While depreciation is often viewed as a routine line item on the balance sheet, its implications for rural hospitals and non-profit entities are far-reaching, influencing reimbursement, capital planning, and long-term viability. Understanding depreciation is essential for organizations looking to strengthen their financial strategy and sustainability.
Depreciation refers to the allocation of the cost of tangible assets such as buildings, equipment, and infrastructure over their useful life. This process helps reflect the gradual wear and tear of assets and is essential for accurate financial reporting. Since rural hospitals and smaller non-profit entities often operate with aging infrastructure and limited capital, depreciation can significantly impact their bottom line.
Rural hospitals face unique financial challenges and many rely heavily on Medicare and Medicaid reimbursement which are influenced by reported costs—including deprecation.
Under Medicare’s cost-based reimbursement system, particularly for Critical Access Hospitals (CAHs), depreciation is considered an allowable cost. This means that properly computed depreciation can lead to higher Medicare reimbursement. However, if depreciation is underreported or misclassified, hospitals may miss this crucial reimbursement. The Centers for Medicare and Medicaid Services (CMS) outlines specific methods for calculating depreciation which is most commonly straight-line depreciation. For specific useful lives and detailed information on depreciation, hospitals can also refer to the American Hospital Association (AHA) guidelines published in the Estimated Useful Lives of Depreciable Hospital Assets.
In the non-profit world, depreciation also plays a significant role in budgeting and financial planning. By including depreciation in their budgets, non-profits can better plan for future capital expenditures and ensure they have the necessary funds to replace or repair assets as they age. Moreover, properly accounting for depreciation can impact a non-profit’s ability to secure funding. Many grant-making organizations and government agencies consider depreciation when evaluating grant applications. By demonstrating that they have accounted for the wear and tear of their assets, non-profits can present a more accurate picture of their financial needs and improve their chances of securing funding.
While depreciation may seem like a routine accounting task, it has considerable implications for both hospitals and non-profit organizations. By understanding and properly accounting for depreciation, critical access hospitals can improve their reimbursement, and both types of organizations can enhance their budgeting and planning processes.
Do have questions about the impact of depreciation on your organization? DZA is always ready to help—contact us here.
