HMA » Topics » e. Use of estimates

This excerpt taken from the HMA 10-K filed Feb 27, 2007.

e. Use of estimates

     The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from these estimates.

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This excerpt taken from the HMA 10-K filed Dec 29, 2005.

          e.     Use of estimates

          The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.  Actual results could differ from these estimates.

          f.     Net patient service revenue and cost of revenue

          The Company records gross patient service charges on the accrual basis in the period that the services are rendered.  Net patient service revenue represents gross patient service charges less provisions for contractual adjustments. Approximately 58%, 58% and 57% of gross patient service charges for the years ended September 30, 2005, 2004 and 2003, respectively, related to services rendered to patients covered by Medicare and various state Medicaid programs.  Payments for services rendered to patients covered by these programs are generally less than billed charges.  Provisions for contractual adjustments are made to reduce the charges to these patients to estimated cash receipts based upon the programs’ principles of payment/reimbursement (i.e., either prospectively determined or retrospectively determined costs).  Final settlements under these programs are subject to administrative review and audit and, accordingly, the Company periodically provides reserves for the adjustments that may ultimately result therefrom. Such adjustments were not material to the Company’s consolidated operations during the years ended September 30, 2005, 2004 and 2003. Laws, rules and regulations governing the Medicare and Medicaid programs are extremely complex and subject to interpretation.  As a result, there is a possibility that recorded estimates may change in the future and such changes in estimates, if any, will be recorded in the Company’s operating results in the period they are identified by management.  Revenue and receivables from government programs are significant to the Company’s operations but management does not believe that there are significant credit risks associated with such programs.  There are no other significant concentrations of revenue or accounts receivable with any individual payor that subject the Company to significant credit or other risks.

          Estimates for contractual allowances under managed care health plans are based primarily on the payment terms of contractual arrangements, such as predetermined rates per diagnosis, per diem rates or discounted fee for service rates.

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HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1.       Business and Summary of Significant Accounting Policies (continued)

          Net patient service revenue is presented net of provisions for contractual adjustments of approximately $8,873 million, $7,410 million and $5,386 million for the years ended September 30, 2005, 2004 and 2003, respectively.  In the ordinary course of business, the Company provides services to patients who are financially unable to pay for their care.  Accounts written off as charity and indigent care are not recognized in net patient service revenue.  The policy and practice at each of the Company’s hospitals is to write off a patient’s entire account balance upon determining that the patient qualifies under a hospital’s charity care and/or indigent policy.  Based on established rates, the foregone charges for charity care and indigent patient services, including discontinued operations, aggregated approximately $556.9 million, $421.2 million and $279.3 million for the years ended September 30, 2005, 2004 and 2003, respectively.

          The presentation of costs and expenses does not differentiate between cost of revenue and non-cost of revenue because substantially all of the Company’s costs and expenses are related to providing health care services.  Furthermore, management believes that the natural classification of expenses is a more meaningful presentation of the Company’s cost of doing business.

          g.     Accounts receivable and allowances for doubtful accounts

          The Company grants credit without requiring collateral from its patients, most of whom are local to the area where the Company’s hospitals are located and are insured under third party payor agreements.  The Company does not charge interest on past due accounts receivable (such delinquent accounts are identified by reference to contractual or other payment terms).  The credit risk for non-governmental program accounts receivable is limited due to the large number of insurance companies and other payors that provide payment and reimbursement for patient services.  Accounts receivable are reported net of estimated allowances for doubtful accounts.

          Collection of accounts receivable from third party payors and patients is the Company’s primary source of cash and is critical to its successful operating performance.  The primary collection risks relate to uninsured patient accounts and patient accounts for which the primary insurance payor has paid, but patient responsibility amounts (generally deductibles and co-payments) remain outstanding.  Provisions for doubtful accounts are primarily estimated based on the age of the patient’s account, the patient’s economic ability to pay and the effectiveness of collection efforts.  When considering the adequacy of the allowances for doubtful accounts, accounts receivable balances are routinely reviewed in conjunction with historical collection rates, health care industry trends/indicators and other business and economic conditions that might ultimately affect the collectibility of patient accounts.  Accounts receivable are written off after collection efforts have been pursued in accordance with the Company’s policies and procedures.  Accounts written off as uncollectible are deducted from the allowance for doubtful accounts and subsequent recoveries are netted against the provision for doubtful accounts expense.  Changes in payor mix, business office operations, general economic conditions or trends in federal and state governmental health care coverage could adversely affect the Company’s accounts receivable collections, cash flows and results of operations.

          Effective June 30, 2005, the Company modified its allowance for doubtful accounts reserve policy for self-pay accounts in order to reserve all those accounts at 120 days based on current collection rates (previously such accounts were reserved at 150 days).  This policy modification reflects increases in underinsured and uninsured patient service volume that have been experienced both by the Company and the hospital industry as a whole.  While management believes that the rate of increase for such patients has moderated in some of its markets, management does not believe that the level of underinsured and uninsured patients will revert to their historically lower levels.  In light of this continuing industry trend, management concluded that reserving self-pay accounts at 120 days is appropriate.  In connection with this policy modification, the Company recognized an increase in its provision for doubtful accounts of approximately $37.5 million during the year ended September 30, 2005.  This change in accounting estimate reduced net income and diluted earnings per share by approximately $23.3 million and $0.09, respectively, during such fiscal year.

49


HEALTH MANAGEMENT ASSOCIATES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)

1.       Business and Summary of Significant Accounting Policies (continued)

EXCERPTS ON THIS PAGE:

10-K
Feb 27, 2007
10-K
Dec 29, 2005
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