current with accounting pronouncements and guidance set by the American Institute of CPAs and the Financial Accounting Standards Board is a huge mistake, Mr. Grigg says. For example, some hospitals may not realize they can no longer classify bad debt expense as an operating expense on the income statement; instead, it will be an offset to gross patient service revenue. These types of pronouncements cannot go unnoticed, and hospital CFOs and other financial officers should not rely on outside accounting or auditing firms to be their conduit of all things financial. "It's a big deal," Mr. Grigg says. "Audit committees need to hold management responsible for the quality of their financial reporting and for staying current."
Solution: A hospital financial team must stay up-to-date with all of the audit and accounting issues for healthcare providers. This November is a key month, as the AICPA is going to be issuing new guidance on several healthcare accounting items in the form of an updated Audit and Accounting Guide.
3. Allowing credit balances to accumulate in accounts receivable. A credit balance occurs when a receivable is on the books, but all of the payments toward the patient bill add up to more than the receivable. For example, take this scenario: Blue Cross Blue Shield, a smaller payor and the patient's deductible have been paid toward the patient's bill, but the amount collected is greater than the amount owed. Mr. Grigg says this "accounting nightmare" happens all of the time, but hospitals may not monitor credit balances close enough — and they often accumulate to millions of dollars.
Solution: "There have to be processes in place to analyze what's really going on," Mr. Grigg says. "Should the hospital have recognized more revenue? Is it really a liability? Is it an overpayment? Should the money be refunded? Someone has to be on top of all credit balances because it's continuous, and hospitals don't want to be over- or understating their revenue."
4. Accumulation of old, outstanding checks. To say hospitals write a lot of checks may be an understatement. Some of its issued checks are a result of credit balances, which are written out to patients or health insurers for their overpayments. Even if a hospital is doing a great job of managing its credit balances and writing checks to patients for overpaid claims, there are still some pitfalls, Mr. Grigg says. Patients may move or pass away, and consequently, that check never clears. "You have a huge accumulation of old, outstanding checks, and now you've got an accounting challenge because those outstanding checks reduce the cash balance on the balance sheet," Mr. Grigg says.
Furthermore, every state has laws regarding "unclaimed property" that say if amounts are owed to individuals but those individuals cannot be located, then the entity is required to turn the money over to the state, and the state will be in charge of locating the individual. Mr. Grigg says hospitals have a legal liability to inform the different branches of government of what those dollar amounts are, and this can be a daunting challenge.
Solution: Hospital CFOs, controllers and other leaders within the hospital financial department must have policies and procedures in place to stay on top of credit balances and the old, related checks, Mr. Grigg says. "If you don't stay focused, outstanding checks will accumulate, and it will be difficult to straighten it out in the future," he adds. "The department of revenue will send out an agent, and they will audit years of bank activity for these old outstanding checks. There could be fines — it's a bad situation, and it all goes back to credit balances in accounts receivable."
5. Overlooking the capitalization of interest during construction. If a hospital is constructing a new entity, such as a bed tower or parking deck, Mr. Grigg says a hospital CFO must remember that the interest expense the hospital pays on the debt obligation is not reflected as an interest expense on the income statement. Instead, it must be capitalized as a cost of the construction project during the construction period. "Capitalizing the interest during the construction period is often overlooked entirely by hospital management and is commonly an audit adjustment," Mr. Grigg says.
Solution: Before beginning a capital construction project, a hospital's financial staff must consider the need to capitalize construction period interest.
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1. Misstating allowances in the revenue cycle. When a hospital provides services to a patient, the standard charges attached to each procedure or supply are entered into the financial accounting system. Third-party payors such as Medicare or commercial insurers only pay a portion of the hospital's set charge, and the difference between the charge and the amount collected is the receivable, Mr. Grigg explains. Several years ago, many third-party payor contracts were written as a percentage arrangement (i.e., a commercial payor would pay 60 percent of charges for a certain procedure). More recently, however, payors have developed their own fee schedules that vary across the board, and estimating allowances to offset the receivables has become a lot more complex. "Hospitals are recording revenue on a daily basis as patients receive care, but if they're only getting a percentage of that revenue from payors, estimating the allowance on every patient procedure and every day a patient is in the hospital is tremendously complex," Mr. Grigg says. Consequently, this sometimes becomes a large estimate that is often misstated and can have a large impact on earnings.
Solution: Find and implement a revenue cycle tool that allows the hospital to track precisely the billing, payments received, allowances and all other financial data historically by payor. This allows hospitals to look back over a period of time and see exactly how much they are receiving for every dollar they are charging by payor. "That data allows the CFO of a hospital to much more precisely estimate those allowances, and hospitals need that hard data to make estimates," Mr. Grigg says.
2. Failing to remain current with new accounting pronouncements. Hospital CFOs and controllers that do not stay current with accounting pronouncements and guidance set by the American Institute of CPAs and the Financial Accounting Standards Board is a huge mistake, Mr. Grigg says. For example, some hospitals may not realize they can no longer classify bad debt expense as an operating expense on the income statement; instead, it will be an offset to gross patient service revenue. These types of pronouncements cannot go unnoticed, and hospital CFOs and other financial officers should not rely on outside accounting or auditing firms to be their conduit of all things financial. "It's a big deal," Mr. Grigg says. "Audit committees need to hold management responsible for the quality of their financial reporting and for staying current."
Solution: A hospital financial team must stay up-to-date with all of the audit and accounting issues for healthcare providers. This November is a key month, as the AICPA is going to be issuing new guidance on several healthcare accounting items in the form of an updated Audit and Accounting Guide.
3. Allowing credit balances to accumulate in accounts receivable. A credit balance occurs when a receivable is on the books, but all of the payments toward the patient bill add up to more than the receivable. For example, take this scenario: Blue Cross Blue Shield, a smaller payor and the patient's deductible have been paid toward the patient's bill, but the amount collected is greater than the amount owed. Mr. Grigg says this "accounting nightmare" happens all of the time, but hospitals may not monitor credit balances close enough — and they often accumulate to millions of dollars.
Solution: "There have to be processes in place to analyze what's really going on," Mr. Grigg says. "Should the hospital have recognized more revenue? Is it really a liability? Is it an overpayment? Should the money be refunded? Someone has to be on top of all credit balances because it's continuous, and hospitals don't want to be over- or understating their revenue."
4. Accumulation of old, outstanding checks. To say hospitals write a lot of checks may be an understatement. Some of its issued checks are a result of credit balances, which are written out to patients or health insurers for their overpayments. Even if a hospital is doing a great job of managing its credit balances and writing checks to patients for overpaid claims, there are still some pitfalls, Mr. Grigg says. Patients may move or pass away, and consequently, that check never clears. "You have a huge accumulation of old, outstanding checks, and now you've got an accounting challenge because those outstanding checks reduce the cash balance on the balance sheet," Mr. Grigg says.
Furthermore, every state has laws regarding "unclaimed property" that say if amounts are owed to individuals but those individuals cannot be located, then the entity is required to turn the money over to the state, and the state will be in charge of locating the individual. Mr. Grigg says hospitals have a legal liability to inform the different branches of government of what those dollar amounts are, and this can be a daunting challenge.
Solution: Hospital CFOs, controllers and other leaders within the hospital financial department must have policies and procedures in place to stay on top of credit balances and the old, related checks, Mr. Grigg says. "If you don't stay focused, outstanding checks will accumulate, and it will be difficult to straighten it out in the future," he adds. "The department of revenue will send out an agent, and they will audit years of bank activity for these old outstanding checks. There could be fines — it's a bad situation, and it all goes back to credit balances in accounts receivable."
5. Overlooking the capitalization of interest during construction. If a hospital is constructing a new entity, such as a bed tower or parking deck, Mr. Grigg says a hospital CFO must remember that the interest expense the hospital pays on the debt obligation is not reflected as an interest expense on the income statement. Instead, it must be capitalized as a cost of the construction project during the construction period. "Capitalizing the interest during the construction period is often overlooked entirely by hospital management and is commonly an audit adjustment," Mr. Grigg says.
Solution: Before beginning a capital construction project, a hospital's financial staff must consider the need to capitalize construction period interest.
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