FMW7A

1. Donations in cash are easy to measure. What is the treatment that not-for-profit organizations use for donated goods and services?

2. How does the accounting industry define a not-for-profit organization and a voluntary health and welfare organization (VHWO)?

3. What are the possible types of interfund transactions? Explain.

4. Distinguish between the way investor owned and not-for-profit healthcare organizations treat investments.

The response to each question should be must be at least 200 words in length in APA format.

References:

Financial Management for Public Health and Not-for-Profit Organizations (4th edition)

Assignment reading attached!

2. Explain variable and fixed costs, direct and indirect costs, and cost accounting principles for
healthcare services or processes.
2.1 Evaluate unique rules of financial accounting for not-for-profit and healthcare organizations.
2.2 Discuss fund accounting, including the typical types of funds, interfund transactions, and the

current use of fund accounting by not for-profit organizations.

5. Discuss change, innovation, and learning as they relate to the financial management of health care
organizations.
5.1 Discuss special rules related to the recognition and reporting of donated goods and services.
5.2 Explain the treatment of investments by not-for-profit and healthcare organizations on

financial statements.

Reading Assignment

Chapter 12:
Unique Aspects of Accounting for Not-for-Profit and Health Care Organizations

Chapter 13:
Unique Aspects of Accounting for State and Local Governments—Part I: The Recording Process

Chapter 14:
Unique Aspects of Accounting for State and Local Governments—Part II: Reporting Financial Results

Unit Lesson

The general principles of accounting are broadly applied to all types of organizations, and as you learned last
unit, the Generally Accepted Accounting Principles (GAAP) should prevail as we prepare financial statements.
However, there are many unique aspects of financial accounting for healthcare, not-for-profit, and
governmental organizations. Unit VII considers unique financial issues for not-for-profit and healthcare
organizations in particular. You will learn that there are certain unique aspects of managing and financial
reporting when healthcare services are involved. This relates, at least in part, to the fact that healthcare in our
nation began as a charitable undertaking, with medical facilities often being operated by churches and other
charitable organizations.

Not-for-profit organization financial statements contain a number of important distinctions from the statements
issued by for-profit organizations. For example, donor-imposed restrictions on net assets must be disclosed in
the statement of financial position (balance sheet). A statement of functional expenses must be provided for
voluntary health and welfare organizations. A specific set of conditions must be met for donated services to
be recorded and reported on the financial statements. All of this is essential due to the not-for-profit status of
the organization. Failure to comply with all of these very specific financial reporting rules could lead to the loss
of not-for-profit status for the organization. That would mean that the organization must begin paying taxes.

Healthcare organizations must report their revenues net of contractual allowances and charity care. Bad
debts must be reported as an expense rather than as a revenue offset. Charity care is not included as a bad
debt expense or revenue offset. The only place that it shows up is in the notes which accompany the financial
statements. You need to very clearly understand charity care and what that means for healthcare facilities.

UNIT x STUDY GUIDE

Title

Charity Care

Many U.S. states provide charity care for patients who meet certain financial requirements. This obligation on
behalf of the hospital is part of an ongoing requirement to hold not-for-profit status in the state, and it is
mandated, not optional. Charity care must be provided if the hospital wishes to retain its not-for-profit status,
ability to receive tax-deductible donations, and avoid paying taxes, so getting this part right is extremely
important to hospitals. Failure to keep track of charity care responsibilities on an annual basis can quickly
result in reversal of a healthcare facility’s not-for-profit status and substantial new tax burdens for future fiscal
years.

Charity care specifically refers to a hospital’s practice of waiving or reducing fees charged to patients who
have incomes which are too low to afford the full cost of the medical care provided. This concept came about
through the Hill-Burton Act of 1946, which funded the construction of many community hospitals across our
nation. It was immediately after World War II, and America needed two things simultaneously: it needed more
and better hospitals to provide care for our rapidly growing population, and it needed jobs for thousands of
returning servicemen. The Hill-Burton Act served to address both needs. The simple concept of Hill-Burton is
if an American community wanted to receive federal funds to build a hospital for its local citizens, the
community would also be agreeing to the rules for charity care which appeared in the Hill-Burton Act. As with
most federal funding scenarios, there were strings attached to accepting Hill-Burton funding.

The specific requirements for providing charity care differ considerably from state to state, and they are
defined by a variety of specific criteria. However, in all cases, hospitals that desire not-for-profit status, and all
the benefits that come with it, must provide charity care for the community. Let us take a few specific
examples here.

Washington: A true national leader and innovator in this area is the state of Washington. The Washington
State Department of Health mandates that not-for-profit hospitals provide charity care to patients who cannot
afford to pay the full cost of care. The law specifically defines eligibility for charity care as any individual
whose income is less than 100% of the federal poverty level (FPL), or any family whose combined income is
less than 200% of the FPL. Also, in order to qualify for charity care, the patient must be ineligible for any form
of public health insurance, such as the Medicaid program or Medicare program. If the patient is eligible for
one of these forms of public health insurance, then the hospital must assist him or her in applying for
coverage. Absent such eligibility, the charity care rules apply.

Under Washington state laws, reduced fees for hospital care for families are provided on a sliding scale basis,
but individuals who qualify for charity care must be treated free of charge. It is a violation of law for the
hospital to charge an individual for services if he or she qualifies for charity care.

Additionally, Washington requires that a hospital must notify any patient when he or she is eligible for charity
care. The charity care obligation is not based simply upon waiting for the patient to ask; it must be a proactive
effort of the hospital to meet the charity care program requirements and educate patients about their eligibility.

The state of Washington is generally considered to be among the leaders nationally in promoting the
availability of charity care for patients who truly need it. Their model has been adopted by several other states
over recent years. You will see similarities among the other states which we will use as examples here.

New Jersey: The state of New Jersey permits patients to receive free or reduced price hospital care for what
it deems to be necessary medical care. The precise definition of necessary medical care varies significantly
from state to state, with the New Jersey definition being broader than that in many other states. To receive
charity care in New Jersey, a patient can either have no health insurance or partial health insurance
coverage. However, the patient cannot qualify for any kind of public health insurance program such as
Medicare or Medicaid. The patient must also meet the New Jersey income requirements. If the patient earns
less than 200% of the federal poverty level (FPL), he or she will quality for charity care—no charges for
services. As the percentage of the FPL increases in 25% increments, the percentage of costs charged to the
patient increases by 20%.

UNIT x STUDY GUIDE
Title

California: The state of California also has laws which mandate charity care in hospitals for patients who do
not have sufficient insurance coverage to pay the full hospital bill. Patients who do not earn enough money to
cover the full cost of care can benefit from this program. In California, a patient must earn only a certain
percentage of the federal poverty level (FPL) in order to qualify for no cost or discounted hospital care. This
percentage actually varies from city to city, and hence hospital to hospital, within the state. That situation is
unique to California. Most states establish eligibility criteria that apply across the state, not varying from city to
city.

Conclusion

Overall, you will find that the principles of GAAP do apply to healthcare organizations, but there are a few
wrinkles. Charity care, and the accounting for that care, is certainly an example. Over recent years, more than
a few hospitals have found themselves in trouble over their handling of charity care, so it is extremely
important for the hospital CFO, CEO, and mangers to understand this issue.