In July 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update 2011-07, Health Care Entities (Topic 954), Presentation and Disclosure of Patient Service Revenue, Provision for Bad Debt, and the Allowance for Doubtful Accounts for Certain Health Care Entities. The amendments in the Update change the presentation of the statement of operations. The provision for bad debts for patient service revenue is required to be presented on a separate line as a deduction from patient service revenue.
The new presentation will show net patient service revenue that is closer to the amount expected to be collected by the hospital. As a result, certain ratios will be affected. This is true for ratios that require net patient revenue, total operating revenue, bad debt expense or total operating expense, all of which will be decreased based on the change.
For instance, the Days Cash on Hand ratio is calculated as 365 x (Unrestricted Cash / Net Operating Expense). The reduction of Net Operating Expense (one of the variables in this computation), due to the absence of Bad Debts Expense related to patient service revenue, will result in an increased days cash on hand value.
The Update is effective for fiscal years and interim periods beginning after December 15, 2011, with early adoption permitted on a voluntary basis.