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The primary reference source of discussion of industry-specific accounting principles, reporting practices, and auditing considerations for health care organizations is AAG-HCO. The incremental industry-specific accounting guidance in AAG-HCO has been codified in ASC 954.
All AICPA Audit and Accounting Guides are updated annually for conforming changes (those necessitated by the issuance of new authoritative pronouncements) and other minor changes that do not require due process. Engagement teams should ensure that they keep abreast of changes to AAG-HCO that are made in this manner.
AAG-HCO (and ASC 954) have a fairly broad scope. The guidance applies to all entities that derive revenue from the sale of health care services. "Health care services" are services provided to individuals by or under the direction of licensed medical professionals in connection with the diagnosis or treatment of illness. By extension, it also includes the sale or rental of certain medical goods (such as medical devices, prosthetics, or durable medical equipment) that are prescribed in connection with medical treatment. ASC 954 lists hospitals, clinics, medical group practices, emergency care facilities, laboratories, surgery centers, and home health entities as examples of entities that provide health care services. Other types of health care providers may not as obvious, for example, a laboratory that has no direct patient-facing activities; entities that sell or rent medical devices that are prescribed by medical professionals; or diversified companies where health care is one of several lines of business.
As a general rule, AAG-HCO (and ASC 954) applies to all entities whose principal operations involve providing (or agreeing to provide, in the case of prepaid health care arrangements) health care services to individuals. "Health care services" are services provided to individuals by or under the direction of licensed medical professionals in connection with the diagnosis or treatment of illness. By extension, "health care services" also would include the sale or rental of certain medical goods (such as medical devices, prosthetics, or durable medical equipment) that are prescribed and billed to patients or third-party payors in connection with medical treatment. ASC 954 lists hospitals, clinics, medical group practices, emergency care facilities, laboratories, surgery centers, HMOs, CCRCs and home health entities as examples of entities that provide health care services (see AAG-HCO par. 1.04 for more examples). Other types of health care providers that would meet this definition may not be as straightforward, for example, a laboratory that has no direct patient-facing activities; entities that sell or rent medical devices that are prescribed by medical professionals and are billed to patients and third-party payors; or diversified companies where health care is one of several lines of business (discussed further below).
There are some exceptions to this general rule, based on the health care organization's ownership characteristics.
  • Excluded from AAG-HCO and ASC 954 are certain not-for-profit health care organizations whose primary source of income is contribution income rather than revenues earned in exchange for providing (or agreeing to provide) health care services (i.e., they do not charge for their services). Those types of organizations (defined in ASC Master Glossary as "voluntary health and welfare organizations") should instead follow the guidance of the AICPA Audit and Accounting Guide, Not-for-Profit Entities, and ASC 958, Not-for-Profit Entities. Accounting and reporting considerations for those organizations are discussed in ARM 9692.
  • AAG-HCO generally applies to state and local government-owned health care enterprises that use enterprise fund accounting and reporting. Governmental health care operations that are not accounted for in enterprise funds because user fees are not a principal revenue source (for example, certain long-term care institutions) follow the AICPA audit and accounting guide for state and local government entities exclusively (see ARM 9812).
AAG-HCO par. 1.05 discusses the applicability of the guide to health care transactions of organizations which have health care as a component of a larger, more diversified operation. FinREC believes that to the extent such entities have unique transactions of the type covered by AAG-HCO, the recognition and measurement guidance it describes would be applicable. FinREC notes that professional judgment should be exercised in determining the applicability of AAG-HCO to transactions entered into by such entities.
AAG-HCO also applies to organizations whose primary activities are the planning, organization, and oversight of entities providing health care services, such as parent or holding companies of health care providers (par. 1.02).
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