Accounting Procedures for Government-Operated Healthcare Facilities
For the month of April, I will be sharing things I’ve written in the process of obtaining my MS in Health Care Administration which I finished up this past fall.
Government-operated healthcare facilities can be run the by state or federal government. Rules can change based on which group is involved. With around 20% of urban hospitals falling under government rule, it’s imperative to understand how accounting works in government-operated healthcare facilities (Horwitz, 2005). There are differences related to actual accounting, funds, and reporting (Rose & Office of the Controller, 2007, p. 11). Overall, the process is straightforward once an understanding of the guidelines and rules is had.
Funds
Governmental health care organizations utilize a method of accounting called fund accounting (Elmerraji, n.d.). Unlike for-profit organizations, the goal of these is not to make money or profit (Elmerraji, n.d.). Instead of profit, then, a surplus may lead to lowered taxes for taxpayers in the area (Elmerraji, n.d.). Funds can be separated into governmental, proprietary, and fiduciary categories.
Governmental Funds
Governmental funds are funds that are generally “tax supported activities” (Rose & Office of the Controller, 2007, p. 14). These funds come from sources such as taxes, grants, and investments (Rose & Office of the Controller, 2007, p. 15). Funds include basic/general funds, special revenue, and others (Washington Office of Financial Management, 2015). These funds must have budgets in place, both to keep track of spending and to ensure proper accounting rules are followed (Rose & Office of the Controller, 2007, p. 15). For example, grants are one time of special fund that requires separate accounts and accounting measures in order to satisfy accounting and purchasing rules (Rose & Office of the Controller, 2007, p. 16). The focus with accounting measures here is on fiscal accountability (Rose & Office of the Controller, 2007, p. 37). Required statements for governmental funds include the “balance sheet, statement of revenues, expenditures, and changes in fund balances” (Rose & Office of the Controller, 2007, p. 37).
Proprietary Funds
Proprietary funds help account for actions that border on business-like, such as “trash collection” (Elmerraji, n.d.). These can be separated into “internal service funds” and “enterprise funds” (Rose & Office of the Controller, 2007, p. 19). Internal service funds are those applied to business-like expenses within the government, such as locksmith services on college campuses. Enterprise funds are those which involve customers outside of the government (Rose & Office of the Controller, 2007, p. 19). The focus with regard to accountability here is on operations (Rose & Office of the Controller, 2007, p. 37). Required financial statements include the statement of net assets, statement of revenues/expenses/changes in fund net assets, and statement of cash flows (Rose & Office of the Controller, 2007, p. 37).
Fiduciary Funds
Fiduciary funds are those “held in the interest of a third-party,” like those utilized for retirement funds (Elmerraji, n.d.). Pensions are the most common form of these (Rose & Office of the Controller, 2007, p. 20). Additional kinds include investments on behalf of others, private-purpose, and agency funds (Washington Office of Financial Management, 2015). The focus regarding accountability here is on operations (Rose & Office of the Controller, 2007, p. 37). Necessary financial statements include the statement of fiduciary net assets and a statement of changes in fiduciary net assets (Rose & Office of the Controller, 2007, p. 37).
Accounting Methods
The measurement focus helps accountants to determine “what financial transactions and events will be recognized in the accounting records and reported in the financial statements” (Washington Office of Financial Management, 2015). The two most important focuses are the flow of economic resources and the flow of current resources (Washington Office of Financial Management, 2015). The flow of economic resources takes into account assets and liabilities of all types, while the flow of current resources focuses on cash or assets that are easily convertible (Washington Office of Financial Management, 2015). The modified version, used for governmental funds, only counts revenue when it is received and available for use (Washington Office of Financial Management, 2017).
Under the basis of accounting, there are two ways in which government organizations can account for revenues – on an accrual or modified accrual basis (Washington Office of Financial Management, 2015). Accrual is used for proprietary and fiduciary funds (Washington Office of Financial Management, 2017). This method revenues as they’re earned, even if the collection time is much longer.
Generally Accepted Accounting Principles (GAAP) state that governments should have budgets, though this is not technically required (Washington Office of Financial Management, 2015). In order to properly balance the books, transactions are entered using the double entry accounting system (Rose & Office of the Controller, 2007, p. 40). This means that each transaction has both a debit and credit.
GASB
The Governmental Accounting Standards Board (GASB) was set up in 1984 to “build an effective structure for creating and implementing consistent accounting standards for state and local governments” (FAF: Financial Accounting Foundation, n.d.). GASB is run by seven people, including a chairperson and board members chosen by the Financial Accounting Federation (FAF: Financial Accounting Foundation, n.d.). The standards set up by GASB help others to “shape public policy and make investments” (FAF: Financial Accounting Foundation, n.d.). GASB sets up GAAP for the United States’ governments, both at a state and federal level (FAF: Financial Accounting Foundation, n.d.). GAAP requires that governments follow GASB statements first and other pieces, such as technical bulletins, second (Washington Office of Financial Management, 2015).
GASB asks governments to publish a Comprehensive Annual Financial Report (CAFR) (Rose & Office of the Controller, 2007, p. 139). This is generally done by what is considered to be the primary government, but includes all funds under their umbrella (Washington Office of Financial Management, 2015). For example, this would be like the State of Wisconsin reporting for all organizations under the state’s financial umbrella, from the University of Wisconsin to the Department of Natural Resources to UW Health. The CAFR consists of three sections (Washington Office of Financial Management, 2016). The introduction is straightforward and can include a letter, certificates, a list of elected officials, and an organization chart (Washington Office of Financial Management, 2016). The financial section includes analyses and a variety of reports from basic financial statements to detailed information on various funds (Washington Office of Financial Management, 2015). This section also includes the Management’s Discussion and Analysis (MD&A). This report contains a narrative on the financial records being presented (Washington Office of Financial Management, 2015). Finally, there is a section that includes statistics and demographics (Washington Office of Financial Management, 2015).
There have been numerous clarifications to ensure government healthcare organizations are aware they must follow GASB standards, such as GASB statement 20 (Duis, 1994). Statement 20 clarifies SAS 69, stating that GASB standards apply to healthcare organizations (GASB, 1993). This was initially slightly unclear (Duis, 1994).
One major difference between other organizations and healthcare organizations run by the government is that employees at the hospital may not actually be employed by the hospital. At the University of Wisconsin’s health system – UW Health – this is the case . Physicians are employed jointly by the UW Medical Foundation and the state government. Other organizations have employees “organized into a separate entity that bills for their services, or they can be employees of the hospitals with their costs built into the hospital’s costs and revenues for their services credited to the hospital as well” (Needleman). This can affect the profits and expense reports for these organizations, leaving “some of their costs unreported on their revenue and expense statement or balance sheet, or results in apparently higher expenses” (Needleman). Government healthcare organizations only have to report net assets (restricted and unrestricted), investments/activities, cash flows, and debt (Horowitz, 2010). Still, they must report both “operating and nonoperating activities” (Horowitz, 2010). In-kind donations are reported “at their fair value” (Horowitz, 2010).
Conclusion
Government health institutions receive both “income and property tax exemptions” (Horwitz, 2005). Because of this, they must be transparent in their financial dealings, even more so than for-profit and private healthcare organizations. Therefore, it is imperative for governmental organizations to follow the rules set by the GASB and others found under GAAP guidelines. Methods outlined here show only rules which apply to all such organizations, but individual states may have further requirements.
References
Duis, T. (1994). Unravelling the confusion caused by GASB, FASB accounting rules. Journal Of The Healthcare Financial Management Association, 66, 68-70.
Elmerraji, J. (n.d.). Navigating Government And Nonprofit Financial Statements. Retrieved from Investopedia: http://www.investopedia.com/articles/basics/07/government_nonprofit_statements.asp
FAF: Financial Accounting Foundation. (n.d.). What We Do: GASB. Retrieved from FAF: Financial Accounting Foundation: http://www.accountingfoundation.org/jsp/Foundation/Page/FAFSectionPage&cid=1351027541296
GASB. (1993). Statement No. 20 of the Governmental Accounting Standards Board: Accounting and Financial Reporting for Proprietary Funds and Other Governmental Entities That Use Proprietary Fund Accounting. Retrieved from GASB: Governmental Accounting Research System.
Horowitz, K. J. (2010). Accounting for Health Care Organizations. Retrieved from Mercer County Community College: Professor Kenneth J. Horowitz: http://www.mccc.edu/~horowitk/documents/Chap017_000.pdf
Horwitz, J. R. (2005, May). Making Profits And Providing Care: Comparing Nonprofit, For-Profit, And Government Hospitals. Health Affairs, 24(3), 790-801. Retrieved from http://content.healthaffairs.org/content/24/3/790.full
Needleman, J. (n.d.). Assessing the Financial Health of Hospitals. Retrieved from AHRQ Achrive: https://archive.ahrq.gov/data/safetynet/needleman.htm
Rose, P., & Office of the Controller. (2007, September). Government Accounting, Reporting & Budgeting Workshop 2007. Retrieved from San Francisco Controller: http://sfcontroller.org/sites/default/files/FileCenter/Documents/1932-Workshop_Presentation_092707.pdf
Washington Office of Financial Management. (2015). Generally Accepted Accounting Principles. Retrieved from Washington Office of Financial Management: http://www.ofm.wa.gov/policy/80.20.htm
Washington Office of Financial Management. (2016). 2016 Comprehensive Annual Financial Report. Retrieved from Washington Office of Financial Management: http://www.ofm.wa.gov/cafr/2016/default.asp
Washington Office of Financial Management. (2016). Comprehensive Annual Financial Report. Retrieved from Washington Office of Financial Management: http://www.ofm.wa.gov/cafr/
Washington Office of Financial Management. (2017). Glossary. Retrieved from Washington Office of Financial Management: http://www.ofm.wa.gov/policy/glossary.asp