Launching or expanding a home medical equipment (HME) or durable medical equipment (DME) business in Florida requires more than just strong clinical knowledge and quality products. The Agency for Health Care Administration (AHCA) requires providers to demonstrate financial stability before granting a license. This is done through the Proof of Financial Ability to Operate (PFA), a filing that shows a provider can sustain operations, meet obligations, and protect patients.
What Is the Proof of Financial Ability to Operate?
Here is a very quick overview. The PFA is a set of financial documents and schedules submitted as part of the AHCA licensing process. It ensures that an HME or DME provider has the resources to operate responsibly. For new businesses, the PFA helps establish credibility, while for existing operators it validates ongoing financial strength. In many ways, the PFA functions like a business plan. By requiring projections, GAAP based reporting, and full disclosure of commitments, it pushes owners to think strategically about their business model.
Key takeaway: The PFA is both a compliance requirement and a valuable planning tool that functions like a business plan.
Core Components of the PFA
A PFA generally includes GAAP based financial statements prepared by a CPA, contingency and working capital calculations, revenue and expense projections, a balance sheet and statement of cashflows, debt and lease disclosures, and schedules of inventory and equipment held for sale or rental. AHCA reviews this closely to confirm that the provider is adequately capitalized and capable of sustaining operations. Unlike cash basis reporting, GAAP often presents a clearer picture of financial reality, as it captures both obligations and assets that reflect true financial health.
Key takeaway: GAAP financials give AHCA and owners a more accurate picture than cash basis reports.
Capped vs. Non Capped Rental Revenue
For HME and DME providers, rental revenue is a key consideration. Under Medicare rules, some equipment falls under capped rental guidelines, such as oxygen equipment and standard wheelchairs, where payments are limited to a fixed number of months, often 13.
Non capped rentals, by contrast, generate recurring income for as long as the patient requires the equipment and medical necessity is documented. Examples include certain complex rehab devices and oxygen concentrators beyond ownership transfer rules.
When preparing projections, providers must also consider that equipment used in capped rentals may return to the applicant once the rental period ends. That equipment can often be serviced, cleaned, and redeployed for another patient rental. This recycling of assets directly affects capital needs, inventory planning, and the long term sustainability presented in the PFA.
Key takeaway: Separating capped from non capped rentals is essential, and projections must also account for returned equipment that can be reused in future rentals.
Compliance with ASC 842 (Lease Accounting)
Accounting for equipment rentals also requires compliance with ASC 842, the current lease accounting standard. In most cases, patient rentals are treated as operating leases because they are short term, month to month arrangements, with no transfer of ownership or bargain purchase option. The provider retains control of the asset, which remains on the balance sheet as property and equipment, while recognizing rental revenue over time. The Applicant must be prepared to make disclosures or at least consider disclosures for both lessee and lessor accounting.This make the Proof of Financial Ability to Operate no simple undertaking
Accurate presentation under ASC 842 strengthens the PFA filing by showing that the provider understands the correct accounting treatment and has reported financials in line with GAAP.
Accounting for Equipment Sales
In addition to rentals, HME and DME providers also sell equipment directly to patients. These traditional sales require separate accounting and presentation in the Proof of Financial Ability to Operate. Providers must maintain an accurate monthly inventory balance at cost, record gross profit on sales, and tie Schedule 3 HME (equipment available for sale and rental) to Schedule 4 (detailed operating revenueresults). This linkage ensures that AHCA can verify consistency between reported sales, cost of goods sold, and the financial results presented in the filing.
Key takeaway: Equipment sales must be tracked with proper inventory accounting and tied directly from Schedule 3 to Schedule 4 to demonstrate accuracy and transparency.
Common Challenges for Providers
Many providers struggle with reporting with GAAP requirements, estimating payer mix across Medicare, Medicaid, and private insurance for 24 months, and documenting equipment at cost rather than market value, recording owner capitalization and reconcile the amounts between all seven schedules. Another common issue is properly allocating revenue among sales, capped rentals, and non capped rentals, while distinguishing cost of goods sold from depreciation expense on rental assets. These challenges can create inconsistencies across schedules and delay AHCA approval if not addressed carefully.
Key takeaway: Common pitfalls include mixing tax and GAAP reporting, misclassifying revenue, and undervaluing equipment.
Best Practices for a Successful Filing
The most effective PFAs are those prepared with the assistance of a CPA experienced in healthcare and AHCA licensing. Providers should use realistic assumptions for revenue mix, present clear schedules separating capped and non capped rentals, and document contributed capital and opening inventory carefully and opening equipment held for sale. It is equally important to maintain accurate inventory balances for sales activity and ensure that gross profit is presented consistently with Schedule 3 and Schedule 4. By anticipating questions AHCA may raise, providers can minimize delays in approval.
Key takeaway: Success comes from realistic assumptions, clear schedules that balance amongst all seven schedules, accurate inventory tracking, and guidance from an experienced CPA.
Conclusion
The Proof of Financial Ability to Operate is a critical step for HME and DME providers seeking licensure in Florida. By carefully preparing GAAP compliant financials, separating capped and non capped rentals, properly accounting for sales, and ensuring compliance with ASC 842 from either of the lessor and lessee side, providers not only meet AHCA’s requirements but also strengthen their foundation for long term success. Unlike cash basis accounting, GAAP often reflects reality more accurately, capturing obligations and assets that impact the balance sheet. This process also forces owners to think deeply about their operations, and in many ways, serves as a business plan that guides the company’s growth strategy. I always tell my clients that the PFA is effectively the financial part of a business plan. Working with professionals who understand the process can make the difference between a smooth approval and costly delays.
Key takeaway: The PFA is both a compliance requirement and a strategic planning tool that strengthens long term success.