Question

Describe how the following types of revenue are reported on the Income Statement:

a...Discounts from Charges

b...Charity care

c...Bad Debt Losses

What do you think is the significance behind this reporting method?

Answer 1

The above terms are basically related to Health Care Service Organisation.

Answer to Question a)

Discounts from Charges are basically PPO(Preferred Provider Organisation) Arrangement i.e PPO makes discount on charge arrangement with service provider .

Reporting:

In this agreement PPO agrees to pay a certain % of service provider's fees . For eg if for any disease service provider charges $1000, PPO would pay him $700 (say 70% of $1000). Service provider will receive $300 less than its usual fees.

Revenues from patients are recorded at reduced value i.e % of payments received from PPO plus % of payment received from patients as per contract.

Significance:

As it encourages patients to use its linked network so to avail the facility of subsidized cost, it discount element could be expensed as Operating Expense in Revenue Statement.

Answer to Question b)

Charity Care is health care service provided for free or at reduced price for low income patients .

Reporting:

Charity Care should be completely eliminated from both Revenue and Receivables i.e it is not to be reported in Revenue and Receivables. However, it is often not known whether the services will meet charity care criteria or not at the time services are provided. So there is no alternative to record keeping for charity care in same manner as any other service.

Significance:

Charity care represnts consumption of valuable uncompensated resources which should be managed wisely and is an important indicator of fulfilment of organisation charitable purpose.

Answer to Question c)

Bad Debt results when a Customer/patient who has been determined to have the financial capacity to pay for such services is unwilling to settle the claim whereas Carity care is provided to a patient with demonstrated inability to pay. Determining anyone's ability to pay requires financial judgement and prudence

Reporting:

Classify Bad Debt as a deduction from Revenue from sale of goods or if entity engaged in healthcare services then as a deduction from patient revenue services.

Significance:.

Bad debt is a key measure of organisation's revenue cycle effectiveness and it is important because additional credit risk is being placed on providers as patient copayement increase.