New accounting standard for hospital bad debt a mixed bag, says Fitch

A new accounting standard for hospitals reporting bad debt will have both negative and positive effects, according to a report from Fitch Ratings.

"The new standard appears to be more robust and consistent about the collectability of patient accounts, and requires expanded disclosure about the methodology used to estimate collectability," said Megan Neuburger, managing director at Fitch. "But difficulties in drawing comparisons between hospitals will persist, and continue to hamper accurate and detailed forecasting of the financial burden of uncompensated care."

The new standard requires hospitals to record a good portion of what would previously be considered bad debt as a reduction of revenue, according to the report. Due to the new standard, Fitch said it anticipates hospitals to report "lower revenue before bad debt, lower bad debt expense and, all else equal, the same amount of revenue after bad debt."

Although the agency said it believes the new standard will affect financial measures that are part of the income statement and balance sheet, such as operating revenue before bad debt expense and bad debt expense, it does not believe operating income or EBITDA will be materially different. Therefore, "determining compliance with debt agreement covenants calculated based on these figures will not be significantly influenced," according to Fitch.

A number of for-profit hospital operators, including Brentwood, Tenn.-based LifePoint Health, Nashville, Tenn.-based HCA Healthcare and Dallas-based Tenet Healthcare, were required to adopt the standard for reporting periods beginning after Dec. 15, 2017.

Access the full report here

 

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