New rule will change how bad debt is re­ported

New FASB rule will al­ter how bad debt is re­ported

Modern Healthcare - - MODERN HEALTHCARE - Vince Gal­loro

One of the prom­ises of health­care re­form is that ex­pand­ing in­sur­ance cov­er­age will lower the amount of bad debt that hos­pi­tals need to write off for un­paid pa­tient bills. A full two years be­fore the re­form act boosts cov­er­age, how­ever, the Fi­nan­cial Ac­count­ing Stan­dards Board will make bad-debt ex­pense dis­ap­pear—from health­care or­ga­ni­za­tions’ in­come state­ments, at least.

In July, FASB (pro­nounced “FAZ-bee”) is­sued a new rule in its gen­er­ally ac­cepted ac­count­ing prin­ci­ples, or GAAP, that is spe­cific to health­care or­ga­ni­za­tions for their ac­count­ing treat­ment of bad debt. Rather than re­port bad debt as an ex­pense item to be sub­tracted from net rev­enue, the es­ti­mate of amounts that a hos­pi­tal op­er­a­tor doesn’t ex­pect to col­lect must be de­ducted from gross pa­tient rev­enue as part of the cal­cu­la­tion of net pa­tient rev­enue. The new rule also re­quires greater dis­clo­sure of the pro­cesses the or­ga­ni­za­tion uses to es­ti­mate bad debt, such as its re­view of col­lec­tions his­tory.

The change goes into ef­fect for fis­cal years that be­gin af­ter Dec. 15 for any health­care or­ga­ni­za­tion that has pub­lic se­cu­ri­ties, such as in­vestor-owned hos­pi­tal com­pa­nies’ eq­uity or tax-ex­empt sys­tems’ mu­nic­i­pal bonds. Or­gani- za­tions with no pub­lic se­cu­ri­ties get an additional year to make the change. Health­care or­ga­ni­za­tions are al­lowed to adopt the rule early. Van­guard Health Sys­tems, Nashville, adopted the new treat­ment for its fis­cal year that be­gan July 1, for ex­am­ple.

For Chris­tus Health, FASB’s change is just catch­ing up to what the Irv­ing, Texas, sys­tem al­ready be­lieved was best prac­tice, says Kim Reynolds, sys­tem se­nior di­rec­tor of fi­nan­cial reporting and cor­po­rate con­troller. Chris­tus has been pro­vid­ing rev­enue on a cash col­lec­tions ba­sis, or cash rev­enue, as an additional mea­sure to its board mem­bers, rat­ings agen­cies and bond in­vestors for four years, Reynolds says.

“I think it’s a more ap­pro­pri­ate treat­ment, and that’s why we’ve been do­ing it that way for a while for any­body who would lis­ten,” she says. “It will re­ally re­flect from the rev­enue per­spec­tive what you ac­tu­ally ex­pect to col­lect. It was a lit­tle mis­lead­ing be­fore. Rev­enue was higher, but there was this big ex­pense.”

The new ac­count­ing rule is ac­tu­ally a case of go­ing back to the fu­ture, says Rick Gundling, vice pres­i­dent of health­care fi­nan­cial prac­tices at the Health­care Fi­nan­cial Man­age­ment As­so­ci­a­tion. In the early to mid-1990s, FASB changed the ac­count­ing treat­ment of bad debt to make it an ex­pense, he says. “The change in the ’90s was made to make it com­pa­ra­ble to other in­dus­tries,” Gundling says, “but in health­care, the num­ber grew so large that it was just dis­torted.”

Prior to that change, ac­coun­tants net­ted out bad debt from gross rev­enue just as they net out con­trac­tual al­lowances from gross charges for man­aged-care pay­ers and char­ity care in or­der to pro­duce net rev­enue, Gundling says. The new rule es­sen­tially treats bad debt the same way, but re­quires it to be a sep­a­rate line item above net rev­enue and also re­quires greater dis­clo­sure about poli­cies for rec­og­niz­ing rev­enue by payer class and any sig­nif­i­cant changes to the qual­i­ta­tive or quan­ti­ta­tive mea­sures by which a health­care or­ga­ni­za­tion es­ti­mates its al­lowance for doubt­ful ac­counts, ac­cord­ing to FASB.

The HFMA agreed with chang­ing the pre­sen­ta­tion of bad debt in its com­ment let­ter to FASB on the re­cent change, Gundling says. Bills for unin­sured pa­tients al­ways have been ques­tion­able un­der GAAP rev­enue recog­ni­tion stan­dards, which in­clude that the col­lectibil­ity of rev­enue be rea­son­ably as­sured in or­der to book the rev­enue, he says.

Dar­ren Lehrich, a health­care stock an­a­lyst and man­ag­ing di­rec­tor for Deutsche Bank Se­cu­ri­ties, says two trends in the in­dus­try have, over time, dis­torted the bad-debt ex­pense re­ported on in­come state­ments and made them less use­ful met­rics. “I think that’s what this change is all about,” Lehrich says.

One trend is that many com­pa­nies are ap­ply­ing man­aged-care-like dis­counts to unin­sured pa­tients when they be­lieve there is at least a chance of col­lect­ing part of the bill, Lehrich says.

Tenet Health­care Corp., Dal­las, was the first in­vestor-owned com­pany to start a dis­count pro­gram, which it im­ple­mented in 2004, and over the next few years, most of the rest of its peer com­pa­nies fol­lowed suit. The re­sult of these poli­cies, Lehrich says, is to sig­nif­i­cantly lower bad-debt ex­pense as a per­cent­age of net rev­enue, which is the tra­di­tional way that an­a­lysts have looked at bad-debt ex­pense to com­pare in­vestor-owned hos­pi­tal com­pa­nies.

Be­fore, for ex­am­ple, if the bill was $10,000, the com­pany would book $10,000 of rev­enue, and then end up writ­ing off $6,500 as bad debt if it col­lected only $3,500, he says. Now, the com­pany might ap­ply a 60% dis­count, so it books $4,000 of rev­enue and col­lects $3,500, and bad debt is only $500.

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