Question

Brookwood Pines Hospital

Goodfellow & Perkins LLP is a successful mid-tier accounting firm with a large range of clients across Texas. During 2022, Goodfellow & Perkins gained a new client, Brookwood Pines Hospital (BPH), a private, not-forprofit hospital. The fiscal year-end for Brookwood Pines is June 30. You are performing the audit for the 2023 fiscal year-end.

The healthcare industry can be very complicated, especially in the area of billing for services provided. BPH contracts with private physician groups who use the hospital facilities, equipment, and nursing staff to treat patients. The physicians in the private group are not employees of the hospital; they are simply using the hospital facilities to treat patients. For example, a group of urologists have their own practice, separate from the hospital, where they treat patients. If one of the patients needs a surgical procedure that must be done at a hospital, then the attending urologist will approve the paperwork required to admit the patient to BPH. BPH offers inducements to the urologists so they will refer patients to BPH rather than a competing hospital. One of the inducements BPH offers is free office space in the hospital for the doctors to use when they are treating patients in the hospital.

After the doctor and hospital services are provided to the patient, the patient and/or the patient’s insurance company is billed. The doctor will bill for the services he or she provided, and the hospital will bill for the use of hospital facilities and staff. Doctors and hospitals bill using a coding system that is standardized across the healthcare industry and consists of three main code sets: ICD, CPT, and HCPCS. Using a coding system is more efficient and data-friendly compared to writing a narrative about the procedures performed. However, the coding system is very complex, with thousands of different codes for medical procedures and diagnoses. To complicate matters even more, for patients who are covered by government-sponsored Medicare or Medicaid, doctors and hospitals must adhere to complicated government regulations surrounding billings to Medicare and Medicaid.

As healthcare costs continue to rise each year, BPH administrators struggle to maintain consistent profitability. They look for ways to keep costs low and also to collect from patients and insurance companies as quickly as possible. In addition, BPH must have a strong risk management team to handle unique situations that may occur in hospitals such as malpractice lawsuits and periodic inspections by the state department of health and hospitals. Negative publicity for BPH could lead to decreased revenues if physicians decide to contract with a competing hospital.

Analysis: Brookwood Pines Hospital has receivables from both insurance companies and from consumers. In the past, only one in four confirmations has been returned. Internal controls have been tested and are strong. How might audit data analytics be used to collect evidence regarding the existence of accounts receivable? Develop a specific audit strategy for how you would screen 100% of the revenues (of a particular type), how you would identify exceptions, and how you might consider what would be acceptable variations from your expectation norm versus unacceptable variations.

Answer 1

Goodfellow and Perkins, LLP should probably segregate receivables into two groups; patients who arrive with insurance coverage, and patients who do not arrive with insurance coverage.

For patients who have insurance coverage, it is normal for the insurance company to make some sort of adjustment to the initial billing based on the hospitals agreement with the insurance company. If the auditor can get a table of procedures and standard adjustment, the auditor can use audit data analytics (ADA) to reconcile billings, with adjustments and subsequent cash receipts from the insurance company. Further, there are often co-pays required by the patient, and once the auditor has determined the amount owed by the patient, the auditor can reconcile this amount to subsequent payments from patients.

For patients who do not have insurance coverage, the auditor can directly validate revenue with subsequent cash receipts.