ASC 954: Patient Service Revenue Adjustment Journal Entries for Health Care Entities
Posted In | ASC Education | Gridlex AcademyThe accounting standards for health care entities are governed by the Accounting Standards Codification (ASC) 954, a part of the Financial Accounting Standards Board (FASB) framework. The ASC 954 establishes the financial reporting standards for organizations that operate within the health care sector, including hospitals, nursing homes, and ambulatory care facilities. One of the critical components of these financial statements is the patient service revenue and the adjustments required to account for contractual allowances, bad debt, and third-party settlements. This article aims to provide a comprehensive understanding of patient service revenue adjustment transactions and the related journal entries in the context of ASC 954.
Patient Service Revenue
Patient service revenue is the primary source of income for health care entities. It represents the amounts charged to patients or their insurance providers for services rendered, including treatments, procedures, and hospital stays. However, the amount recorded as patient service revenue must be adjusted to reflect the actual cash expected to be received from patients or third-party payers.
There are three primary adjustments that health care entities need to make to patient service revenue
Contractual Allowances: These represent the difference between the standard billing rates and the negotiated rates with third-party payers, such as insurance companies, government programs like Medicare and Medicaid, and other managed care organizations.
Bad Debt: Bad debt arises when a patient or their insurance provider is unable or unwilling to pay for the services provided. Health care entities need to estimate the portion of patient service revenue that is uncollectible and adjust for it.
Third-Party Settlements: These are retrospective adjustments made by third-party payers after comparing their contractual obligations with the actual services provided. The settlements can either result in additional payments to the health care entity or require the entity to return previously received funds.
Journal Entries for Patient Service Revenue Adjustments
To illustrate the adjustments, let's assume that a health care entity has billed patients and third-party payers $1,000,000 in a specific period. Based on historical data and contractual agreements, the entity estimates that it will receive only $700,000 after adjusting for contractual allowances, bad debt, and third-party settlements. The following journal entries can be used to record the patient service revenue and the adjustments:
1. Record the patient service revenue:
Dr. Accounts Receivable $1,000,000
Cr. Patient Service Revenue $1,000,000
2. Record the contractual allowance:
Dr. Contractual Allowance $250,000
Cr. Accounts Receivable $250,000
3. Record the provision for bad debts:
Dr. Bad Debt Expense $30,000
Cr. Allowance for Doubtful Accounts $30,000
4. Record the third-party settlements:
Dr. Third-Party Settlements $20,000
Cr. Accounts Receivable $20,000
After these adjustments, the net patient service revenue can be calculated as:
Gross Patient Service Revenue: $1,000,000
Less: Contractual Allowances: $250,000
Less: Third-Party Settlements: $20,000
Net Patient Service Revenue: $730,000
Understanding the patient service revenue adjustments and the related journal entries is crucial for health care entities to provide accurate financial statements in accordance with ASC 954. By considering contractual allowances, bad debt, and third-party settlements, health care organizations can better assess their financial performance and make informed decisions about their operations.