Note on Statement 16: Classifying, Valuing, and Analyzing Accounts Receivable Related to Patient Services

This Principles and Practices Board project was undertaken in response to the frequent requests from HFMA members for a standard calculation of "days of revenue in receivables." The board's work on this project indicated that every element of the calculation required standards, which is what this statement provides. Since there have been few standards for accounts receivables related to patient services, the industry follows a variety of practices, which often differ from each other. This statement is intended to provide a framework for enhanced external comparison of accounts receivable related to this very important asset. Thus, the standards decried in this statement represent long-term goals for gradual transition of recordkeeping practices and not a sudden or revolutionary change. The standards described in this statement will provide the necessary framework for the meaningful external comparisons. Furthermore, management's understanding of deviations from these standards will immediately assist in analysis of differences in data between providers.

The provisions of this statement need not be applied to immaterial items.


Statement 16: Classifying, Valuing, and Analyzing Accounts Receivable Related to Patient Services

I. Background and Introduction 

1.1 Accounts receivable related to patient services are one of the largest assets of any institutional healthcare provider.1 There are a number of characteristics of these receivables that are unique to healthcare organizations, and there are significant variations in the way the unique attributes of receivables are handled by different provider organizations. The lack of consistency makes comparisons between organizations less meaningful and, thereby, diminishes the ability to evaluate the effectiveness of the management of this very important asset.

1.2 The lack of clear definitions and consistent handling of various aspects of accounts receivable related to patient services was apparent when, in 1986, the Healthcare Financial Management Association (HFMA) undertook a regular survey of Medicare accounts receivable trends. The objective of this survey was to identify the effect of changes in Medicare payment practices. While the survey yielded useful information, there were difficulties resulting from the lack of common classification and valuation procedures.

1.3 The survey heightened industry interest in sharing receivables information as a means of evaluating collection effectiveness and differences in payment practices among payers. Accordingly, in 1988, HFMA began offering a Receivables Analysis Service, which allows subscribers to submit information about their receivables and receive reports comparing their experience with that of other organizations. Considerable attention is given to clear definitions to enhance consistency among subscribers. This Principles and Practices Board (P&P Board) project builds on and enhances the definitions used in the Receivables Analysis Service.

1.4 Other P&P Board statements have also dealt with attributes of patient service revenue and receivables related to patient services. P&P Board Statement No. 15, Valuation and Financial Statement Presentation of Charity Service and Bad Debts by Institutional Healthcare Providers, discusses the differentiation between charity service and bad debts, valuing and reporting charity service and bad debts, and disclosing information about these amounts in general purpose external financial statements.

1.5 In 1985, P&P Board Statement No. 7,2The Presentation of Patient Service Revenue and Related Issues, was released. Statement No. 7 introduced the ideas that patient service revenue should be reported at the amount a payer has an obligation to pay and that bad debts should be recognized as expenses. These concepts are now generally accepted in the healthcare industry.

1.6 This statement benefits from the previous projects of HFMA and the P&P Board and is intended to provide a basis for meaningful and consistent comparison of accounts receivable related to patient services through clear guidelines for classification, valuation, and analysis. While this statement uses an illustrative chart of accounts to help describe the organization of information discussed in the statement, it is not intended to require adoption of this chart of accounts for internal recordkeeping. The principal purpose of this statement is to provide a framework that will enhance comparability of general purpose, external financial statements and usefulness of inter-institutional comparison reports.

II. Both Revenue and Receivables Must Be Valued and Classified in a Consistent Way 

2.1 For internal recordkeeping, each service or episode of care for each patient results in both revenue and receivables. Because analysis often focuses on the relationship between revenue and receivables over a period of time, it is essential that both sides of the equation be valued in the same way. If receivables are stated at the amount of charges for services, it is important that any analysis compares receivables with services valued on the basis of charges. Similarly, if receivables are valued at the amount which a payer has an obligation to pay, revenue should be valued in the same way. Furthermore, the adjustment from charges to revenue must be the same, and both revenue and receivables should be adjusted at the same time.

2.2 In its Statement No. 14,3 the P&P Board concludes that it is most meaningful to value both revenue and receivables at the amount that a payer has an obligation to pay. Therefore, for general purpose, external financial statements including inter-institutional comparison reports, both revenue and receivables should be valued on the basis of the amount that a payer has an obligation to pay (i.e., the revenue amount). Adherence to this basic guideline will greatly enhance the consistency of reporting over time and the comparability of reports among organizations.

2.3 Consistency of both valuation and classification will be enhanced if services and receivables amounts are adjusted from the charges to the revenue amounts when first classified. Prior to classification, amounts are stated at charges; subsequent to classification, revenue amounts are used. Paragraphs 3.10 and 5.9 discuss transfers of amounts after initial classification.

III. Classification4

3.1 It is customary and meaningful to differentiate revenue between inpatient and outpatient services for both analysis and reporting. (Using the illustrative chart of accounts in Section 6, inpatient revenue is recorded in accounts RV 1xxxx, and outpatient revenue is recorded in accounts RV 2xxxx.)

3.2 A key aide to analysis is to differentiate both revenue and receivables between amounts that are patient-specific and amounts that are not related to specific patients (nonpatient-specific). Patient-specific amounts are defined and discussed in Paragraphs 3.3 through 3.13 of this statement and nonpatient-specific amounts are defined and discussed in Paragraphs 3.14 through 3.17. Differentiation between patient-specific and nonpatient-specific amounts is helpful for inter-institutional comparison reports; the amounts are combined for general purpose, external financial statements. (Using the illustrative chart of accounts in Section 6, patient-specific receivables are recorded in accounts AR 01xxx, patient-specific revenue is recorded in accounts RV x1xxx, nonpatient-specific receivables are recorded in accounts AR 02xxx, and nonpatient-specific revenue is recorded in accounts RV x2xxx.)

Patient-Specific Amounts

3.3 Patient-specific revenue and receivables result from providing services to individual patients in exchange for a promise of payment either from the patient, a guarantor, or another party acting on the patient's behalf. The payment by or on behalf of the patient is directly related to the services to that patient.

Identifying Payers

3.4 Patient-specific amounts are also classified by payer. Amounts can be transferred between payer categories and between patient-specific and nonpatient-specific as described in Paragraph 3.17.

3.5 The patient-specific expected payment amount should be identified by payer using the best information available at the time the amount is classified. The time when this classification is made is discussed in Paragraphs 3.11 through 3.13 of this statement.

3.6 At the minimum, the following payer categories should be used for inter-institutional comparison reports. This degree of detail is not necessary for general purpose, external financial statements; however, footnote disclosure of information about payers is discussed in P&P Board Statement No. 14. (The receivables account number from the illustrative chart of accounts in Section 6 is shown in parenthesis after each payer; the revenue accounts are the same, except they are preceded by RV rather than AR):

  • Medicare standard arrangement (AR xxx1x);
  • Public Aid programs, including Medicaid (Title XIX of the Social Security Act), Aid to Dependent Children, and similar state and local programs (AR xxx2x);Charge-based payments by third parties, such as commercial insurance (AR xxx3x);
  • Risk arrangements with third parties, such as health maintenance organizations (HMO), comprehensive medical plans (CMP), and similar arrangements in which the provider shares risk with the insurer and in which an individual patient-specific payment amount can be identified (ARxxx4x). Third party risk arrangements may be sponsored by Medicare, Medicaid, Blue Cross, commercial insurance companies, unions, and others. All patient-specific risk arrangements, regardless of their sponsorship, should be included in this category. Many risk arrangements are not patient-specific, as is discussed in Paragraph 3.15 of this statement;
  • Third parties other than the above,5 such as preferred provider organizations (PPO), worker compensation programs, Indian Health Service, and CHAMPUS (ARxxx5x); and
  • Self-pay, which includes only those services for which a patient has no third party payment arrangement or plans to handle the relations with a third party payer personally and, thereby, is personally liable for the services rendered (AR xxx6x).

3.7 Providers may find that additional classifications of revenue and receivables are beneficial for internal analysis. The additional classifications might include the organizational operating unit (such as a psychiatric care unit of an acute care hospital), a product line (such as obstetric service), or some combination of these classifications. Payer categories may also be subdivided. For example, it may be desirable to identify the revenue and receivables amounts related to each major risk contract.

3.8 There may be a tendency to minimize the number of classification categories in order to avoid complexity or conflicting criteria. However, recording detailed information initially provides greater opportunity for subsequent analysis. The extent of the classification scheme should consider the implications of avoiding misclassifications, provisions for correcting misclassifications that occur, and analysis that recognizes that misclassifications may exist.

3.9 An organization may find it convenient to maintain various tallies and records to supplement the principal classification scheme. For example, almost any amount, regardless of classification, may result in a time payment arrangement. A supplementary record of amounts being paid in accord with such arrangements may be needed for control purposes. When such tallies and supplementary records are maintained, care should be taken that reports of such amounts clearly indicate that the amounts are included in, and not in addition to, the primary classifications.

3.10 Once a payer has been properly identified, the P&P Board does not believe transfer of the receivables to reflect secondary payers or changes in financial responsibility is essential. Recordkeeping procedures related to identifying changes in payer responsibility are discussed in Paragraph 5.9.

Timing of Classifying Amounts

3.11 The classification should be determined as soon as the payer responsibility can be determined with reasonable accuracy, if possible at the time a patient is registered. The best information for classifying an amount may be available at the time of billing, but it is not necessary to defer classification until the time of billing if adequate information to identify the amount of the payers' financial responsibility is available sooner. The advantages of early classification must be weighed against the practical consideration of inaccurate information about payer responsibility in revenue and receivables.

3.12 In some cases, it is necessary to initially record patient-specific receivables and related revenue that is not classified. For example, payer responsibility may not be clear for inpatients who are not discharged, for inpatients who have been discharged but whose bills to payers have not been processed, for outpatients who are still actively engaged in a treatment program, or for outpatient services for which bills have not been processed. (Using the illustrative chart of accounts in Section 6, receivables not classified are recorded in accounts AR 011xx, and revenue not classified is recorded in accounts RV x11xx.)

3.13 If revenue and receivables are recorded before an amount is classified, the unclassified receivables and related revenue should be transferred to the proper classification as soon as necessary information is available, generally at the time payer responsibility is determined. Methods of estimating the classification of unclassified revenue and receivables and the value of these amounts are discussed in Paragraphs 5.11 and 5.12. Recordkeeping related to the adjustment in value of revenue and receivables at the time of classification is discussed in Paragraph 4.3 (Using the illustrative chart of accounts in Section 6, receivables are transferred from AR 011xx to AR 012xx and revenue from RV x11xx to RV x12xx.)

Nonpatient-Specific Amounts

3.14 Certain third party payments are for services to patients, but do not relate to specific patients. For example, Medicare makes a separate payment for direct medical education. The amount paid relates to cost incurred by the organization and the ratio of Medicare patient services to services provided to all patients. While calculations can be made that relate these payments to individual patients, the analysis of revenue and receivables is not enhanced by such calculations, and they can add significant additional recordkeeping complexity. It is more meaningful, especially for inter-institutional comparison reports, to classify such nonpatient-specific revenue and receivables separate from patient-specific amounts.

3.15 Also, risk6 contracts, such as a contract with a health maintenance organization, may include provisions that relate payment to aggregate services to a group of patients rather than to the service for an individual patient. For example, a risk contract may make payment on a capitation basis rather than for specific services rendered. Therefore, the payment amount does not relate to the services rendered to an individual patient, but rather to the aggregate effect of all individuals covered by the terms of the risk contract. Therefore, it is appropriate to classify these amounts separate from patient-specific revenue and receivables. (In the illustrative chart of accounts in Section 6, nonpatient-specific receivables are recorded in AR 02xxx and nonpatient-specific revenue is recorded in RV x2xxx.)

3.16 Nonpatient-specific revenue and receivables are accrued as earned, such as the Medicare payment for direct medical education.

3.17 Some payment arrangements call for a retrospective settlement for all services provided during the year. For example, in many cases the patient-specific account is merely a vehicle for recording interim payments. Any difference between an interim payment amount and the final settlement amount is transferred from the patient-specific category to the nonpatient-specific category and aggregated for final settlement. (Using the illustrative chart of accounts in Section 6, an amount due from Medicare that was originally classified as patient-specific but which is determined to be nonpatient-specific is transferred from AR 01210 to AR 02120, and a like amount of revenue is transferred from RV x1210 to RV 12120.)

Financial Statement Reclassification

3.18 Some amounts may not be collectible within a year and, therefore, no longer qualify as a current asset. Amounts being paid according to a time payment plan as described in Paragraph 3.9 are an example. If a material portion of receivables is not properly classified as a current asset on a balance sheet date, the amount should be reclassified for general purpose, external financial statements and inter-institutional comparison reports, but this reclassification does not change the recordkeeping or management of the receivables.

IV. Valuing Accounts Receivable 

4.1 Valuing accounts receivable related to patient services in accordance with the following paragraphs will enhance inter-institutional comparison reports. In some cases, as noted in specific paragraphs, the valuation described is required for general purpose, external financial statements.

Valuing Revenue and Receivables at the Expected Payment Amount

4.2 For general purpose, external financial statements, revenue and receivables must be valued at the expected payment amount. (This requirement is discussed in Paragraph 2.2 of this statement.) It is customary for services and receivables to be initially recorded at the charge amount. The charge amount can be adjusted to the expected payment amount (revenue) at the time of classification as described in Paragraph 4.3, or an estimate can be made for general purpose, external financial statement purposes as described in Paragraph 4.5.

4.3 At the time amounts are classified, generally when the payer is identified and the expected payment amount can be determined with reasonable accuracy (see Paragraph 3.11), the receivables amount is restated from charges to the amount for which a payer has a payment obligation (revenue). This entry is also recorded as a charge adjustment (revenue offset). Charges are reduced by the charge adjustment amount for general purpose, external financial statements. (In the illustrative chart of accounts in Section 6, the charge adjustment account for Medicare inpatient revenue is RV 11219.)

4.4 Historical experience or current analysis may show that the expected payment amount may have changed since it was recorded, and it is probable that a different amount will be collected. For example, collection efforts after classification may disclose that coverage was different or the financial status of the patient was different. Therefore, a general adjustment to increase or decrease patient-specific revenue and receivables may be required and is the basis of general purpose, external financial statement amounts. (In the illustrative chart of accounts in Section 6, a general adjustment of this sort involving Medicare would be recorded in accounts AR 01210 and RV x1219.)

4.5 Prior to classification, services and receivables amounts are valued at charges. For general purpose, external financial statements, these charge amounts must be restated to the expected payment amount. This restatement is based on past experience and current analysis. Factors to consider in restating the value of receivables from charges to revenue include the terms of the payment agreement, changes in diagnosis, and so on. A receivables contra account should be used to restate the unclassified patient-specific amount total from charges to revenue with the same amount reflected as a revenue contra amount. (Using accounts in the illustrative chart of accounts in Section 6, this adjustment would involve accounts AR 01109 and RV x1109.)

4.6 Nonpatient-specific amounts are valued at the time of preparing general purpose, external financial statements using the best information available. For example, expected Medicare payments for direct medical education are estimated based upon current law and regulations and such factors as the number of residents in training, cost incurred, and the proportion of Medicare patients served during the period for which payment is determined.

4.7 Receivables related to groups of accounts awaiting final settlement should be adjusted to the amount of settlement that is expected. Revenue and receivables related to managed care contracts for which the payment amount is determined on a group basis should be based on the terms of the contract (such as payment rates and promptness of payment and risk pool arrangements) and the volume of services rendered or expected to be rendered during the period that will influence the payment amount. For example, a contract may pay for services at one rate up to a threshold volume and a different rate for services in excess of that volume. The amount of revenue, therefore, depends on the total expected volume and the rates of payment specified in the contract. Revenue and receivables amounts determined in accordance with the payment agreement rather than the provider's charges are the amounts that should be included in general purpose, external financial statements.

Stop-Loss Settlements

4.8 Probable recoveries on risk contracts from stop-loss settlements should be included in receivables and should reduce stop-loss insurance expense in accord with provisions of P&P Board Statement No. 11. This is the proper basis for general purpose, external financial statements.

Accounts Turned Over to a Collection Agency

4.9 When all collection efforts have been completed, including work by an independent collection agency, uncollectible receivables are written off against the allowance for bad debts. (Using accounts in the illustrative chart of accounts in Section 6, an unpaid self-pay balance that is determined to be a bad debt would be recorded by reducing AR 01260 and charging AR 03200.) If a determination about eligibility for charity service has not been made and the collection process provides information indicating that the amount qualifies as charity service, the amount is removed from the receivables account with an entry to the allowance for charity service.7 Also, the bad debt expense provision should reflect the write-off and recovery experience. (Using the illustrative chart of accounts in Section 6, bad debt recoveries would be recorded in AR 03300.)

Advance and Interim Payments

4.10 Patient advance payments should be offset against the patient-specific receivable at the time of billing for general purpose, external financial statements. Advance payments for services rendered but not billed should also be offset against the patient-specific receivable amount. Unapplied advances are properly reported as a liability, should include only amounts related to future services, and should not include any amounts for services that have already been rendered. (In the illustrative chart of accounts in Section 6, unapplied patient advance payments are included in account LB 01000.)

4.11 Some payers provide an advance in lieu of prompt payment. These advance amounts are adjusted from time to time to reflect the amount of unpaid claims against the specific payer. For general purpose, external financial statements, advances that are subject to offset should reduce the receivables balance, as discussed in Paragraph 4.14. If the advance exceeds the related receivables balance, the excess should be classified as a liability as discussed in Paragraph 4.10.

4.12 General purpose, external financial statements should also report receivables net of any interim payments. Interim payments should be applied to specific patient receivables, if possible, or may be offset against the nonpatient-specific receivables, such as Medicare's interim payments for direct medical education. (In the illustrative chart of accounts in Section 6, unapplied interim or advance payments of nonpatient-specific receivables are included in accounts AR 02180.) If interim payments will apply to specific patient accounts, but inadequate information is available to make specific application, the amount of the unapplied interim payments should be offset against patient-specific receivables for general purpose, external financial statements, including inter-institutional comparison reports. (In the illustrative chart of accounts in Section 6, unapplied payments of patient-specific receivables are included in accounts AR 012x9.)

Charity Service

4.13 Charity service should not be included in general purpose, external financial statements as revenue or receivables. However, it may not always be practical or possible to determine that an amount will qualify as charity when service is rendered. The elimination of charity service from revenue and receivables is a reporting, not a recordkeeping, consideration.8 Accordingly, at the time of service, internal records necessarily include revenue and receivables for all service rendered. When it is determined that an amount qualifies as charity service, the amount is removed from receivables and revenue. (Using the accounts in the illustrative chart of accounts in Section 6, an amount in AR 01100 would be offset by an entry to account AR 04200.) For general purpose, external financial statements and for inter-institutional comparison reports, an estimate of unrecorded charity service included in receivables should be recognized by reducing receivables by the allowance for charity service. Revenue is reduced for the estimated amount of charity service in a manner similar to establishing a bad debt allowance, but as a revenue offset rather than an expense. This adjustment to recognize unrecorded charity service does not change the recordkeeping or management of the receivables. (Using the illustrative chart of accounts in Section 6, revenue is adjusted for the estimated amount of charity service by an entry to account RV 11289 with an offsetting adjustment of receivables by an entry in account AR 04100.)

Credit Balances

4.14 When there is an overpayment on a patient's account, possibly resulting from receipt of payment from more than one payer, the resulting credit balance should be refunded as soon as the appropriate party to receive the refund can be identified. For general purpose, external financial statements, credit balances not refunded may appropriately be offset against amounts due from the same entity only if a legal right of offset exists.9 Credit balances not refunded on a balance sheet date that are not properly offset against the receivables should be reclassified as a liability for general purpose, external financial statement purposes. This reclassification does not change the recordkeeping or management of the receivables. It is most desirable to retain accounts receivable credit balances in the detailed receivables records where they can most easily be related to information about payer responsibility, and the appropriate party to receive a refund can best be determined.

V. Analysis

5.1 In general, revenue and receivables can be analyzed in terms of outcome or process. The objective in management of accounts receivable related to patient services is to maximize collections at the least possible cost. (The costs related to receivables are discussed in Paragraph 5.3).

5.2 Outcome measures include:

a. Turnover, otherwise known as days of revenue in receivables;

b. Collectibility, or the percentage of revenue actually collected; and

c. Productivity, or the cost incurred for the collections obtained.

5.3 While there is a general understanding of the asset value of receivables, there are also costs associated with receivables of institutional healthcare providers including:

a. Opportunity cost, that is, the investment income foregone as a result of having funds tied up in receivables;

b. Administrative cost of managing the receivables records and the collection process;10 and

c. Bad debt expense.

Each of these costs can be quantified, such as defining opportunity cost to equal the yield on an equivalent amount of U.S. Treasury Bills. The total cost of receivables is derived by adding opportunity cost, administrative expense, and bad debt expense. Clear recognition of these costs related to receivables will help managers focus attention on those alternatives that will maximize collections for the least possible cost. Alternatives can be better evaluated when the relationships are clearly understood. For example, a reduction in collection effort may save more administrative cost than the higher bad debt expense. It may initially look like a net cost savings is achieved, but when the opportunity cost of the higher uncollected receivables balances is also considered, a different conclusion may be apparent.

5.4 Process measures provide information about the collection process that will eventually be reflected in outcome measures.

5.5 Both outcome and process analysis can consider the experience of other providers (peer comparison), the organization's historic experience (trend analysis), or other internal or external standards.

Outcome Analysis

5.6 The outcome analysis used most frequently for both internal and external evaluation is turnover, or days of revenue in receivables. Both peer comparisons and trend analysis are more meaningful if a standard method of calculation is used. The following standard method of calculation is recommended. (If a different calculation method is used, it should be clearly described in reports prepared for inter-institutional comparison.)

Accounts Receivable Turnover = Accounts Receivable11 divided by Average Daily12 Revenue13

5.7 The daily revenue amount used in the turnover calculation should be the average during the most recent three-month period. The most recent three months is selected as the calculation standard to highlight long-term trends and avoid the distortions of short-term fluctuations. By using average daily revenue for the most recent three months, receivables are also evaluated in terms of the revenue earned during the period the receivables represent.

5.8 Another important outcome measure is collectibility, which is calculated by dividing bad debt expense for any specified period of time by revenue during the same period of time. Dividing bad debt expense for the most recent year by revenue for the same period is recommended as a standard for inter-institutional comparison reports. Using bad debt expense for a year is recommended because the adequacy of the allowance for bad debts should be evaluated prior to making this calculation to ensure that the amount recorded as bad debt expense represents current experience and this evaluation is most thoroughly done annually.

Component Analysis

5.9 If analysis involves only a component of revenue or receivables, such as amounts related to a specific payer, to a product line, or to an operating unit, it is essential that the classification of both revenue and receivables for the component, such as the payer, be consistent. Current recordkeeping systems often transfer receivables from one payer category to another to reflect the payer with the primary remaining financial responsibility. For example, once Medicare has paid its share of a patient's bill, the remaining receivables balance may be transferred from Medicare to another third party or the self-pay classification. Currently, it is unusual for recordkeeping systems to transfer revenue when receivables are transferred. Therefore, many types of analysis that relate revenue and receivables of specific payers are distorted by the differences in classification of the two amounts. This statement provides guidelines for approximating a consistent classification of revenue and receivables if the recordkeeping system does not transfer revenue when receivables are transferred.

5.10 If current recordkeeping practices do not result in consistent classification of revenue and receivables, adjustments for analytic reports based on a closed account analysis or current cash receipts analysis should be made. A closed account analysis is discussed in Paragraph 5.11 and is illustrated in the appendix of this statement. A current cash receipts analysis is discussed in Paragraph 5.12.

5.11 In order to aid in the analysis of components of revenue or receivables, a regular process of closed account analysis is suggested. A closed account analysis identifies, for each account or a representative sample of accounts, the payer identified at the time the revenue amount is first classified, the amount of charges and the nature of all charge adjustments, and the source of actual payments received for the account. Such analysis may disclose, for example, that 20 percent of amounts classified as Medicare are received from the patient as payment for deductibles and coinsurance. The closed account analysis results can be used to adjust the classification of revenue that has not been transferred to mAudio Webcasth changing payer responsibility. For example, using the previous example, 20 percent of revenue classified as Medicare would be adjusted to self-pay for purposes of analysis of days of Medicare revenue in Medicare receivables. Also, the closed account analysis results can be used to make interim classifications of unclassified revenue and receivables for general purpose, external financial statement purposes as discussed in Paragraphs 3.12 and 3.13 or estimate the settlement of uncollected amounts. An illustration of a closed account analysis and description of its use is included in the appendix.

5.12 Another method of estimating the effect of changing payer responsibility, for the purposes described in Paragraph 5.11, is the current cash receipts analysis. A current cash receipts analysis identifies the actual payer of amounts during a sample time period and compares the actual payer with the payer identified at the time of classification. This analysis may show, for example, that 20 percent of payments of amounts classified as Medicare are received from the patient as payment for deductibles and coinsurance. The results of a current cash receipts analysis can be summarized in a format similar to that illustrated in the appendix, and the results of the analysis are used in the same way as described in Paragraph 5.11.

Process Analysis

5.13 Process analysis includes such measures as the number of days between service and billing, the dollar value of amounts in various collection steps, the number of billing and collection activities accomplished, the number of successful collection efforts, the number and dollar value of payments processed, and the number and dollar value of accounts processed.

VI. Illustrative Chart of Accounts

6.1 The accounts that are necessary to record revenue and receivables as described in this statement are listed below. This is only an illustrative chart of accounts, and necessary accounts can be incorporated in each organization's chart of accounts in a manner that best meets the organization's recordkeeping and reporting needs. It is not intended to require adoption of this chart of accounts for internal recordkeeping. An x in one of the following account numbers indicates that more than one number can be used in that position. For example, account AR 01xxx introduces a series of accounts, all starting with the same number and all relating to patient-specific receivables. Similarly, RV112x9 indicates that there are several charge adjustment accounts and the next to the last number changes to indicate the type of adjustment.

6.2 Essential accounts have BOLD account numbers. There are many possible optional additional accounts. A few are shown below and are not in bold.

AR Accounts Receivable Related to Patient Services

AR 01xxx  Patient-specific receivables
AR 01100  Not classified, valued at charges
AR 01101  Patient advance payments related to services included in AR 01100
AR 01109  Allowance for charge reductions, amounts not classified
AR 012xx  Classified by payer, valued at payment obligation
AR 01210  Medicare standard arrangement
AR 01219  Unapplied interim payments
AR 01220  Public Aid programs (Medicaid, and so on)
AR 01229  Unapplied interim payments
AR 01230  Charge-based payments by third parties (commercial insurance, and so on)
AR 01239  Unapplied interim payments
AR 01240  Risk arrangements with third parties (HMO, CMP, and so on)
AR 01249  Unapplied interim payments
AR 01250  Other third parties (PPO, CHAMPUS, and so on)
AR 01259  Unapplied interim payments
AR 01260  Self-pay
AR 01290  Allowance for nonpayer-specific payment adjustments
AR 02xxx  Nonpatient-specific receivables
AR 02100  Medicare
AR 02110  Direct medical education
AR 02120  Final settlement for 19xx
AR 02130  Bad debts
AR 02180  Unapplied interim or advance payments
AR 02190  Allowance for dispute resolution
AR 02200  Non-Medicare
AR 02210  Stop loss insurance recoveries
AR 02280  Unapplied interim or advance payments
AR 02290  Allowance for dispute resolution
AR 03000  Allowance for bad debts
AR 03100  Additions to allowance
AR 03200  Specific amounts written off
AR 03300  Recoveries of amounts previously written off
AR 04000  Allowance for charity service
AR 04100  Additions to allowance
AR 04200  Specific amounts reducing receivables

LB Liabilities

LB 01000 Unapplied patient advance payments

RV Patient Service Revenue

RV 1xxxx    Inpatient
RV 11xxx    Patient-specific
RV 11100   Not classified, valued at charges
RV 11110   Not discharged
RV 11120   Discharged, not billed
RV 11109   Provision for charge reductions, amounts not classified
RV 112xx   Classified by payer, valued at charges
RV 11210   Medicare standard arrangement
RV 11220   Public Aid programs (Medicaid and so on)
RV 11230   Charge-based payments by third parties (commercial insurance, and so on)
RV 11240   Risk arrangements with third parties (HMO, CMP, and so on)
RV 11250   Other third party payments (PPO, CHAMPUS, and so on)
RV 11260   Self-pay
RV 112x9   Charge adjustments
RV 11219   Medicare standard arrangement
RV 11229   Public Aid programs (Medicaid and so on)
RV 11239   Charge-based payments by third parties (commercial insurance, and so on)
RV 11249   Risk arrangements with third parties (HMO, CMP, and so on)
RV 11259   Other third party payments (PPO, CHAMPUS, and so on)
RV 11289   Provision for charity service
RV 11299   Nonpayer specific adjustment
RV 12xxx   Nonpatient-specific
RV 12100   Medicare
RV 12110   Direct medical education
RV 12120   Final settlement for 19xx
RV 12190   Provision for dispute resolution
RV 12200   Non-Medicare
RV 12290   Provision for dispute resolution
RV 2xxxx   Outpatient
RV 21xxx   Patient-specific
RV 21100   Not classified, valued at charges
RV 21110   In treatment
RV 21120   Treatment complete, not billed
RV 21109   Allowance for charge reductions, amounts not classified
RV 212xx   Classified by payer, valued at charges
RV 21210   Medicare standard arrangement
RV 21220   Public Aid programs (Medicaid, and so on)
RV 21230   Charge-based payments by third parties (commercial insurance, and so on)
RV 21240   Risk arrangements with third parties (HMO, CMP, and so on)
RV 21250   Other third party payments (PPO, CHAMPUS, and so on)
RV 21260   Self-pay
RV 212x9   Charge adjustments
RV 21219  Medicare standard arrangement
RV 21229  Public Aid programs (Medicaid, and so on)
RV 21239  Charge-based payments by third parties (commercial insurance, and so on)
RV 21249  Risk arrangements with third parties (HMO, CMP, and so on)
RV 21259  Other third party payments (PPO, CHAMPUS, and so on)
RV 21289  Charity service
RV 21299  Nonpayer-specific reductions
RV 22xxx  Nonpatient-specific
RV 22100  Medicare
RV 22110  Direct medical education
RV 22120  Final settlement for 19xx
RV 22190  Provision for dispute resolution
RV 22200  Non-Medicare
RV 22290  Provision for dispute resolution

EX Expenses

EX 10090 Provision for bad debts, inpatient services
EX 20090 Provision for bad debts, outpatient services
EX 30000 Stop-loss insurance expense
EX 30090 Stop-loss insurance recoveries

VII. Appendix: Closed Account Analysis

In order to improve the data available for classification of accounts receivable, and to aid in the analysis of accounts receivable, a regular process of closed account analysis is suggested. A closed account analysis identifies, for each account or a representative sample of accounts, the payer identified at the time the revenue amount is classified, the amount of charges and the nature of all charge adjustments, and the source of actual payments received for the account.

A closed account analysis of a single account might take the following form:

Payer initially identified __________________________

Amount paid by each payer:

Medicare standard arrangement ___________

Public Aid programs ___________

Charge-based payments ___________

Risk arrangements ___________

Other third parties ___________

Self-pay ___________

Total of all payments ___________

Adjustments to charges: ___________

Required by Medicare ___________

Required by Public Aid ___________

Charge-based payment

Risk arrangement ___________

Other third parties ___________

Total of all charge adjustments ___________

Reductions for charity ___________

Amounts written off to allowance for bad debts ___________

Total of above equals the original charge amount ___________

A matrix summary of individual closed account analysis by payer could take the following form. The amount in each box is the total dollar amount and also the percent of the column total.

  Payer Initially Identified Total
Medicare Public Aid Charge Based Risk Based Other 3rd Party Self-pay  
Amount paid by payer  
   Medicare
   Public Aid
   Charge-
   based
   Risk   arrangements  
   Other 3rd
   parties
   Self-pay
   Total
   payments
Charges
adjustments
   Medicare
   Public Aid
   Charge-
   based
   Risk
arrangements
   Other 3rd
   parties
   Total
   adjustments
Charity
Bad debts
TOTAL

 

This type analysis may disclose, for example, that 20 percent of amounts identified as Medicare are received from the patient as payment for deductibles and coinsurance.

The percentage of payment, adjustment, and write off for each payer shown in the matrix can be used to estimate the settlement of uncollected amounts that are classified by payer or of amounts that have not yet be classified.

1992-1993 Principles and Practices Board Members

Edmund R. Abel, FHFMA, CMPA, CPA
Paul R. DeMuro, FHFMA, CMPA, CPA
John R. Doidge, FHFMA, CMPA
Richard J. Donoghue, CPA
Terry E. Duis, FHFMA, CPA
Thomas H. Kohl, FHFMA, CMPA, CPA
Richard L. Marrapese, CPA
Thomas F. McNulty, CMPA
David B. Petrie, FHFMA, CMPA
Suzanne M. Petru, FHFMA, CPA
L. Vann Seawell, DBA, CPA
James G. Sullivan, CPA

 

HFMA Staff

Ronald R. Kovener, FHFMA, CAE

 

Footnotes

1. Examples of institutional healthcare providers are hospitals, continuing care retirement communities, skilled nursing facilities, subacute care facilities, multispecialty clinics, and freestanding ambulatory centers.

2. P&P Board Statement No. 7, The Presentation of Patient Service Revenue and Related Issues, has been replaced by P&P Board Statement No. 14 with the same conclusions regarding the basis of valuing revenue reported in general purpose, external financial statements and classifying the provision for bad debts as an expense. P&P Board Statement No. 14 conforms the reporting of charity service to AICPA's Audit and Accounting Guide "Audits of Providers of Health Care Services," concluding that charity service is not a receivable and is not revenue or expense.

3. Traditionally, institutional healthcare provider financial statements have included references to the terms "gross revenue" and "net revenue." In accordance with the definition of revenue included in Principles & Practices Board Statement No. 14, The Presentation of Patient Service Revenue and Related Issues and the AICPA healthcare audit guide, this statement uses the term "revenue" to mean the amount that a payer has a responsibility to pay is analogous to the traditional meaning of "net revenue." In this statement, the term "charges" is analogous to the traditional meaning of "gross revenue."

4. In this statement, the term "classification" includes identification of revenue and receivable amounts as inpatient or outpatient, as patient-specific or nonpatient-specific, by payer, by location in the financial statement (i.e. current asset, liability), and by other criteria.

5. Including payment arrangements based on fee schedules unrelated to the provider's charges.

6. P&P Board Statement No. 11, Accounting and Reporting by Institutional Healthcare Providers for Risk Contracts, discusses types of risk contracts, the time when revenues are recognized in relation to these contracts, and other matters related to risk contracts.

7. P&P Board Statement No. 15, Valuation and Financial Statement Presentation of Charity Service and Bad Debts by Institutional Healthcare Providers, describes criteria for classifying amounts as charity service, the timing of that determination, and accounting procedures related to both charity service and bad debts.

8. P&P Board Statement No. 15 discusses the accounting and financial reporting of charity service.

9. Principles & Practices Board Statement No. 6, How to Measure Working Capital: Classification and Definition Issues, discusses the offsetting of a simultaneous due-to and due-from amounts for a single entity. FASB Technical Bulletin No. 88-2 also discusses the conditions that must be met to offset due-to and due-from amounts.

10. Administrative costs include personnel and related direct expenses of recording charges, payments, and allowances; related data entry, software, and hardware; processing bills and refunds; and collection including related fees by collection agencies and attorneys.

11. Accounts receivable should include patient-specific amounts less all applied and unapplied interim or advance payments, credit balances, and all allowances including amounts for dispute resolution, for bad debts, and for charity service. Advance payments or credit balances that are appropriately classified as a liability are not part of this calculation. While accounts receivable is reduced by the allowance for bad debts, and revenue is not reduced by the provision for bad debts, this treatment is consistent with the practices of other businesses. Consistency in the calculation for internal trend comparison and for inter-institutional comparison is more important than the specific data elements included in the calculation.

12. The average daily amount is determined by dividing revenue for the three-month period ending on the date of the calculation by the number of days in the three-month period.

13. Revenue includes patient-specific amounts whether or not classified. The charge amount is reduced by all actual and estimated adjustments to state revenue at the amount that a payer has an obligation to pay. Revenue is not reduced by the provision for bad debts, an expense account.

 

Publication Date: Saturday, May 01, 1993