Prof. Quan: Financial managers classify assets in order to evaluate the health of the organization by examining the specific performance of each type of the organization’s assets.
Assets typically noted on the healthcare organization’s balance sheets are current assets, receivables, inventory, prepaid expenses which are short-term assets, investments, and plant and equipment which are long-term assets. Common liabilities include accounts payable, accrued expenses payablewhich are short-term liabilities, deferred revenue, and long-term liabilities.
In terms of net equity, stocks we previously mentioned are also included on the balance sheet. Cash and cash equivalents include coin, currency, savings accounts, CDs, and temporary marketable securities.
Accounts receivables for the healthcare organizations are a little different for the healthcare organization when compared to other types of organizations. Generally speaking, healthcare organizations actually receive substantially lower amounts than what is charged to its customers than other types of organizations.
The healthcare organization uses allowances to restate its receivables as a result of its low collected amounts versus its billed amounts. The allowances are categorized as charity allowances, courtesy allowances, doubtful account allowances, and contractual allowances. Health services managers are tasked to make sure that allowances are not so large that they do not cover the actual cost of the service provided.
Sophia: So, Professor Quan…can you explain the allowances?
Prof. Quan: Absolutely!The charity allowance applies the difference between established rates and the amount that is actually charged to a financially indigent patient. There are some healthcare facilities that adjust their fees for those who are considered to have incomes below a standard, such as the poverty level.
To determine the allowance, the discounted rate is deducted from the initial price. In terms of the courtesy allowance, providers may grant a special discount to other providers. The difference between the list price and the discounted amount is considered the courtesy allowance.
Tyler (interrupts): Just to be clear, a courtesy discount is given for other professionals?
Prof. Quan: Yes, we see it quite often where a doctor who is treating another doctor offers a professional courtesy discount. This is very common…sometimes employees are granted courtesy discounts as well.
The doubtful account allowance is interesting because the allowance is based on the provider’s belief that the billed amount, although discounted may never be recouped because a patient is medically indigent. Then there is the contractual allowance. This particular allowance is actually the most common. It is the difference between the list charge and the contract charge between the provider and the third party payer.
Lauren: I am still not quite clear on the doubtful account allowance. Can you provide an example?
Prof. Quan: Sure….Let’s assume that a medically indigent patient receives care that totals one-hundred dollars. The provider may recognize that the patient is medically indigent and may offer to charge the patient half of the total bill.
The provider will bill the patient, but may feel as though the patient may not pay the fifty-dollars because of his or her financial challenges, under this circumstance, the fifty-dollars will be entered as a doubtful account allowance. This basically means that there is no reasonable expectation of payment.
The allowance must be carefully reviewed as significant increases in the allowance may affect the reliability of the organization’s cash flow.
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