Chapter 39 Auditing Health Care Organizations

39AuditingHealthCareOrganizations39.1OVERVIEWOFTHEINDUSTRY(a)HealthCareServices,(b)HospitalSegment,(c)LawsandRegulations,(d)Third-PartyReimbursementorPayment,39.2ACCOUNTINGPRINCIPLESANDPRACTICES(a)AuthoritativePronouncements,(b)RevenuefromHealthCareServices,(c)Third-PartyPayorConsiderations,(i)EstimatingRevenueRelatedtoGovernmentalPrograms(d)DeferredThird-PartyReimbursementandPayment,(e)AccountingforContractswithHospital-BasedPhysicians,(f)ContinuingCareRetirementCommunities,(g)CapitalizationofInterest,(h)FinancialStatementPresentation,39.3RISKFACTORSANDAUDITREACTION(a)InherentRisks,(i)Tax-ExemptStatus,(ii)SourcesofLong-TermFinancing,(iii)MedicalMalpracticeClaims,(b)AuditStrategy,(c)Materiality,(d)SingleAuditActandRelatedAuditConsiderations,39.4AUDITCONSIDERATIONS(a)PatientRevenueCycle,(i)Admitting/RegistrationFunction,(ii)DailyHospitalServiceCharges,(iii)AncillaryServiceCharges,(iv)OutpatientServiceCharges,(v)DischargeandBillingFunctions,(vi)SubstantiveTestsofAccountsReceivable,(vii)CostReports(viia)SignificantEstimatesRelatedtoGovernmentProgramRevenues(viii)NonpatientRevenues,(b)PurchasingCycle,(i)Payroll,(ii)SuppliesandOtherExpenses,(c)Inventories,(d)FixedAssetsandIntangibles,(e)TestsofRestrictedNetAssets,(f)AnalyticalProcedures,(g)MalpracticeInsurance,(h)IllegalActsRelatedtoGovernmentPrograms(i)ConsiderationsforTax-ExemptDebtIssuers39.1OVERVIEWOFTHEINDUSTRYHealthcareisoneofthefastest-growingindustriesintheUnitedStates.Thesystemofhealthcaredeliveryorganizationsisextensive,encompassingthefollowingsegments:HospitalsNursinghomesHealthmaintenanceorganizations(HMOs)andotherprovidersofprepaidcareContinuingcareretirementcommunities(CCRCs)andassisted-livingfacilitiesHomehealthagenciesMedicalgrouppracticesClinicsOtherambulatorycareorganizationsExpendituresforhealthcarerepresentapproximatelyone-seventhofthenationaleconomy,approaching$1trillionannually.Thefederalgovernmentisthemajorpayorforhealthcareservices,principallythroughtheMedicareandMedicaidprograms.StatesalsoparticipateinthefundingandadministrationofMedicaidprogramsand,insomecases,inspecialpaymentsforuncompensatedcare.MostAmericansreceivehealthcarecoveragethroughtheiremployersandvarioustypesofinsuranceprograms-BlueCross,HMOs,andawidevarietyofotherprogramsandprivateinsurers.Insurersofferavarietyofmanagedcareplans-preferredproviderorganizations(PPOs)ornetworks,point-of-service(POS)plans,andHMOs.APPOisamanagementorganizationthatcontractswithanetworkofproviderswhoagreetodeliverhealthcareservicestoenrollees.POSplansarehybridsofHMOsandtraditionalindemnityplans.Theyprovidefinancialincentivestomemberstousenetworkproviders,butallowout-of-networkcarewithahigherco-payment.Managedcareisgrowingsignificantly,withexpansionrecentlyintoMedicareandMedicaidmanagedcareprogramsasthefederalandstategovernmentsattempttocontrolhealthcarespending.Respondingtofinancialpressures,thehealthcareindustrycontinuestoreexaminethedeliveryofhealthcareservicesinordertofindcost-effectivewaystoprovidehigh-qualityhealthcare.Drivingthereorganizationofhealthcaremarketsareseveralforces:payors'demandsforcostcontainment,uncompensatedcareforservicestoindigentpopulations,reductionsingovernmentspending,anagingpopulation,newdiseasesrequiringcostlytreatments,andemergingandexpensivenewtechnologies.Asmanagedcarebecomesmoreprevalent,providersfinditdifficulttoprosperasstand-aloneorganizations.Toparticipateinamanagedcareenvironment,hospitalsandphysicianshavejoinednetworksthatgenerallyrequiredirectcontractingwithpayors,adoptednewreimbursementarrangementssuchascapitation,andincreasedtheirabilitytoofferawidearrayofessentialservices.Providersincreasinglyaresharingintheriskoftreatingpatientpopulationsthroughreceivingpredetermined,per-personmonthlypayments(capitation)thatmaynotnecessarilytakeintoaccountthelevelofservicesdelivered.Providershaverestructuredtheirorganizationsinternallyandexternallytoadapttothemanagedcareenvironment.Hospitals,physicians,andcarriershavecreatedverticallyintegratednetworksthroughphysicianhospitalorganizations(PHOs),integrateddeliverynetworks,consolidations,jointventures,acquisitions,andmergers.Thesetypesofarrangementsaffordprovidersnumerousadvantagessuchasincreasedbargainingpower,thecapacitytocontractdirectlywithpayors,consolidationofcostlyservices,awidearrayofserviceofferings,acost-effectivewaytomanageadministrativeandinformationfunctions,andaprominentmarketpresencetoattracthealthcarebuyers.Contributingtothetrendtowardhospitalmergersisashifttooutpatientcareduetotechnologicaladvancements,witharesultinggrowthinexcessbedcapacity.Largefor-profithospitalsystemshaveexpandedbypurchasingotherfor-profitaswellasnot-for-profithospitals.PhysiciansalsohavejoinedtogethertoformgrouppracticesandIndependentPhysiciansAssociations(IPAs),oftencontractingwithmanagedcareorganizations.Undersomeformsofmanagedcare,physiciansaresubjecttothemonitoringofplanadministrators(physicianprofiling),practiceinaccordancewithacceptedguidelines(clinicalpathways,practiceguidelines),andreceivecapitatedreimbursementastheirp