The few months after a facility's fiscal year-end are always challenging. From closing the books to preparing for the external audit process to providing information for and completing the Medicare cost report, there is never enough time in the day to get everything done. We have all been through the experience– at the time, we have all said, “Next year will be better” and “We will fix the bottlenecks.”

Whether or not your facility has had success or not made progress in this area, the items below serve as a checklist of ways to plan, prioritize, and complete items throughout the year and before the audit. The goal is to make the year-end process easier for staff, more efficient for auditors and cost report preparers, and make your facility less prone to large audit adjustments and/or make costly mistakes in reimbursement.

Month-End Close & Financial Statements

One of the best ways to avoid bottlenecks at year-end is to review your monthly close and financial statement preparation process. If not monthly, at least quarterly, a facility should reconcile all material balance sheet items back to a supporting schedule. Ideally, try to complete your monthly reconciliation schedule in the auditor's preferred format so you avoid having to take your reconciliations and input them into the auditors’ format at year-end.

Managing your close process monthly will enable your staff to complete the needed reconciliations and financial statements. Are the monthly board meetings being held at the appropriate time and/or day of the month? How long does it take to close accounts receivable, payroll, and accounts payable? Do we have a month-end close schedule created that includes the closing schedule and gives the accounting staff time to prepare financial statements?

Management should have at least three or four business days to review the prepared financials before presenting them at the monthly board meeting. This allows management to ask questions upon review and gives staff the time to make corrections as needed. Managing your month-end process will increase the accuracy and timeliness of your month-end financials, providing management and the board with a better ability to see trends. This enables them to make operating and strategic decisions throughout the year.

Material Accounting Estimates

By far, the most common material audit entries made among hospitals stem from the contractual adjustment, allowance for doubtful accounts, and the Medicare cost report 3rd party payable or receivable. These can significantly change the hospital’s net income and cash flow and therefore are critically important calculations for hospital management.

1. Contractual Allowance: This is an estimate of how much cash the hospital will collect from their patients’ AR balances and establishes the net realizable value of the AR. Determining this amount is anything but simple because all payor classes will pay the hospital differently. We recommend establishing and monitoring actual contractual percentages by patient type and financial class based on reporting from your software system and/or contracts established by various payors.
2. Allowance for Bad Debt: An estimate to evaluate the net realizable value of self-pay AR and bad debt based on age. With aging receivables, the expectation is as it ages, the balances will be less likely to be collected from patients. We recommend that hospitals review any self-pay AR for collectability and establish a methodology that accurately values AR and bad debt. Many audit firms will disallow 100% percent of the balances older than 365 days.
3. Due to/from Third Party: Facilities should also prepare a Medicare and Medicaid interim cost report template at least quarterly. This will help a facility manage cash flow throughout the year by requesting Medicare interim rate changes and settlements as needed and avoid large auditor adjusting journal entries. Many facilities do not prepare an interim cost report, which can create large cash flow swings. With an accurate cost report settlement, management is better informed of their cash position for the year and can make strategic financial decisions on more accurate data. Preparing this entry is not only critical for the audit but critical for the hospital’s strategic plan.

External Financial Statement Audit & Cost Report Process

If your facility has followed the recommendations for the monthly close and financial statement process, the external audit preparation time hopefully will already be reduced. However, gathering other information for the audit and for the Medicare cost report can still be overwhelming. Other recommendations to prioritize work and time during the external audit and Medicare cost report process include:

1. Upon receiving the request for information from the auditor, meet with staff to identify responsibilities and due dates.
2. Organize, review, and send non-financial information as soon as you can after year-end close. This information should not change after the end of the fiscal year, so there is no reason to wait to pull this information together as time permits. Examples include:
   • Monthly statistical reports
   • Board of Director Meeting Minutes
   • Accounts Receivable Reports
   • Payroll Reports
   • Chargemaster and Revenue Usage Reports
   • Internal control checklists
   • Charity Care information
   • New or amended contracts, debt agreements, capital lease contracts, etc.
   • Medicare and Medicaid Correspondence received throughout the year
   • Medicare cost report statistics and information
     1. Statistics, including observation hours, rural health clinic visits, and 96-hour compliance log for critical access hospitals
     2. Payroll information and FTEs
     3. B-1 Square Footage Summary with detail support, including updates for changes during the fiscal year
     4. A-8-3 Contracted Therapy Invoices and Information
     5. Emergency Room Time Studies
     6. Rural Health Clinic Time Studies
     7. Rural Health Clinic Vaccine information and invoices
     8. Any other B Series allocation statistics that will not change, such as:
        • Laundry pounds
        • Dietary Meals
        • Housekeeping Time Study

As you can see, if you are able to complete the list above well in advance of the scheduled audit date, it should help reduce stress and bottlenecks, allowing staff to focus on finalizing the correct year-end trial balance. If you are able to put the time in to review research and correct accounts as needed, you can put the facility in a better position to reduce any surprise auditor adjusting journal entries that can have a material impact on your bottom line and cash flow.

If you have any questions or would like to learn more about this topic, please contact us.