Bad Debt and Charity Care Reporting

Ask the Experts: Analyzing Bad Debt

August 14, 2018 3:28 pm

Our healthcare system is looking to find best practices for a model to assess a bad-debt reserve related to self-pay and free-care business. What are best practices related to aging accounts receivable buckets and determination of reserve rate-based time frames (e.g., 12-month rolling)?

Answer 1: This report covers changing rules related to revenue recognition that may impact financial reporting going forward. Note that governmental organizations will not fall under this standard, at least not yet.

This question was answered by: David A. Williams, FHFMA, CPA, partner, Horne LLP, and is a member of HFMA’s Mississippi Chapter.

Answer 2: Based on my experience, the valuation of accounts receivable is extremely important for healthcare providers. In past years, I saw the careers of two otherwise excellent CFOs be damaged by a surprise in the evaluation of accounts receivable at the conclusion of the annual audit. In each case, the CFO lost his job.

A number of providers where I have worked have engaged their auditors for a quarterly review of the valuation of accounts receivable. If done properly, the quarterly review should minimize the chances of an unfortunate surprise in the valuation of accounts receivable at year-end.

Some providers update monthly a graph of the number of days of revenue in accounts receivable. The graph shows the results for both the number of days using gross receivables and gross revenues and the number of days using net receivables and net revenues. These two ratios should be very similar each month and should also be following similar trends from month to month. Any diversion on the graph should be a red flag that prompts immediate attention.

The use of 12-month rolling totals for the monthly analysis for various components of accounts receivable and other areas related to receivables and revenue is a technique that I believe is underutilized by many providers. This technique not only provides an early warning of changes in trends but also avoids incorrect interpretations that can happen during the year due to seasonal factors.

Finally, it is good to check regularly on how bad debts are defined and written off by provider staff. For example, in some hospitals, it is not unusual to find cases that were totally denied by Medicare being identified and written off incorrectly as Medicare bad debts rather than being identified as denials that should be investigated and perhaps rebilled.

This question was answered by: Robert J. Ellertsen, FHFMA, a former hospital CFO with more than 35-years of experience in healthcare finance, and a member of HFMA’s Massachusetts-Rhode Island Chapter.

Answer 3: We built a spreadsheet model that incorporates historical data and is updated each month. It uses a rolling 12-month time frame. Essentially, it looks at how the gross charges booked 12 months ago ended up getting disposed of (i.e., payment or allowance or bad debt or charity). We developed it years ago on the professional billing side during discussions with one of our internal auditors. We then built it for the hospital side as well. It took some time to get our finance folks and external auditors to see how well it predicted actual results. The prior process was more primitive but more familiar to them.

I don’t know if it is best practice, but as with any predictive tool, you can go back and see how well any proposed methodology predicts current results.

This question was answered by: Ruth Landé, vice president, patient revenues, Memorial Sloan-Kettering Cancer Center, and a member of HFMA’s Metropolitan New York Chapter.

What do you think? Please share your thoughts on this question in the comments section below.  

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