The system implemented accounting reforms to avoid overestimating its revenue moving forward.
Edward-Elmhurst Health, an integrated system based in Naperville, Illinois, went public this week with sour news: The three-hospital nonprofit system discovered a $92 million accounting error.
Accounts receivable had been overstated for a number of reasons over the course of six years, making it appear as though Edward-Elmhurst was poised to collect more revenue than it should reasonably expect. Upon discovering the problem late last fall, the system hired an independent auditor and began implementing a few accounting changes.
President and CEO Mary Lou Mastro, MS, RN, FACHE, who is scheduled to speak about the accounting changes with investors on a conference call Thursday afternoon, says leaders at other hospitals and health systems across the country should take another look at their books to make sure they’re not falling into the same predicament.
“Given the complexities of healthcare reimbursement and the incredible number of assumptions that go into calculating accounts receivable, I would recommend that anyone do a valuation of their accounts receivable, as we did, which included what’s called a ‘cash waterfall analysis,’” Mastro tells HealthLeaders Media.
That analysis revealed Edward Hospital and Elmhurst Hospital had each contributed to the problem before they merged to form Edward-Elmhurst Health in 2013. About $42 million of the error accumulated prior to the merger.
The system’s financial statements for fiscal years 2016 and 2017 will be restated to reflect a reduction in expected revenue, and the changes will lower the system’s operating income for the first half of fiscal year 2018 by $10.4 million, from negative $5 million to negative $15 million.
Even so, Mastro says the forthcoming savings from a $50 million cost-cutting initiative the system already implemented will keep the books balanced.
“We’ve identified the problem. We have worked rapidly to put corrective actions in place, and we’re confident that moving forward we will have reliable financial statements,” she says.
“We are a strong organization. We have a strong cash position and certainly have a solid market share, and we’re growing in our market, so going forward we’re very optimistic about the future and that we will be profitable or break even this year.”
Three major causes
Mastro cites three major variables in the equation that gave leadership too-rosy a picture of the system’s expected revenue: contractual allowances, charity care, and bad debt.
First, contractual allowances—which Mastro describes as “the difference between what we bill and what we actually get paid”—can vary drastically depending on the payer. It can be quite difficult, therefore, to account accurately for every negotiated discount, she says.
Steven Porter is an associate content manager and Strategy editor for HealthLeaders, a Simplify Compliance brand.