Core Concepts of Long Term Care Accounting

Long-term care accounting is a specialized discipline focused on the financial operations of facilities such as nursing homes and assisted living centers. It diverges from standard business accounting because of a complex payer mix, significant government regulation, and specific reporting mandates. Accountants in this sector manage the unique financial data inherent in a healthcare environment, from resident billing to government reimbursements. The financial statements they produce provide a picture of the facility’s fiscal health, guiding decisions on resource allocation and strategic planning.

Navigating Complex Revenue Streams

Long-term care facilities use the accrual basis of accounting, recognizing revenue when it is earned, not when payment is received. The revenue cycle blends payments from private individuals and government programs, each with distinct rules and reimbursement models.

The most straightforward source is private pay, where residents or their families pay for services directly. Revenue is recognized as care is provided at the facility’s standard rate. This income is predictable because it does not involve third-party negotiations.

A significant revenue source is Medicare, which covers short-term, post-acute care after a hospital stay. Revenue is recognized based on the Patient-Driven Payment Model (PDPM), where rates are determined by a resident’s clinical characteristics and care needs, requiring meticulous documentation.

Medicaid is another substantial revenue source, funding long-term care for residents who have exhausted their resources. As a joint federal and state program, reimbursement rates and rules vary significantly. Facilities recognize Medicaid revenue based on state-set per diem rates, which are often lower than private pay and Medicare rates.

A central concept is the contractual allowance, the difference between a facility’s gross charges and the amount it expects to collect from payers like Medicare and Medicaid. For example, a facility with a $500 daily rate but a $250 Medicaid contract records the full $500 as gross revenue and a $250 contractual allowance. This entry reduces gross revenue to its net realizable value, showing accurate net patient service revenue on the income statement.

Tracking Key Operational Expenses

The largest expense category for facilities is labor, which includes wages, benefits, and taxes for all staff. Labor costs are segregated by department for analysis, with the most significant portion for nursing staff like registered nurses (RNs), licensed practical nurses (LPNs), and certified nursing assistants (CNAs). Costs also include salaries for administrative personnel and support employees in departments like dietary, housekeeping, and laundry.

Dietary costs represent another major expense, covering raw food, nutritional supplements, and kitchen supplies. Medical supplies and pharmacy expenses are also a constant outlay. These include items not directly reimbursed by insurance, such as over-the-counter medications, wound care supplies, and personal protective equipment.

Maintaining the physical plant creates significant facility and maintenance costs. This category includes utility payments, rent or mortgage payments, property and liability insurance, and the cost of routine repairs. It also covers contracts for services like landscaping and snow removal.

To manage these expenditures, facilities use a system of cost centers, which are distinct departments or functions to which costs can be allocated, such as Nursing or Administration. By assigning every expense to a specific cost center, management can analyze the financial performance of each department. This makes budgeting decisions more informed.

Managing Resident Trust Fund Liabilities

Long-term care facilities often manage residents’ personal funds in a Resident Trust Fund (RTF). These funds are used for personal expenses like haircuts or toiletries. It is important to understand that these funds are a liability owed to the residents, not an asset or revenue source for the facility.

The primary requirement for managing an RTF is the complete segregation of funds. Federal regulations under 42 CFR 483.10 mandate that a facility must deposit a resident’s personal funds into an interest-bearing bank account separate from any facility accounts. This rule applies to funds over $50 for Medicaid residents and $100 for all others, protecting the money from being used for facility operations.

Facilities must maintain a detailed accounting system for the trust fund. This involves a subsidiary ledger with an individual account for each resident who has deposited funds. Every transaction, such as a deposit, withdrawal, or interest payment, must be recorded on the resident’s specific ledger to ensure an auditable trail.

Strict internal controls governing access to these funds are also required. When a resident withdraws money, there must be a clear procedure, typically involving a signed withdrawal slip that documents the transaction. The facility must provide residents with a quarterly statement detailing all activity in their account and the ending balance.

Accounting for Ancillary Services

Beyond room and board, many facilities offer ancillary services, which are specialized services billed separately from the standard daily rate. Common examples include physical, occupational, and speech therapy. Other examples are specialized medical supplies and non-medical services like beauty and barber shop visits.

A key accounting consideration arises when these services are provided by third-party contractors rather than facility employees. The facility bills the resident or their insurance for the service, recording the full amount as ancillary revenue. Simultaneously, it records a corresponding ancillary expense for the amount owed to the third-party contractor.

This “pass-through” arrangement requires careful accounting to ensure that both the revenue and related expense are recorded in the same period, accurately reflecting the net income from the service. For example, if the facility bills $150 for a therapy session and owes the therapy contractor $120, it recognizes $150 in revenue and $120 in expense. This separation is important for assessing the profitability of each service.

Medicare and Medicaid Cost Reporting

A significant accounting function for facilities in government payment programs is preparing the annual Medicare and Medicaid cost report. This report is a detailed summary of a facility’s operational costs and statistical data for a fiscal year. For skilled nursing facilities, Form CMS-2540-24 is required for cost reporting periods ending on or after September 30, 2025. The report’s purpose is to provide government agencies with data to set future reimbursement rates.

A central component is reporting allowable costs, which are expenses deemed necessary for providing patient care. These costs are drawn from the expense categories in the facility’s general ledger, such as nursing labor and dietary supplies. Costs not directly related to patient care, such as certain marketing expenses, are considered non-allowable and must be excluded.

In addition to financial data, the cost report mandates extensive statistical information. This includes patient days broken down by payer type, total available beds, and occupancy rates. Facilities must also report total hours worked by different categories of staff, which is used to calculate various cost-per-patient-day metrics.

A complex aspect of the cost report is cost allocation. Overhead costs from non-revenue-producing cost centers, like Administration and Housekeeping, must be systematically allocated to revenue-producing cost centers, such as Skilled Nursing. This is done using a specified statistical basis, ensuring the full cost of providing services is accurately captured and providing a basis for future rate setting.