Generally Accepted Accounting Principles in Health Care

GAAP

Generally Accepted Accounting Principles in Health Care

GAAP (generally accepted accounting principles) in health care

Within the United States, all businesses that keep financial records must adhere to GAAP or generally accepted accounting principles, including both for-profit and not-for-profit healthcare entities. "GAAP is not a single accounting rule, but rather the aggregate of many rules on how to account for various transactions" (Kramer & Applebaum 2013). The first two principles of GAAP are that "financial records must be separately maintained for each economic entity" in a separate fashion and that "an economic entity's accounting records include only quantifiable transactions. Certain economic events that affect a company, such as hiring a new chief executive officer or introducing a new product, cannot be easily quantified in monetary units and, therefore, do not appear in the company's accounting records" (GAAP, 2013, Houghton Mifflin Harcourt). These details may be included as qualitative data and, in fact, may be necessary to insert as footnotes to reports to investors to give a full financial picture of the entities' future financial health. Finally, all entities, regardless of industry type, are recorded according to the going concern principle, which suggests that there is an assumption that the entity will exist indefinitely (GAAP, 2013, Houghton Mifflin Harcourt).

Unique challenges of healthcare accounting

Some unique characteristics of financial reporting in healthcare may be manifested, however, when creating a report compliant with GAAP. For example, in most healthcare organizations there is a delay between full payment and the services rendered, because patients use health insurance to pay for their care. "Making matters more complicated, many payments are subject to billing reviews, retroactive adjustments or other queries which may occur over a considerable period of time," even months or years (Kramer & Applebaum 2013). Thus, healthcare organizations must make estimates "in order to record revenue and related patient receivables in the financial statements. The basis for such estimates may range from relatively straightforward calculations to highly complex judgments based upon assumptions about future events and decisions" (Kramer & Applebaum 2013).

This may seem to flout some of the basic principles of GAAP which include the revenue recognition principle that "revenue is earned and recognized upon product delivery or service completion, without regard to the timing of cash flow" and the matching principle that "the costs of doing business are recorded in the same period as the revenue they help to generate" but it is an inevitable necessity, given the economic structure of the healthcare environment (GAAP, 2013, Houghton Mifflin Harcourt). There is also the cost principle which suggests that assets are entered at the cost the extract at the time of the exchange, even if they appreciate and are later affected by other financial, technological and environmental pressures. Although changes will be coming to the industry with the new healthcare law, the payment insurance 'gap' (as opposed to GAAP) will continue. GAAP reflects accrual basis accounting vs. cost basis accounting "which adheres to the revenue recognition, matching, and cost principles…[this method] captures the financial aspects of each economic event in the accounting period in which it occurs, regardless of when the cash changes hands" GAAP, 2013, Houghton Mifflin Harcourt).

GAAP also suggests that entities adhere to what is known as the time period assumption, which suggests that an artificial time period, however 'constructed' must be used to define periods of reportage. "Using artificial time periods leads to questions about when certain transactions should be recorded" (GAAP, 2013, Houghton Mifflin Harcourt). An initial investment in hospital equipment may be very costly one year, but not so in subsequent years and even may result in a gain for the organization in terms of profitability. Regardless, the principle of GAAP is that whatever time frame is chosen, it should be the one which most accurately reveals the organization's financial health. Then, "once the time period has been established, accountants use GAAP to record and report that accounting period's transactions" (GAAP, 2013, Houghton Mifflin Harcourt).

Other principles of GAAP particularly relevant to healthcare include the full disclosure principle which states that "financial statements normally provide information about a company's past performance. However, pending lawsuits, incomplete transactions, or other conditions may have imminent and significant effects on the company's financial status. The full disclosure principle requires that financial statements include disclosure of such information" via footnotes (GAAP, 2013, Houghton Mifflin Harcourt). Given the widespread existence of lawsuits throughout the healthcare industry, this is particularly significant for organizations: not only regarding lawsuits specific to the entities themselves but also to the types of products used and prescribed by providers at the entity.