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Proof of Financial Ability to Operate

Healthcare Accounting Specialist Explains Proof of Financial Ability to Operate

As you may know, part of the process to complete the Health Care Licensing Application, the Florida Agency for Health Care Administration (AHCA) and the Florida Statutes requires that each applicant to establish AHCA Proof of Financial Ability to Operate and to show per Healthcare accounting requirements the anticipated provider revenue and expenditures, the basis for financing anticipated cash-flow requirements of the provider, and an applicant’s access to contingency financing. To establish AHCA proof of financial ability to operate, information is provided in detailed forms and schedules which include the monthly projected summary of revenue and expenses, the monthly projected cash flow statements for 24 months and the two annual balance sheets and detailed footnotes that include summaries of significant assumptions, accounting policies and other informative disclosures as required by Generally Accepted Accounting Principles (GAAP). Typical Excel based spreadsheets may be cumbersome to design for this purpose.  Because of the special requirements to produce monthly income statements and cash flows for 24 months, customized projection software is needed to meet the reporting requirements. Subsequent to approval, certain Medicare providers will have to file an annual Medicare Cost Reports.

To show AHCA proof of financial ability to operate per Healthcare accounting requirements the forms and schedules must accompany any initial or change of ownership (CHOW) application for the following types of health care providers.

•  Adult Day Care Centers

•  Assisted Living Facilities

•  Health Care Clinics

•  Home Health Agencies

•  Home Medical Equipment

•  Hospice

•  Intermediate Care Facilities for the Developmentally Disabled

•  Prescribed Pediatric Extended Care Center

•  Skilled Nursing Facilities

All schedules must be prepared in accordance with generally accepted accounting principles (GAAP). A Certified Public Accountant (CPA) must compile, examine, or apply agreed-upon procedures to prospective financial statements, including summaries of significant assumptions and Healthcare accounting policies. Such a requirement is usually not required for the annual Medicare Cost Reports

To establish AHCA proof of financial ability to operate each applicant can select the type of financial statement to be given to the Provider.  As mentioned above, the three choices are :

1.  Compiled

2.  Agreed-upon procedures

3.  Examined

To establish AHCA proof of financial ability to operate and to learn more about your financial statement options and Healthcare accounting requirements:

Before you select the level of service from the CPA , the following will serve as a brief analysis of each option.

1.  Compile – A compilation engagement is the lowest level of service that an accountant can perform on prospective financial presentations that is intended for third parties. Despite it being the lowest level of service, it is a very common deliverable provided by a CPA and often a cost effective solution for many companies, when required or accepted by third parties and acceptable healthcare accounting practices utilized. Compilation procedures includes assembling, to the extent necessary, the prospective financial information based on the responsible party’s assumptions. Performing the required compilation procedures, including reading the prospective financial statements with their summaries of significant assumptions and healthcare accounting policies, and considering whether the prospective financial statements appear to be (1) presented in conformity with American Institute of Certified Public Accountants(AICPA) guidelines and (2) not obviously inappropriate. The compilation procedures are not performed for the purpose of providing any assurance on the presentation or on the underlying assumptions. The accountant may prepare the financial statements or then reads them when they are prepared by the Company’s management  to make sure that they appear appropriate in form and content. Because the accountant does not perform any other procedures, the accountant does not obtain any assurance that the financial statements are free of material misstatement. A compilation report is issued by the CPA.

2.  Agreed-upon procedures – With an agreed-upon procedures engagement the accountant is engaged by a client to perform specific procedures and report findings. The accountant does not perform an examination or provide an opinion. Rather, the accountant reports only procedures and findings. In this type of an engagement, the accountant performs whatever procedures the users of the prospective statements specify. It is a flexible form of engagement; the procedures may be as extensive or cursory as the specified parties want, but should include more than a mere reading of the prospective financial statements. The service may be lower than a compilation, between a compilation and an examination, or as high as an examination.

3.  Examined – An examination engagement is a professional service that involves extensive corroborative procedures, resulting in the CPA’s expression of positive assurance about the presentation and the underlying assumptions. It is similar to an audit of historical financial statements and is the highest level of service that CPA’s can provide on prospective financial statements. The examination involves (a) evaluating the preparation of the prospective financial statements,(b) evaluating the support underlying the assumptions,(c) evaluating the presentation of the prospective financial statements for conformity with AICPA presentation guidelines, and (d) issuing an examination report.

Some additional insight factors to consider when choosing the levels of service

In an examination engagement an opinion is given by the CPA and it states that (i) the prospective financial statements are presented in conformity with AICPA guidelines and (ii) the assumptions provide a reasonable basis for the responsible party’s projection, the assumptions provide a reasonable basis for the responsible party’s projection given the hypothetical assumptions. Because an examination is an extensive service, it is more expensive to provide than the other two alternatives. Examinations are typically performed when the prospective presentation is associated with a decision involving a large amount of money or when a regulatory agency (such as a securities commission or health care authority) requires it.

Notwithstanding the statutory requirement for either a compilation, or agreed-upon procedures or examination to establish the AHCA proof of financial ability to operate, you may want to consult with your counsel and the healthcare accounting authority before hiring the accountant to prepare the Florida AHCA Proof of Financial Ability application.

We can help you with …..

•Due diligence on acquisitions of Home Health Agencies  that are  primarily Medicare based.

•To provide the AHCA proof of financial ability to operate, we can assist  you with the Florida AHCA Proof of Financial Ability application including assistance with compiled prospective(projected) financial statements that are required to be completed by a Certified Public Accountant for Home Health Agencies that are primarily Medicare based. We have developed specialized projection software that was customized to meet the AHCA requirement(s) for a Medicare based Home Health Agency that shows the monthly projected summary of revenue and expenses and the monthly projected cash flow statements for 24 months and the two annual balance sheets.

•Setting up accounting systems with QuickBooks and related training after obtaining your license from the State of Florida.

We have prepared dozens of projections  over the years in various industries and recently successfully assisted a Medicare based Home Health Agency and HME   in completing and filing a AHCA proof of financial ability to operate (CHOW) and to attain a license from The Florida Agency for Healthcare Administration (AHCA) by completion of the  Proof of Financial Ability To Operate application, which included preparation of the projections, forms and schedules referred to above and communication with the AHCA reviewer.

About 

Gustavo A Viera is the managing partner of Gustavo A Viera, PA. His experience spans more than 25 years. He started his career in public accounting at PriceWaterHouseCoopers where reached the level senior audit manager. His Fortune 500 experience includes positions as CFO – Latin America Region for both Hewlett Packard and Telefonica of Spain. Gustavo also writes a blog twice a week that addresses trending accounting and tax issues. He is an SBA Advisor and teaches workshops for aspiring entrepreneurs. His office is located at One Alhambra Plaza Floor PH Coral Gables FL 33134, and is admitted to practice in the State of Florida as a licensed Certified Public Accountant. Gus welcomes questions and he can be reached at 786-250-4450.

About the Author

Gustavo VieraGustavo A Viera is the managing partner of Gustavo A Viera, PA. His experience spans more than 25 years. He started his career in public accounting at PriceWaterHouseCoopers where reached the level senior audit manager. His Fortune 500 experience includes positions as CFO - Latin America Region for both Hewlett Packard and Telefonica of Spain. Gustavo also writes a blog twice a week that addresses trending accounting and tax issues. He is an SBA Advisor and teaches workshops for aspiring entrepreneurs. His office is located at One Alhambra Plaza Floor PH Coral Gables FL 33134, and is admitted to practice in the State of Florida as a licensed Certified Public Accountant. Gus welcomes questions and he can be reached at 786-250-4450.View all posts by Gustavo Viera →

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