Question

Your team is the Executive Committee at St. Everywhere Health System. The system consists of five (5) hospitals totaling 1,775 beds, thirty (30) affiliated physician practices including 240 physicians of a variety of specialties, two (2) long-term care facilities, and ten (10) urgent care clinics.

Overall, these divisions of the health system generate the following proportions of revenues for the system:

Hospital - 50%

Physicians - 30%

Long-term care - 15%

Urgent care - 5%

You are considering adopting a unified policy on bad debts. Currently each division has its own bad debt policy where the division considers a patient account to be a bad debt and recognizes bad debt expense when an account gets to a certain age. The bad debt policies for each division are:

Hospital - 180 days

Physicians - 120 days

Long-term care - 90 days

Urgent care - 60 days

Your team is considering a change to make bad debts recognized across all divisions at 120 days. Your team must make a recommendation to the Finance Committee of the Board next week. Your assignment is to develop that recommendation and include the following items:

Arguments for and against the proposed change;

Estimated impacts to the income statement and cash flows;

Your team's recommendation with rationale.

Answer 1

Arguments for the proposed change:

• ?it will gave clarity as to the Health System's policy and a level playing to all the divisions
• it will help streamline revenues in a better way

Arguments against the proposed change:

• Every division has its own revenue collection ways and it will lead to showing bad performance of them compratively than their peer division. Hospital division historically had higher days level for the purpose of classifying as bad debt and reducing it to 120 days will show bad performance for them as well as Health System
• It will lead to overall decrease in profits as Hospital which gives 50% revenue has the highest 180 days. When their bad debt time will reduce it will show it as bad performance of them as well as Healyh System overall because there would be chances that payment comes after 120 days also.

Estimated impacts to the income statement and cash flows;

Income statement will show lower profits because of higher bad debts classification in Hospital which generate 50% revenue. Cash flows will not be impaced by the decision

Your team's recommendation with rationale.

We do not support the decision as each division has its own characteristic and revenue collection pattern as per industry trends. Reducing or increasing it abruptly may alter the results inapproperiately.

If you like the explanation than please give it a like. Thanks.