Your Speaker. Your Speaker. Home Health Accounting-Are You Getting What You Need from Your Chart of Accounts?

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1 Home Health Accounting-Are You Getting What You Need from Your Chart of Accounts? Indiana Association for Home and Hospice Care May 19, :30 p.m. 5:00 p.m. Your Speaker Terry Cichon, CPA FR&R Healthcare Consulting, Inc. Frost, Ruttenberg & Rothblatt, P.C 111 Pfingsten Road, Suite 300 Deerfield, IL (847) or (888) FR&R Healthcare Consulting, Inc Your Speaker Scott Manson, CPA, CMA Senior Manager FR&R Healthcare Consulting, Inc. Frost, Ruttenberg & Rothblatt, P.C 111 Pfingsten Road, Suite 300 Deerfield, IL smanson@frronline.com (847) or (888) FR&R Healthcare Consulting, Inc

2 Financial Speak Defining Key Terms Cash Basis vs. Accrual Basis Cash basis accounting records financial transactions in the period in which they occur Cash received in May from CMS paying an April claim is recorded as revenue in May July payment of your attorney s May invoice is recorded in July Accrual basis accounting records financial transactions in the period to which they apply The revenue is recorded in April based on expected payment The invoice is recorded in May 2009 FR&R Healthcare Consulting, Inc Financial Statements A set of documents that reports the financial status of the organization that typically includes: Balance Sheet Statement of Financial Position Income Statement Statement of Activities Statement of Cash Flows Sources and Uses of Cash Notes to Financial Statements Descriptions and Disclosures of Significant Information 2009 FR&R Healthcare Consulting, Inc

3 Assets A representation on the balance sheet of what the organization owns or those things in which it has a financial interest 2009 FR&R Healthcare Consulting, Inc Types of Assets Current Assets Cash or cash equivalents, accounts receivable, pledges receivable, grants receivable, prepaid items Fixed Assets Land, buildings, equipment, transportation vehicles Other Assets Restricted funds Conceptual rather than fixed Deposits Copyrights 2009 FR&R Healthcare Consulting, Inc Liabilities A representation on the balance sheet of bills and expenses the organization must pay as well as formal debts such as loans 2009 FR&R Healthcare Consulting, Inc

4 Types of Liabilities Current Liabilities due within 12 months Accounts payable Accrued expenses Current portion of long term debts Deferred revenue Long Term Liabilities Loans or notes due after 12 months 2009 FR&R Healthcare Consulting, Inc Equity The accumulated net worth of an organization Nomenclature depends on type of organization For profit shareholder s equity Not for profit net assets 2009 FR&R Healthcare Consulting, Inc Types of Equity For Profit Stock original value of issued and outstanding shares of stock Additional Paid-in Capital additional money paid to purchase stock Retained Earnings profits or losses Prior year accumulated balance Current year earnings 2009 FR&R Healthcare Consulting, Inc

5 Types of Equity Not for Profit Net Assets accumulated profits or losses of the organization Restricted Board of Directors has made these funds unavailable and has determined a specific use for the funds Unrestricted can be used to fund the operation of the organization 2009 FR&R Healthcare Consulting, Inc Accounts Receivable Money due to the organization for services that it has provided The money due has not been collected Is it meaningful to classify A/R by payer? 2009 FR&R Healthcare Consulting, Inc Accounts Payable Money that the organization owes to others for purchases and services 2009 FR&R Healthcare Consulting, Inc

6 Accruals Defined expenses for the current financial period that are not reflected in the cash transactions during that period Accrued Salaries salaries earned during the month of March that are paid in April Accrued Payroll Taxes payroll taxes the organization must pay for the wages earned in the period that are due and paid in the next period Unemployment compensation taxes, employer portion of the FICA taxes 2009 FR&R Healthcare Consulting, Inc Revenue Money earned by the organization for providing services Operating Revenue Skilled Intermittent Home Health Services Medicare Other payers Private Duty Home Health Services Skilled Non-skilled Non-operating Revenue Interest Income 2009 FR&R Healthcare Consulting, Inc Deferred Revenue Medicare and some other payers, pay for skilled intermittent care on an episodic basis Some billing systems post the revenue in different ways RAP when filed/fc when filed Entire episodic payment at SOC Must establish a system for recording revenue as it is actually earned Earned 1/60 th per day Earned based on ALOS 2009 FR&R Healthcare Consulting, Inc

7 Deferred Revenue Accounting entry for deferred revenue actually records a liability for the unearned portion Records earned portion as regular revenue Must be adjusted on a periodic basis to coincide with time frame of financial statements 2009 FR&R Healthcare Consulting, Inc Contractual Adjustments The difference between the organization s usual charges and the amount that it is obligated to accept as part of its contract with the third party payer Example: agency bills insurance company 10 PT $150 each = $1,500 Insurance company pays per contract 10 PT $100 each = $1,000 Difference of $500 is a contractual adjustment 2009 FR&R Healthcare Consulting, Inc Direct Expenses Direct Expenses expenses associated with providing resident care Nursing Physical therapy Occupational therapy Speech therapy Social worker Home health aide Non-routine medical supplies 2009 FR&R Healthcare Consulting, Inc

8 Direct Cost A direct cost is one that can be traced to the hands-on care provided to a patient Nursing salaries Outside therapy services Medical supplies 2009 FR&R Healthcare Consulting, Inc General and Administrative Expenses General and administrative expenses, also called Indirect Costs are needed to keep the agency functioning, but cannot be traced directly to a patient s care Administrative salaries Marketing salaries and costs Office supplies Telephone 2009 FR&R Healthcare Consulting, Inc Capital Expenses The expenses related to operating the office/building itself Rent Real estate taxes Depreciation 2009 FR&R Healthcare Consulting, Inc

9 Net Income Also called net profit What is left after subtracting both direct and indirect costs from revenue 2009 FR&R Healthcare Consulting, Inc Net Loss The amount by which the organization s direct and indirect costs exceed revenue The organization is spending more than it is taking in Losses must be covered from prior earnings or borrowing 2009 FR&R Healthcare Consulting, Inc Fixed Cost A cost that remains the same (within a relevant range) no matter how many patients you have or what their acuity level is Rent Administrative salaries Liability insurance 2009 FR&R Healthcare Consulting, Inc

10 Variable Cost Costs that will go up and down depending on the number of patients and the case mix Non-routine medical supplies Telephone Per visit salaries 2009 FR&R Healthcare Consulting, Inc Solvency An organization has achieved solvency when it is able to meet its short term obligations and is expected to be able to also meet its long term obligations 2009 FR&R Healthcare Consulting, Inc Balance Sheet 10

11 Balance Sheet Example Assets Current Assets Cash and Cash Equivalents $ 100,000 Accounts Receivable 600,000 Prepaid Insurance 80,000 Resident Trust Fund 10,000 Total Current Assets $ 790,000 Property and Equipment Furniture & Fixtures 500,000 Equipment 200,000 Less: Accumulated Depreciation (400,000) Net Property and Equipment $ 300,000 Total Assets $ 1,090, FR&R Healthcare Consulting, Inc Balance Sheet Example Accounts Payable $ 4,000 Deferred Revenue 106,000 Line of Credit 110,000 Total Current Liabilities $ 220,000 Total Liabilities $ 220,000 Net Assets Temporarily Restricted Net Assets $ 270,000 Unrestricted Net Assets 600,000 Net Assets $ 870,000 Total Liabilities and Net Assets $ 1,090, FR&R Healthcare Consulting, Inc Balance Sheet Ratios Available Borrowing Under Line of Credit Days Sales Outstanding Working Capital Current Ratio Debt Ratio Debt to Equity Ratio 2009 FR&R Healthcare Consulting, Inc

12 Balance Sheet Accounts Receivable Aging Report Current Days Days Over 90 Days $ 230,000 $ 150,000 $ 120,000 $ 100,000 Calculation $ 230, , ,000 $ 500,000 x.80 Available Borrowing $ 400, FR&R Healthcare Consulting, Inc Balance Sheet Available Borrowing Under Line of Credit Can vary based on lender Example 80% of accounts receivable less than 90 days outstanding May have to calculate and report monthly to lender 2009 FR&R Healthcare Consulting, Inc Days Sales Outstanding Days Sales Outstanding Accounts Receivable Revenue/days $600,000 ($4,300,000/360 Days) =50.23 Days 2009 FR&R Healthcare Consulting, Inc

13 Balance Sheet Days Sales Outstanding Measures the number of days of revenue uncollected Accounts receivable/(revenues/360 days) Example: there are days of revenue uncollected Medicare pays in approximately 14 Days Private should be collected within 30 Days 2009 FR&R Healthcare Consulting, Inc Working Capital $790,000 - $220,000 $470, FR&R Healthcare Consulting, Inc Working Capital Working Capital = Current Assets Less Current Liabilities A primary indicator of the short term solvency of an organization Useful when compared to other time periods 2009 FR&R Healthcare Consulting, Inc

14 Current Ratio Current Assets Current Liabilities $790,000 $220,000 = FR&R Healthcare Consulting, Inc Current Ratio Current Ratio Current assets/current liabilities An indicator of short term debt paying ability Should be greater than 1.0 in order to pay bills timely 2009 FR&R Healthcare Consulting, Inc Debt Ratio Total Liabilities Total Assets $220,000 $1,090,000 = FR&R Healthcare Consulting, Inc

15 Debt Ratio Debt Ratio = Total Liabilities Total Assets Used to determine the organization s long term debt paying ability The lower the ratio, the better the organization s position 2009 FR&R Healthcare Consulting, Inc Debt to Equity Ratio Total Liabilities Net Assets $220,000 $870,000 = FR&R Healthcare Consulting, Inc Debt to Equity Ratio Debt to Equity Ratio = Total Liabilities Shareholder s Equity Also used to determine organization s ability to pay long term debt The lower the ratio, the better the organization s position 2009 FR&R Healthcare Consulting, Inc

16 Income Statement Sample Income Statement Revenue Skilled nursing visits 10,000 $150 $1,500,000 Physical therapy visits 8,750 $175 $1,531,250 Occupational therapy visits 1,500 $175 $262,500 Speech therapy visits 300 $175 $52,500 Social worker visits 700 $200 $140,000 Home Health Aide visits 8,500 $100 $850,000 NRS 1 $70,000 $70,000 Total Charges $4,406,250 PPS adjustment -$56,250 Contractual Adjustments -$50,000 Net Revenue $4,300, FR&R Healthcare Consulting, Inc Sample Income Statement Direct Expenses Nursing $ 900,000 Physical Therapy 962,500 Occupational Therapy 157,500 Speech Therapy 34,500 Social Work 87,500 Home Health Aide 467,500 Non-routine supplies Total Operating Expenses 2,609,500 Gross Profit 1,690, FR&R Healthcare Consulting, Inc

17 Sample Income Statement General and Administrative Expenses Administrative Salaries $ 650,000 Marketing Expenses $ 350,000 Insurance - General 75,000 Professional Fees 15,000 Telephone 35,000 Office Expenses 55,000 Other.. 425,000 Total General & Administrative Expenses 1,605,000 Net Profit (Loss) 85, FR&R Healthcare Consulting, Inc Gross Profit Margin Gross Profit Margin Gross Profit Revenue $1,690,500 $4,300,000 =39.3% FR&R Healthcare Consulting, Inc Gross Profit Margin Profit before general & admin expense (gross profit) divided by revenues Determines ability of management to control direct costs 2009 FR&R Healthcare Consulting, Inc

18 Net Profit Margin Net Profit Margin Net Income Revenue $85,500 $4,300,000 =2% 2009 FR&R Healthcare Consulting, Inc Net Profit Margin Net Profit Margin Net profit divided by revenues Determines total profitability of company 2009 FR&R Healthcare Consulting, Inc Accounts Receivable 18

19 Accounts Receivable Aging Accounts Receivable Aging Report Current Days Days Over 90 Days $ 230,000 $ 150,000 $ 120,000 $ 100,000 Total A/R = $600,000 Percentage over 90 days: $100,000 $600, % 2009 FR&R Healthcare Consulting, Inc Average Payment Wait Medicare: 14 days after submitting a clean claim Medicaid: several months lag time Private Pay: 30 days Insurance: 60 days 2009 FR&R Healthcare Consulting, Inc Capital Purchases 19

20 Fixed Asset Purchases A fixed asset or capital purchase is one that is purchased for use in operations with the plan to be kept for many years Land Buildings Equipment Furniture/Fixtures Automobiles 2009 FR&R Healthcare Consulting, Inc Depreciation Depreciation is the allocation of the cost of a capital purchase to the time period(s) in which it will be used Slowly expensing the item over the number of years in which the item is in service 2009 FR&R Healthcare Consulting, Inc Depreciation Periods of depreciation can vary, but typical time frames are: Land never depreciates Buildings: years Equipment: 5-10 years Computer Equipment: 3-5 years Leasehold Improvements: 20 years Autos: 5 years 2009 FR&R Healthcare Consulting, Inc

21 Depreciation Example Office cubicles are purchased for $5,000; they are expected to be used for 10 years An asset of $5,000 would be shown on the balance sheet Each year $500 would be depreciated on the income statement as a reduction to net income 2009 FR&R Healthcare Consulting, Inc The Effect of Capital Purchases Large ticket items (typically in excess of $5,000) do not affect the profitability of the organization all at once The purchase will reduce our net profit over several years However, the purchase does affect cash flow at the time it is purchased 2009 FR&R Healthcare Consulting, Inc Case Study #1 We ve Got Money Home Health Agency is privately owned. Their current ratio is 3:1; they are generating positive cash flow and have excellent borrowing capability. They are considering a major upgrade to their computer systems. What would be the effects on the balance sheet and income statement if they purchase the equipment? What if they rent the equipment? 2009 FR&R Healthcare Consulting, Inc

22 Case Study #1 Purchase Option Purchase price recorded as an asset Depreciated over 5 years 20% of expense to income statement every year Rental Option No asset Rental expense to income statement on monthly basis 2009 FR&R Healthcare Consulting, Inc Case Study #2 Refer to Attachment #1 Sample Financial Statement Detail 2009 FR&R Healthcare Consulting, Inc Case Study #2 Can you identify the total Medicare revenue per episode net of LUPAs? 2009 FR&R Healthcare Consulting, Inc

23 Case Study #2 Can you identify the direct cost per visit for? SN PT OT SP MSS HHA 2009 FR&R Healthcare Consulting, Inc Case Study #2 What is the administrative cost per visit? 2009 FR&R Healthcare Consulting, Inc Case Study #3 Refer to Attachment #2 Chart of Accounts 2009 FR&R Healthcare Consulting, Inc

24 Case Study #3 What are examples of some accounts that assist in the preparation of the Medicare cost report? What are examples of some accounts that assist in the preparation of the federal income tax return? 2009 FR&R Healthcare Consulting, Inc Questions 2009 FR&R Healthcare Consulting, Inc

25 Attachment #1 WE ARE THE BEST HOME HEALTH AGENCY CHARGES $/VISIT # units /visits #VISITS PER EPISODE SKILLED NURSING $1,923, , PHYSICAL THERAPY $2,300, , OCCUPATIONAL THERAPY $311, , SPEECH PATHOLOGY $35, MEDICAL SOCIAL SERVICE $81, HOME HEALTH AIDE $345, , MEDICAL SUPPLIES $179, TOTAL $5,178,604 33, REVENUE # OF MEDICARE EPISODES 1,909 # OF MEDICARE EPISODES NET OF LUPAS 1,680 # OF NONMEDICARE ADMISSIONS 162 LUPA = 12% (1.5RN 1.1PT = $291.19) 66,646 AVG MEDICARE PER EPISODE RATE ,801,967 INSURANCE REVENUE 135,495 PUBLIC AID REVENUE 76,216 ALLOWANCE FOR MEDICARE ADJ (25,000) TOTAL REVENUE $6,055,324

26 Attachment #1 WE ARE THE BEST HOME HEALTH AGENCY DIRECT COSTS SN SALARIES 742,292 SN PAYROLL TAXES 60,497 SN BENEFITS 56,412 SN MILEAGE 96,721 SN COMPANY AUTO EXPENSE 24,384 ON CALL PAY 68,067 CONTRACT SN SERVICES 216,320 PHYSICAL THERAPY PER VISIT 52,000 PT PAYROLL TAXES 4,160 PT MILEAGE 13,677 CONTRACT PT SERVICES 833,065 CONTRACT OT SERVICES 125,223 CONTRACT SP SERVICES 14,183 MSS SALARIES 32,503 MSS PAYROLL TAXES 2,213 MSS BENEFITS 1,881 MSS MILEAGE 4,181 HHA HOURLY EMPLOYEES/FT 157,898 HHA PAYROLL TAXES 14,606 HHA BENEFITS 17,387 HHA MILEAGE 26,888 HHA COMPANY AUTO EXPENSE 22,302 CONTRACT HHA SERVICES 0 BILLABLE MEDICAL SUPPLIES 89,880 TOTAL DIRECT EXPENSES 2,676, % GROSS PROFIT $3,378, %

27 Attachment #1 WE ARE THE BEST HOME HEALTH AGENCY ADMINISTRATIVE & GENERAL SALARIES ADMINISTRATION 183,003 SALARIES RN SUPERVISOR 172,447 OASIS/ED./QI COORDINATOR 166,096 OFFICE STAFF SALARIES 125,454 MARKETING SALARIES & COMMISSIONS 289,926 ADMIN PAYROLL TAXES 80,669 ADMIN BENEFITS 75,245 TUITION REIMBURSEMENT 6,000 EMPLOYEE ASSISTANCE PROGRAM 1,159 ADMIN MILEAGE 40,115 CONTRACT CLERICAL SERVICES 8,347 NON BILLABLE MEDICAL SUPPLIES 23,100 OFFICE EXPENSES 63,725 RECRUITING EXPENSES 135,675 CONFERENCE AND MEETINGS 17,200 MEALS AND ENTERTAINMENT 2,500 PRINTING & STATIONERY 31,500 COMMUNICATION EXPENSE 103,557 UTILITIES 7,100 RENT 74,470 DEPRECIATION & AMORTIZATION 40,574 OFFICE EQUIPMENT RENTAL 22,225 OFFICE EQUIP REPAIRS & MAINT 15,210 INSERVICE/STAFF EDUCATION 20,000 EMPLOYEE RELATIONS 6,000 CONTRIBUTIONS 2,450 DATA PROCESSING 42,287 WEBSITE EXPENSES 1,440 PROFESSIONAL FEES 55,525 BENCHMARKING/QUALITY 5,415 MEDICAL DIRECTOR 1,400 ADVERTISING & PROMOTION 12,725 DUES & SUBSCRIPTIONS 12,150 INSURANCE 550 SALES TAX 558 INTEREST OTHER 1,700 LICENSE & FEES 250 TOTAL GENERAL & ADMIN EXPENSE 1,847, % NET INCOME 1,530,839 NET INCOME BEFORE TAXES 1,530,839 PROFIT PERCENTAGE 25.28%

28 Attachment #2 Chart of Accounts Home Health Agency 1005 Asset Cash in Bank 1006 Asset Petty Cash 1160 Asset A/R - Medicare 1170 Asset A/R - Insurance 1180 Asset A/R - Ins/Self Pay 1190 Asset A/R - Medicaid 1200 Asset Allowance for Doubtful Accounts 1360 Asset Prepaid Insurance 1362 Asset Prepaid Expenses 1520 Asset Employee Advances 1525 Asset Due from Stockholder 1550 Asset Security Deposits 1860 Asset Furniture and Fixtures 1870 Asset Vehicles 1880 Asset Computer Equipment 1890 Asset Leasehold Improvements 1900 Asset A/D Furniture and Fixtures 1910 Asset A/D Vehicles 1920 Asset A/D Computer Equipment 1930 Asset A/D Leasehold Improvements 2250 Asset Amortization - Start-Up Costs 2260 Asset Amortization 2510 Liability Accounts Payable 2515 Liability Accounts Payable-Insurance 2520 Liability Loans Payable 2525 Liability Note Payable/Line of Credit 2530 Liability Other Current Liabilities 2540 Liability Federal Withholding 2550 Liability FICA 2560 Liability State Withholding 2570 Liability Wage Garnishments 2580 Liability Employee Benefit Plan 2810 Liability Accrued Payroll 2815 Liability Accrued Payroll Taxes 2820 Liability Accrued Expenses 2830 Liability Accrued Pension Plan Contribution 2835 Liability Accrued Vacation/Sick 2840 Liability Due to Others 2850 Liability Deferred Lease 2990 Liability Deferred PPS Income 3910 Liability Common Stock 3915 Liability Additional Paid-In Capital 3920 Liability Retained Earnings Liability Retained Earnings Prior Year Adjustments Revenue Skilled Nursing Medicare Revenue Skilled Nursing Insurance Revenue Skilled Nursing Private Revenue Skilled Nursing Public Aid

29 Revenue Physical Therapy Medicare Revenue Physical Therapy Insurance Revenue Physical Therapy Private Revenue Physical Therapy Medicaid Revenue Occupational Therapy Medicare Revenue Occupational Therapy Insurance Revenue Occupational Therapy Private Revenue Occupational Therapy Medicaid Revenue Speech Therapy Medicare Revenue Speech Therapy Insurance Revenue Speech Therapy Private Revenue Speech Therapy Medicaid Revenue Medical Social Worker Medicare Revenue Medical Social Worker Insurance Revenue Medical Social Worker Private Revenue Home Health Aide Medicare Revenue Home Health Aide Insurance Revenue Home Health Aide Private Revenue Home Health Aide Medicaid Revenue Medical Supplies-Wound Care Revenue Medical Supplies-Other 4050 Revenue Less: Medicare Contractual Allowance 4055 Revenue Medicare PPS Revenue 4056 Revenue Medicare PPS Adjustments 4060 Revenue Less: Insurance Contractual Allowance 4065 Revenue Less: Medicaid Contractual Allowance Expense Skilled Nursing Salaries/RN Expense Skilled Nursing Salaries/LPN Expense Skilled Nursing Payroll Taxes Expense Skilled Nursing Employee Benefits Expense Skilled Nursing Professional Liability Ins Expense Skilled Nursing Mileage Expense Skilled Nursing Contracted Expense Skilled Nursing Uniforms Expense Physical Therapy Salaries Expense Physical Therapy Payroll Taxes Expense Physical Therapy Employee Benefits Expense Physical Therapy Professional Liability Ins Expense Physical Therapy Mileage Expense Physical Therapy Contracted Expense Occupational Therapy Salaries Expense Occupational Therapy Payroll Taxes Expense Occupational Employee Benefits Expense Occupational Therapy Professional Liability Ins Expense Occupational Therapy Mileage Expense Occupational Therapy Contracted Expense Medical Social Work Salaries Expense Medical Social Work Payroll Taxes Expense Medical Social Work Employee Benefits Expense Medical Social Work Professional Liability Ins Expense Medical Social Work Mileage Expense Medical Social Work Contracted Attachment #2

30 Expense Home Health Aides Salaries Expense Home Health Aide Payroll Taxes Expense Home Health Employee Benefits Expense Home Health Professional Liability Ins Expense Home Health Aide Mileage Expense Home Health Aide Contracted Expense Home Health Aide Uniforms 4710 Expense non Routine Medical Supplies Expense Admin Office Salaries Expense Admin Mgmt Salary Expense Admin Marketing Salary Expense Admin Payroll Taxes Expense Administrative Employee Benefits Expense Administrative Mileage Expense Administrative Clerical Services 5145 Expense Medical Director 5146 Expense Routine Medical Supplies 5150 Expense Office Equipment Rental 5155 Expense Office Equipment R&M Expense Office Supplies Expense Bank Charges Expense Postage 5166 Expense Printing and Stationery 5170 Expense Telephone 5175 Expense Utilities 5185 Expense Advertising & Promotion 5186 Expense Dues & Subscriptions 5188 Expense Rent Expense 5189 Expense Depreciation Expense 5240 Expense Conferences & Meeting 5242 Expense Inservice and Staff Education 5245 Expense Employee Relations 5246 Expense Meals 5247 Expense Employee Meals 5248 Expense Donations Charitable 5249 Expense Donations Political 5500 Expense Data Processing 5501 Expense Website 5502 Expense Internet Access Fees 5505 Expense Employee Recruiting Expense Accounting Fees Expense Legal Fees Expense Computer Consultant Expense Professional Fees Other Expense License 5535 Expense Seminars Expense Insurance - General 5550 Expense Insurance - Vehicles 5560 Expense Interest Expense 5565 Expense Bad Debt 6240 Expense Miscellaneous Expenses 6241 Expense Taxes Attachment #2

31 4101 Revenue Other Income 4110 Revenue Interest Income Attachment #2