Advancement in medical practice and increased demand for access to health care services have led to significant growth in the health care industry. Expenditures for medical care now equal more than 10% of the gross national product. Health care entities include hospitals, clinics, continuing care retirement communities, health maintenance organizations, home health agencies, and nursing homes. Classified by sponsorship or equity structure, health care units fall into three categories:
1. Investor-owned health care entities (or proprietary entities), which are privately owned and operated for a profit.
2. Governmental health care entities (or public entities), which are operated by a governmental unit and accounted for as an enterprise fund, such as a veterans’ hospital.
3. Voluntary not-for-profit health care entities, including those with a religious affiliation, which are organized and sustained by members of a community.
A modern health care provider may be a complex entity with medical, surgical, research, teaching, and public service aspects. One very unusual element about health care operations is the manner of payment for services. A significant portion of the fees for health care service is paid by a third party, such as Medicare, Medicaid, Blue Cross, or some other insurance provider. Health care entities are reimbursed not on the basis of listed prices but on the basis of the cost of providing services, as that cost is defined by the third-party payor. A cost determination must be made according to formulas agreed upon in the law (Medicare and Medicaid) or in the contract (other insurance providers). Cost determination requires allocation of overhead, including depreciation. Thus, not-for-profit health care organizations follow the accrual basis of accounting, permitting
comparison of results with profit-oriented health care units.