 Hello and welcome to the session. This is Professor Farhad. In this session we're going to be looking at cost reimbursement for healthcare providers. This topic is covered in a governmental and not for profit accounting, as well as the CPA exam. As always, I would like to remind you to connect with me only then. YouTube is where you would need to subscribe. I have over 1500 plus accounting, auditing, tax lectures. If you like my lectures, please like them, share them, put them in the playlist, let the world know about them. If they're benefiting you, they might benefit other people as well. This is my Instagram account. This is my Facebook account. And I do have a website on my website. You are more than welcome to donate if you'd like to support the channel down the road. Cost reimbursement. What is cost reimbursement? Cost reimbursement is basically when someone, a third party, pay the healthcare provider money. What did they pay the money for? For reimbursement. What type of reimbursement? Maybe reimbursement for equipment, computers, fixed assets, so on and so forth. Allowable costs are certain third party, such as Medicare, Medicare insurance company, that would reimburse healthcare provider for certain costs. And those costs are not typically built to patients. So when the healthcare provider buys like an MRI, they're not going to build a customer for that. Okay. So what's going to happen is, those costs, some of these costs, they get reimbursed by either Medicare, Medicaid or the insurance company, like depreciation on equipment, computers, so on and so forth. So what would the company have to do? What would the healthcare provider have to do? Well, they have to prepare costs to get reimbursed. So in order to be reimbursed, you have to tell them, what did you incur in terms of cost? And this report will, this document will summarize the allowable cost for a period of time. And this is a big deal for healthcare providers, for hospitals and physicians with medical operation. Why? Because they will need to be reimbursed. So basically, this is sometime the lifeblood of the healthcare provider. Okay. And this report could be filed quarterly, yearly, monthly. So it used to be filed yearly, then quarterly, then monthly, because healthcare providers, they will need to be paid on a regular basis. This way they can keep on operating. So the question is, when we prepare this cost report, what accounting basis do we use? Interesting. Well, each third party uses its own accounting basis called the cost report basis. So simply put, if you're going to be dealing with Blue Cross, Blue Shield, well, each one of them, they're going to have a different accounting basis. Therefore, your cost report will have to comply with this. Simply put, if you have eight different providers, eight different parties reimbursing, you have to prepare eight different reports, because each one of them would require you to prepare the report based on their cost accounting basis. So what does it mean cost report basis, not cost accounting, cost report basis? It means the basis that they use. And you have to comply with this. Well, think about the cash basis, the accrual basis. Well, we have many basis to modify the accrual. Well, cost report basis is a basis that is designed or administered by that insurance company, Blue Cross, Blue Shield. And you have to follow their basis. Therefore, there are differences between cost incurred on the income statement and cost reimbursed by the third party. Why? Because the way you report your cost report is different than you prepare your financial statement. So we have cost incurred, which is financial statement basis, whatever financial statement usually it's accrual. And cost reimbursed, which is the cost report basis. What does that mean? It means there's a difference between the two. There's a permanent and timing differences. Well, let's talk about those differences that arises because we have to prepare our financial statements different than the cost report basis. Actually, the difference is here. The difference between those two. Those two right there. I'm going to draw the line. We have what's called permanent differences and timing or temporary. Timing means temporary. Temporary means they would reverse down the road. Permanent means they will never reverse. So permanent differences, as I just told you, those differences will not reverse in the future. Okay, so the cost you report on the cost report basis will never equal to the financial statement basis. So simply put, this is a permanent difference. And the good news about permanent difference just like in the third accounting, the third income taxes, we don't have to record them. We don't have to worry about permanent differences. An example of permanent differences is the insurance company reimbursed you 60% for depreciation expense. So 40% is unreimbursed. Okay, and it's a permanent difference. There's a few titles here. Let me just fix them real quick. Unreimbursed and this is a permanent difference. So this is an example of a permanent difference. All right. Timing differences, as I told you, timing difference is the same as temporary difference. Now if you are studying about those differences, temporary and permanent, you could always go to my intermediate accounting and I have a full lesson about timing differences, temporary as well as permanent. But here we're not talking about financial income, accounting for income taxes. We're talking about the cost report. Timing differences, they differ, but in the future, they would reverse. Timing differences are recorded. Why? Because they are going to reverse. An example will be the hospital insurance might be using the straight line depreciation method. The insurance company uses the 200 double declining method, double declining rate. Well, it doesn't matter. In some years, for example, year one, we may take 10,000. In year one, we may take 20,000. So simply put, let me just show you what do I mean by this. So in year one, we have the hospital and we have the insurance company. The hospital might take only 10,000 worth of depreciation. The insurance company may take 15. In year two, the company may take only 10,000. The insurance company may take eight. And in year three, the hospital might take 10,000. And the insurance company might take seven. So notice in total, they're equal to 30,000 over a three-year period. But every year, they differ. Every year, they differ. In some years, the hospital had more depreciation, less depreciation, for example, in year one, and more depreciation in year three. So this is the, this is what we mean by temporary differences. It means overall, they equal over the long period. So how do we compute, how to record the timing difference? Here's the formula. We'll look at revenue recognized for financial statement basis. And we subtract that from revenue reimbursed, basically the revenue that we're going to be reimbursed, coming from the cost report. The difference between those two equal to a balance sheet account, usually it's a liability called deferred revenue. So we'd look at the revenue recognized for financial statements minus the revenue recognized based on the cost report. Again, this is for timing for temporary differences. Okay, the best way to illustrate this is to actually look at an example to see how this all fits together. Okay. So the hospital records depreciation using straight line method. However, in accordance with the term of certain third-party reimbursed, the hospital using $100, double declining, not $100, $150, double declining rate. During the year, the hospital charged $2 million of depreciation for the equipment, but expect to be reimbursed $3 million. So the way they booked their depreciation is the straight line. The way they get reimbursed for the depreciation is the double declining rate. Well, how does the hospital record depreciation for them? It's straight line, debit depreciation expense, credit, accumulated depreciation, basically the straight line. Now, what's going to happen is this, they are going to reimburse them for that particular year $3 million. So they will debit a receivable, a third-party receivable, $3 million. We haven't received it yet. They will credit revenue, reimburse revenue. Why reimburse revenue? Because they booked the expense and now they're getting reimbursed $2 million. And what's going to happen? They have a $1 million, the third revenue, which is a liability. Why? It seems why? Because the cost report for that third-party provider, it's going to use in the double declining. So under the double declining, they're going to reimburse them for this particular year more than what they actually book, $1 million more. That $1 million more is a liability for now called the third reimbursement liability, which will reverse once they book more depreciation in the future, more depreciation than the cost report. Let's take a look at another example. We have this clinic is reimbursed by Blue Cross Health Insurance Company for 60% of certain allowable cost. The following item affect the clinic for the year 2016 to 2018. In 2016, the clinic purchased equipment for $60,000. It depreciated over three years using the straight line method. It means $20,000 per year. Blue Cross reimbursed over three years with the $200 double declining balance. Well, here we go. This is a temporary difference, temporary difference. What you use for depreciation is different than what the third-party insurers use for the cost reimbursement. In 2006, the clinic realized $10,000 loss on early debt extinguishing. So basically they bought back their debt and they incurred $10,000. The clinic recognized the debt loss in the year that that was occurred in 2016. Well, the Blue Cross reimbursed over the life of the debt, which is two years. So you're going to take the loss in that particular year when the Blue Cross, the way they reimburse you for this loss is over two years. Now prepare a comparison schedule, not compassion, comparison, comparison schedule, comparison schedule between reportable expenses and reimbursable expenses. So basically, reportable expenses is financial statement and this is cost report basis. This is the special accounting method. So let's go ahead and start to do so and prepare the journal entries for that matter. So let's first take a look at 2016 reportable expenses. Notice under reportable expenses, this is the financial statement and this is the cost basis, not cost basis, cost report basis, cost report basis, which is the special method. Okay, the depreciation for the financial statement is $20,000. The depreciation for the reimbursable expense is $60,000 times two-third, which equal to $40,000. So notice there's a $20 difference in between. Now we have to look at the other thing. The other things are loss on that extinguishment, loss on that extinguishment. We have the company realize a $10,000 loss it will be taken in that particular year. Well, we're going to take the loss, that $10,000 in that particular year. Blue Cross, it's going to take this $10,000 and take it over two years. So in year 2016, they're only going to be able to take $5,000. Let's look at the total. For financial statements, we have $30,000 of expenses. For reimbursable expenses $45,000, which is more. Why? Because why more? Well, although they're not going to reimburse us the full loss on that this year, but the depreciation was much higher. So that's why we have more reimbursement. Times 60%, that's the reimbursement rate. Therefore, amount to be reimbursed. They're going to reimburse us $27,000 in the reportable expense, which is the revenue, will be $18,000. So we will debit receivable. So this is the amount that they're going to reimburse for us. Because of that, and we incur expenses of $18,000, that expense becomes a revenue because they are reimbursing it. We credit revenue. And the difference between those two is a temporary difference of $9,000, which will reverse. And I will show you at the end, which will reverse. So this $9,000, if you want to create a T account for the third revenue, that's a good idea. And put there $9,000, that's not a bad idea. Put there $9,000, which you will see over 2017 and 2018. This is the third revenue will reverse. Let's take a look at the following year, which is 2017. 2017, the straight line depreciation would still be $20,000. The double declining balance depreciation will be $60-40, which is the book value times two-third, which will be $13,333. Notice this year, what we're doing is we're taking more depreciation for SL than the double declining balance. Loss under debt extinguishment, we already computed all the loss for the financial statement purposes. Now Blue Cross would say, you can take the other $5,000 off the loss and would reimburse you for it, would reimburse you 60% for it. Therefore, amount to be reimbursed for the financial statement $12,000, reimbursable expense is $11,000. So they're going to reimburse us $11,000. We have revenues of $12,000, and the difference between those two is $1,000. Now remember this is the third revenue I told you to create earlier, the third revenue, and we had in there, I want you to add in there, the third revenue we had in there $9,000. We had in there $9,000. Now of the $9,000, $1,000 already reversed, so we still have $8,000 to go. Now let's look at the third year. In the third year, the straight line is still $20,000 of depreciation, $20,000 plus $20,000 plus $20,000 plus $20,000. Now the double declining balance, remember you have to take, if you take this amount times two third, whatever the amount is, you have to plug in the amount that's going to give you zero depreciation, right? Because by year three, you have to fully depreciate the asset. So what's left, this is a plug for year three. Why? Because you need to depreciate in total $60,000. In year one, you depreciated $40,000. In year two, $13,333. What's left is $6,666 while rounding, but you got the point. Okay? So there is no more loss on the debt extinguishment, not by the company, not by the insurance company, not by the hospital, not by the insurance company. Therefore, the total reportable expenses is $20,000. We multiply this by 60% and the reimbursable amount is $6,666. So we expect to be reimbursed $4,000. Our revenue will be $12,000. So this is the revenue. This is the reimbursed amount, $4,000. And the difference is a debit two and a third revenue. So notice in the prior, from the prior example, we had the third revenue of $8,000. Well, let's go from the beginning. We started with $9,000. We debited the $9,000. Now we debited the $9,000 and we debited the third revenue, $8,000. Therefore, the third revenue is $0,000. And this is what I meant to tell you, right? From the get-go, this $9,000 will be reversed. So the $9,000 then reverse over the years. So let's see what happened over a three-year period. Over a three-year period, we bought an equipment that's worth $60,000 and we were reimbursed 60% of that. 60% times $60,000 is $36,000. Also, we had that extinguishment of $10,000, which is over a period of two years. We got reimbursed for 60%. That's also $6,000. So $36,000 plus $6,000 equal to $44,000. So the total reimbursement we got over a period of three years is $44,000. Well, let's see if that's the case. Year three, let me highlight them in yellow. Year three, we were promised $4,000. That's $4,000 plus $11,000. $4,000 plus $11,000 is $15,000. $15,000 plus $27,000. So let's do it. Just make sure we show you the math. $15,000 plus $27,000 plus $27,000 equal to $42,000. What did I do? Maybe it's $42,000, not $44,000. Actually, it is $42,000. I made a mistake here. So it is $42,000. It is $42,000. Therefore, notice the total reimbursement over a three-year period is $42,000. It fluctuates between our financial statement expenses and the reimbursable expenses. But over three years, it is $42,000. If you have any questions, any comments about this session, please email me. If you happen to visit my website, please consider donating. If you're studying for your CPA exam, as always, study hard. It's worth it. Good luck and see you on the other side of success.