Accounting Patterns: Health Insurance Chart of Accounts

tripp+gnucash-user at tripp+gnucash-user at
Mon Aug 18 05:03:46 CDT 2003

[NOTE: This is really quite long, but I wanted to post it here for some
feedback and what-not. It's much harder to do inline quoting if I just
paste a URL]

A long while ago, I started collecting "accounting patterns" (inspired by
the design patterns of architecture and then software development) to help
me get my head around various accounting and bookkeeping concepts.

I'm going to try to post these from time to time, as my wife and I are
slowly harmonzing all of our bookkeeping and moving things into GnuCash
for the long haul (after fits and starts).

The first of these patterns is an excerpt from my Chart of Accounts (CoA)
for dealing with (US, anyway) health insurance claims:

As you can see from the linked image, I'm crazy (which we knew by the fact
that I consider accounting a hobby). But nevermind that...

I will back this up with screenshots of transaction splits later, but I'm
about to redo those splits having realized a slightly better way to
approach them for my own recordkeeping needs, so I don't want to post them
the way they are now.

Before you read what's below, study the CoA for a moment to familiarize
yourself with my account names, abbreviations, and descriptions. If you
don't realize that AHF == "Amanda Hyatt-Fields", you may scratch your head
for a while trying to figure out what accounting concept it abbreviates :)

Without further ado, the basic transaction flow:

	- A visit to a health care provider debits expenses and credits an
	  "insurance claims pending" accounts payable account for the
	  provider. In the sample CoA, this would be (for example):

		EXP:MED:PSYCHOLOGY:AHF:THERAPY                  90.00
		LIABILITY:AP:AHF:PENDING:CFBCBS                         90.00

Note that I have chosen to subdivide the provider expense quite finely
because I want to track the "type" of visit (at least partially because my
benefits are different (read: nonexistent) for some types of visits).

Note also that the "PENDING:CFBCBS" account is -under- the provider's AP
account. This is because I'm more interested in how much I owe her than in
how much (total) in outstanding claims my insurer has yet to process.

Someone with opposite priorities would, of cours, rearrange this
hierarchy, but the core concepts remain the same.

The end result of this first step is a permanent record (in EXP:...) of
the full amount of the incurred expense, and a temporary record (in the AP
hierarchy) of both the pending claim, and the fact that, ultimately, the
full $90.00 is my responsibility regardless of the insurance company's

	- If I make a payment in the office, I credit whatever account
	  provided the funds for the payment (cash, checking, a credit
	  card, etc.), and then debit the "patient responsibility" AP
	  account for this provider.

	  (note that the cash account isn't on the CoA)

		LIABILITY:AP:AHF:PATIENT                        18.00
		ASSETS:CURRENT:CHECKING                                 18.00

An important thing to note about this configuration is how we've taken
advantage of the hierarchical nature of accounts in GnuCash. We're (in the
US, anyway) in the habit of calling these office payments our "co-pay",
but, in reality, they're just a payment against our standing
accounts-payable balance with the provider, the amount of which is
determined by estimating what our co-pay will be.

Because of this, it's not really useful to debit one of the COPAY
accounts directly, because we're just guessing. As you'll see below, there
are lots of other ways besides the co-payment that the insurer transfers
liability for the payment from themselves to us. All that matters is the
balance of the entire AP:AHF:PATIENT hierarchy, which takes into account
what I owe (reflected in the lower-level accounts that break down my
liabilities very specifically) and whatever I've paid (which just gets
applied wholesale to my account).

Note that I choose to apply my payments to AP:AHF:PATIENT instead of
AP:AHF because I want to be clear that the money came from me. Everything
from the the pending claims account must ultimately move out of there, so
I'm not worried about trying to move the payments up to AHF to balance out
the pending claims. AHF itself is just an empty placeholder account to
serve to give me the big picture.

At this point, AP:AHF:PATIENT reflects the $18.00 I've paid them so far,
and the fact that none of the overall liabilities for the service have yet
been transferred to me. The AP:AHF:PENDING:CFBCBS account still holds the
original ($90.00) balance, and AP:AHF reflects the overall remaining
balance which either I or the insurance company will have to eventually
pay out to the provider:

		LIABILITY:AP:AHF				($72.00)

	- When the wheels of bureaucracy turn themselves slowly back
	  around to my claim, I'll receive my "Explanation of Benefits"
	  form, which reads like a form of fiscal fetish porn in which I'm
	  the unwilling submissive. But I digress...

In the explanation of benefits will be a breakdown of how exactly the
insurer managed to pay neither me nor my provider and still collect my
premium every month (uh, if I sound bitter, check out my "20% co-payment"
and then check out how I'm left paying over 50% of the total under
EXP:MED:...) I digress again.

Each line item in the explanation of benefits describes a portion of how
the original $90.00 bill will be satisfied.

Some of this satisfaction will come in the form of an insurance "benefit",
which we treat as a form of income (though we account for it under "OTHER"
so as not to confuse it with tangible income). All this "income"
effectively does is offset the part of the original expense for which
we're not responsible, whether it's because the insurer has a sweet deal
with the provider for a discount, or because the insurer actually coughed
up real cash to the provider. Either way, not our problem, except to know
that it happened, and the nature of the happening to satisfy our fiscal
curiosity (and know what kind of deal our provider is getting from the
insurer, too).

Other portions of this satisfaction (and I use the term loosely) of the
expense are our responsibility. It took me a while to have the a-ha moment
here, but these don't go in the "OTHER:..." series of accounts because
THEY'RE NOT BENEFITS. All they are is a transfer of a liability from the
insurer's "pending claims" account to one of my "here's how I got the
shaft" accounts.

As you can see in the CoA, my insurer has assembled quite an impressive
array of ways to stick it to me. One of my prime goals in this exercise
was to examine those ways in detail, and make sure I had a complete
accounting of their impact, so I can make more informed decisions about my
health care plans in the future.

Back, then, to the concrete example, entering the data from the
hypothetical "Explanation of Benefits" (EoB):

	- The first item on the EoB is the original charge, but I've
	  already accounted for that with the original expense and
	  "pending claims" transaction.

	- The next item in the EoB is a "non-allowed amount" (code R001),
	  which, in this case, means the insurer has set the price of this
	  service with the provider, and the provider has agreed to accept
	  that price. This is an actual benefit, as I'm not responsible
	  for the amount by which the price was reduced.

	  Since this also reduces everyone's liability, I debit the
	  pending claims account and credit the appropriate account for
	  this benefit code in "OTHER:...":

		LIABILITY:AP:AHF:PENDING:CFBCBS                 14.94

Now, in OTHER, I have a record of the total benefits received, and in the
R001 account, a specific breakdown of how much my provider's "lost" by
being with the plan.

The AP:AHF account grand-total is now down to $57.06 because I've already
made my co-pay, but my insurance company's pending claims account is only
down by $14.94 to $75.06.

		LIABILITY:AP:AHF				($57.06)

	- The next item in the EoB is a "benefit reduction amount" (code
	  GAB9) because I was a bad boy and didn't get pre-authorized for
	  the visit. Nevermind that you have to go to the provider to get
	  that pre-authorization...

	  Anyway, unlike the above item, this one isn't a benefit, but
	  merely a transfer of the liability from the insurer back to me.
	  I debit the pending claims account and credit my AP:AHF:...
	  account for this particular code:

		LIABILITY:AP:AHF:PENDING:CFBCBS                 15.01

This item hasn't changed the overall AP:AHF liability balance. "We" still
owe the provider $57.06, but now "I" owe $15.01 of that, and my insurer
owes $60.05. Since I've already paid $18.00 to the provider, I'm still
$2.99 in the positive (again, reflecting only the liabilities that have so
far been transferred to me):

		LIABILITY:AP:AHF				($57.06)

	- The next item in the EoB is my co-payment. Again, this isn't a
	  benefit, but a transfer of a liability from the insurer to me:

		LIABILITY:AP:AHF:PENDING:CFBCBS                 12.01

Again, this item doesn't change the overall AP:AHF liability balance. It
does, however, tip the scales on my personal liability. I'm now going to
have to (eventually) get out the checkbook and make another payment:

		LIABILITY:AP:AHF				($57.06)

	- Now, finally, the EoB reflects the actual payment by my insurer
	  to the provider. Note that this is the first time in this entire
	  process that the insurer has put any cash forward. The rest has
	  all been money shuffling for them:

		LIABILITY:AP:AHF:PENDING:CFBCBS                 48.04

At this point, the insurance company has satisfied its liability, so all
that's left is for me to evaluate the balance sheet and see that I need to
write a check for $9.02, the remaining liability in accounts-payable:

		LIABILITY:AP:AHF				($ 9.02)

That one gets recorded just like the one I wrote in the office, so I won't
repeat the recording, but the balance sheet will afterward look like this
(including the original expense, which I've heretofore left off):

		LIABILITY:AP:AHF				 $ 0.00
		LIABILITY:AP:AHF:PATIENT:CFBCBS                 ($27.02)

Which tells me everything I need to know about the visit and the attendant

	- I've used $90.00 worth of the provider's services at her
	  nominal, published rates.

	- I don't owe the provider anything, nor does the insurance

	- The insurance company reduced my burden for the visit by $62.98,
	  $14.94 of which was due to their discount with the provider, the
	  remaining $48.04 of which they paid the provider outright.

	- I paid $27.02 for the visit

I realize this has been a bit long, but I hope instructive. Perhaps it
will help someone else organize their CoA for maximum effectiveness in
evaluating a thorny fiscal flow.

- t.

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