Texas Tech University Health Sciences Center
Gray Areas in Accounting: Answering the Tough Questions

Gray Areas in Accounting: Answering the Tough Questions

Most people think accounting is straightforward, and that it is not subjective in any way. And, to a certain extent that is true. We have our famous Generally Accepted Accounting Principles (GAAP), which are accounting rules and procedures designed to achieve uniformity and accuracy in the preparation of financial statements.

Why is this important? Think of your 401(k) plan. When you select companies in which to invest, even if you never personally look at the financial statements of these companies, you want to have confidence that an independent accounting expert is looking at the documents to ensure they truthfully describe the financial condition of the companies. Our system of regulation of public companies is founded on a core principle: disclosure.

While Texas Tech Physicians isn’t a publically traded company by any means, we also rely on our financial data to be accurate in order to make informed decisions. But, accuracy does not eradicate all subjectivity in our health care accounting world here at Texas Tech Physicians.

One subjective aspect of accounting is the difference between bad debt and charity.  What is the difference? We know that all businesses have a certain percentage of customers who don’t pay as per an agreement.  If the balance, or a portion of the balance, cannot be collected, it is ultimately labeled bad debt. But, not many businesses provide charity. I would say very few.

Health care does for several reasons—humanitarian concerns being foremost. We know that some patients simply don't have the resources to pay for medical services.  And, we want to help them, if the legitimacy of their situation can be determined.  But, when is an account charity and when should we bill the patient? When should an account be classified as bad debt and necessarily turned over to a collection agency?  To me, bad debt relates to a patient who is unwilling to pay a health care account, even though it has been determined he or she has the financial capacity to pay. While similar in that both accounts are in unpaid status, the patient's financial status is the determining factor between charity and bad debt, and that is always the tricky part.  As a general rule, charity should be determined in advance of a bill becoming bad debt or even providing services based on a “financial needs assessment.” This is not always possible, however. Emergencies happen.

Hopefully, I have explained this well enough.  You now see that while many call accounting “bean counting,” it is not as straightforward as counting beans at all. We often have to determine how to classify funds and transactions, so there is judgment involved. GAAP doesn’t answer all questions. A determination must be made.

On what we are discussing, a person might ask what difference does it make if it’s bad debt or charity when we probably won’t be paid either way. It makes a great deal of difference to the person’s credit rating and for governmental programs that ask for information about the amount of charity care we provide.

I could give other examples, but that is enough for today.  Have a great week!

Written by: Brent Magers, CEO