Hospital Accounting – An Accountants perspective

The following article shows the tip of the iceberg of hospital accounting. I have assumed some aspects to make it easier to elaborate on some topics. In real world some of these aspects explained below may be handled differently based on the situation and the hospital policies. See how bad debt is different than charity care – this tweak pertains to healthcare industry.

1.      Accounting Period                                       

While it may preferably be a Continuous Period of 12 months, thirteen continuous four-weekly periods or fifty two continuous weekly periods are also practiced by some hospitals.

2.      Accrual Basis of Accounting                             

Accounts are kept on the accrual concept. For example, all revenue earned for in-house patients up to the last day of the accounting period should be accounted as revenue for that period irrespective of whether paid or not. All revenues may be appropriately classified into accounts the specific revenue centers in which they arise. Any reductions from amounts already billed to patients on account of discounts allowed, credit notes issued on cost of drugs; other materials and services are similarly accounted for the relevant accounting period in which they are recorded, or arise.

3.      Accounting Principles and Concepts                     

Given below are more examples of possible deductions from revenue.

  • Hospital agreeing to take less than 100% of total amount due from a patient in full and final settlement of his/her total due. The difference between total due and agreed settlement amount known as contractual arrangement is written off against revenue as contractual adjustment (resulting in adjusting entry)
  • Despite ability to pay, any amount refused to be paid by a patient may be written off under certain circumstances as a bad debt.
  • A hospital may care for and treat a patient knowing his/her incapacity to pay. Such costs too could be written off against revenue as charity care.

Care should be taken to ensure that revenues and expenses allocated to a particular revenue/cost center by name or accounting code are accurately classified and matched accordingly,  and are credited or debited to that specific revenue/cost center, and no other.

4.      Inter-Departmental Transfers                

Interdepartmental Transfers refer to some utility or value provided by a one department to another within the same hospital. It comprises a process of assigning costs to appropriate cost centers directly. The objective is to ensure distribution of appropriate cost centers prior to allocating such pooled costs from the cost centers to the appropriate heads of expenditure. This is precisely an exercise of matching and assigning costs as against allocating pooled costs.

All transfers are usually at their invoiced costs. That said there is always a discussion on market value vs fair value. It is important that are all transfers are valued on a monthly basis, and invariably at end of an accounting period so as to reflect the true and accurate costs – at least in the periodical accounting statements.

4.1   Centralized Services & Supplies       

This in effect is the overhead cost center where direct costs of all purchased supplies are initially debited. The direct cost of medical and surgical items issued from this cost center for use of patients is then transferred to the “Medical Supplies Sold to Patients” Cost Centre, where an additional mark up charge will be added when billing to patients. The added revenue part of it too must be recorded in the Medical Supplies Sold to patients Revenue Center irrespective of the nature of the items sold such as medical supply as against surgical supply. That is, even if an item of surgical supplies were to be sold to a patient, it should still be recorded in the Medical Supplies Sold to Patients Cost Center, and not in a so called Surgical Supplies Sold to Patients Cost Center. This is a based on the Hospital policy.

In the case of any reusable items issued for patients’ use by the Centralized Services & Supplies, that item should be prorated according to its expected number of occasions of possible use, and charged proportionately to all the cost centers that actually used it.

4.2   Pharmacy 

Pharmaceutical items issued by the pharmacy and charged to a patient consists of 2 components that are accounted for under 2 separate cost centers: (i) the cost of the item (at invoice cost) is charged to Drugs Sold to Patients Cost Center, (ii) while the profit or revenue component of it is accounted for under Drugs Sold to Patients Revenue Center. An item issued free to a patient is treated as an Interdepartmental Transfer (at invoice cost).

4.3   Pharmacy   

All expenses of a non-capital, non-routine nature charged to Maintenance Account are identified and transferred to the relevant Cost Center directly assignable for using the particular part of  equipment.


4.4   Other Interdepartmental Services 

If and when required, expenses may be reclassified and transferred to the most appropriate account using either the actual natural classification accounts or transfer sub classification accounts. Care should be taken to ensure that what is transferred is the exact amount originally debited.

5.      Revenue and Expense Recognition 

Setting off an expense against a corresponding revenue item is incompatible with standard accounting practices. Any reimbursements/ refunds should be reflected under  “Other Operating Revenue” while recording the relevant statistics of revenues and expenses in the appropriate revenue/cost center.

6.      Inclusive Rate Hospitals    

If at any stage, an “inclusive rate” is adopted for billing patients, it should confirm to the definition of the American Hospital Association, which states that Total Charges should consist of a charge for the length of stay at a predetermined base rate for the type of accommodation provided, irrespective of the ancillary services utilized.  It follows that any revenue component contained in an inclusive rate should be reclassified under the cost center’s providing the ancillary service’s.

7.      Chemical Dependency Aftercare   

Chemical Dependency Aftercare Services are instances where an outgoing inpatient may be charged a “one-time-charge” calculated at the actual cost of services rendered as an inpatient, plus an estimated charge to cover an expected number of follow up visits to the hospital in continuation of treatment as an outpatient.

The patient may or may not fully utilize these follow-up visits offered seemingly at no additional expense. Good accounting practices require that the cost of these “free services” as an outpatient be deferred; to be set off as and when the patient avails of this facility extended.

Therefore, that part of the estimated charge in respect of possible follow up visits as an outpatient included in the “one-time-charge” should properly be reflected in an account to be named “Deferred Revenue – Other”.

Each time as and when the patient returns for outpatient treatment within the same accounting period would be transferred to Deferred Income Account on a proportionate basis (to the total number of possible visits actually charged to the patient in advance). Proportionate income with respect to possible visits falling within the next accounting period as well as charges of un-utilized visits remain for the time being in the Deferred Revenue – Other Account to be dealt with appropriately at a later stage.

Each follow-up visits should be treated in the accounts in the same way as for Outpatient Chemical Dependency Visits.

8.      Accounting for Payroll Costs     

Salaries and Wages comprise remuneration for actual hours worked by hospital employees paid for by cash. Actual hours worked are productive hours only (net of unproductive hours).

Non-productive hours are to be accounted as Employee Benefits and would consist of hours paid for while not on the job, such as all types of leave pay and any other paid hours approved by the employer such as in respect of holidays, time off, attending meetings and for training and education.

Amounts paid for Non-productive Hours:

Overtime and time spent “on-call” (standby) are to be charged to Salaries and Wages.  As already stated above, non-productive hours are usually to be charged under Employee Benefits. Time spent on standby does not fall under productive hours, or unproductive hours.  

The following example will illustrate the procedure for analyzing standby time by an employee:

A technician waits on standby at home for 4 hours from 6 pm to 10 pm. Rate for a standby hour is $1.50. He is then called to hospital and works 8 hours from 10 pm to 6 am the next day. His Overtime rate is $5 per hour.

His standby earning of $6.00 ($1.50 x 4) is charged to Salaries & Wages; but for purposes of office statistical records, the 4 hours is not taken under productive hours since only the actual hours worked is reckoned as productive. However, neither is it taken as non-productive hours. His overtime earning of $40 ($5 x 8) is charged to Salaries and Wages, and is also shown in office records as productive hours.

8.1   Employee Benefits    

Employee benefits paid to any employee is usually charged to the relevant cost center where that employee works.

8.2   Accrued Paid Time-Off         

Standard Accounting Principles along with hospital policies suggests that an accrued employee benefit expense and the related liability in respect of Paid Time-Off (PTO) are recorded in the relevant pay period it actually arises. The liability account is debited and cash credited when the employee actually avails of the PTO or gets reimbursed.  Hospital may set the guidelines as below for recording and accounting for non-productive hours relating to a PTO:

  • Non-productive hours relating to the PTO is to be recorded only when the PTO is actually taken, or is reimbursed.
  • Non-productive hours relating to any year-end carry-over should not be accrued.
  • Similarly, non-productive hours should not be accrued for an employee in instances where an employee is reimbursed for unused PTO at year-end, or on termination of employment.

However, it will be noted that the concept of non-productive hours (not-on-job hours) is not being satisfied in each of the above cases. It is very important that a hospital’s accounting system is properly geared to distinguish between PTO hours taken, and PTO hours reimbursed.

8.3 Reimbursements of Workers’ Compensation

In keeping with the accepted accounting principle of not setting off any expenses against related revenues (as stated under 5 above), any reimbursement/ refund received from a third party in respect of a workmen’s compensation payment made to an employee in a prior year under a relevant insurance scheme or under any other payroll-related benefit should be credited to the Other Operating Revenues Account.


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