When thinking about healthcare, the accounting practices within such an industry aren’t typically top of mind. Rather, healthcare tends to sit within spaces of necessity as well as complex and, at times, frustrating experiences many of us need to endure. We tend to think of “the business” behind healthcare solely when dealing with premium payments, out-of-pocket expenses, or insurance company reimbursements. Yet, healthcare industry organizations deal with many other complex financial issues, with challenges that need to be overseen by sophisticated controls and accounting processes.
Delivering high-quality healthcare is no easy task. Businesses that do so, whether small healthcare clinics or large, incredibly complex hospital systems, must navigate a range of ever-changing functions and responsibilities to ensure care is supplied effectively and efficiently. However, as in any business, ensuring an entity is profitable while managing these complex financial issues (and the necessary accounting) is fundamental.
So, what do we mean by healthcare accounting? First, it covers the multiple aspects of financial management, including the tracking, recording, and analyzing of transactions in healthcare organizations, such as ongoing bookkeeping, budgeting, auditing processes, and more. It’s a set of procedures that are integral to ensuring the financial well-being of an organization and the basis for providing critical data needed for effective management. Accurate financial information is essential for healthcare organizations to maintain compliance and make informed strategic decisions. It’s the basis healthcare executives look to when allocating resources efficiently. It’s also the foundation for effective cost management, which is needed for maintaining competitive pricing (there is competition in healthcare, after all), with a focus on the ultimate goal of maximizing revenue and profits.
All said, this is no easy task as healthcare and the accompanying accounting are fraught with challenges. Getting a handle on diverse reimbursement models, overseeing complex accounts receivable processes, and staying up to date on the multitude of legal and regulatory changes are just the tip of the iceberg. Let’s dive a bit more into this topic in this healthcare accounting guide.
Importance of Accurate Financial Reporting in the Healthcare Industry
Accurate financial reporting in healthcare cannot be overstated. According to the Centers for Medicare & Medicaid Services, an agency within the US Department of Health and Human Services, healthcare spending in the United States grew 4.1% in 2022 (the most recent data) and has reached an eye-popping $4.5 trillion. This accounts for approximately $13,500 for every man, woman, and child in the nation. As a share of the country’s Gross Domestic Product, spending in the healthcare sector accounted for roughly 17% or nearly one out of every five dollars spent on goods and services produced over the year.
The numbers are hard to fathom. So, when thinking about this at an organizational level, it’s obvious the stakes are high for companies to maintain the financial and operational integrity of their businesses through accurate financial accounting and reporting. Compliance with regulatory requirements is just one element of this. That’s a given. No healthcare business can risk not following the spirit and the letter of the law with accurate and timely financial reporting. However, as with other profit (and non-profit businesses), detailed reporting can also assist in the strategic planning and internal management of the organization. Accurate financial reporting offers busy healthcare executives a transparent view into their businesses, helps identify red flags, and zeroes in on potential areas of improvement to maintain accountability within the system.
Let’s get specific. Financial reporting is the backbone of any successful healthcare organization. Why? It’s crucial for several of the following reasons:
Regulatory Compliance and Healthcare Accounting
The healthcare industry is highly regulated. And rightly so. While healthcare in the United States may have its problems, the quality and speed of care delivery are often regarded as the envy of the world. Part of this is due to the governmental oversight the industry contends with. Financial reporting helps organizations comply with intricate laws and regulations set by governmental agencies. It keeps the system running (a huge plus for the public at large) and is key for healthcare organizations themselves to avoid legal and financial ramifications due to problematic accounting practices.
Transparency and Accountability
However, rather than just thinking of the potentially punitive outcomes of inadequate financial reporting, we should also consider the benefits. In an industry such as healthcare, where trust is paramount, being transparent about financial dealings builds confidence and accountability in the system, which is critical to the major stakeholders involved, be they government regulatory bodies, patients, healthcare providers, or, of course, insurers.
Identifying Improvement Areas
Another bonus is that quality and detailed financial reporting can help healthcare managers and upper executives identify trends within their businesses, enhancing the organization’s financial health. It’s a critical component of this discussion given that we live in a world awash in data (and it’s “big data”) where organizations are sitting on one of the most important commodities of the modern era – the data and the “knowledge” that can be gleaned from it. This business intelligence allows healthcare executives to uncover financial and operational inefficiencies and, on the positive side, provides insights that recognize the best-performing areas within their organizations – all crucial for continuous improvement.
Informed Decision-Making
Well-executed financial reporting provides clear snapshots of the status of a healthcare organization. And for those charged with making informed decisions on matters that involve life and death (and often millions of dollars), it’s a necessity. These decisions can range from strategic expansions to reallocation of resources to budget cuts.
Essential Financial Reporting for Healthcare Organizations
So, as in other industries, healthcare organizations need to produce and interpret data in several key financial reports to understand their financial position. These are likely known to readers but are important to mention and include:
- Balance Sheet: A hallmark of financial reporting, this document offers a “snapshot” of an organization’s financial standing at any given point in time and details the entity’s assets, liabilities, and shareholder equity.
- Income Statement: Known also as a profit and loss statement, this reveals how an organization’s revenue, expenses, and profits are changing (over a specific period).
- Cash Flow Statement: This document provides a summary of cash inflows and outflows, helping managers understand the liquidity position of the organization. Some consider this the most important financial document as “cash is king” and illustrative of the strength of a business that can appear profitable “on paper” but insufficient in keeping operations running with the necessary capital for equipment, salaries, or replenishing inventory.
A precise system of financial accounting is necessary to produce each of these reports correctly and can aid healthcare executives in strategic planning. Tax projections, another area of business accounting, and something covered in a recent Walters blog are also part of the toolkit.
Trends in Healthcare Accounting
Accurate healthcare accounting means more than just keeping “the books” in order. It is also essential for maintaining operational and financial efficiencies that help to ensure high-quality patient outcomes. As noted above, it gives leaders the knowledge to make informed decisions about how to allocate resources while maintaining regulatory compliance with the ever-changing healthcare landscape. It’s being recognized increasingly as a crucial element of healthcare industry management.
What else is seen as trending in this important field?
Automating Healthcare Accounting Processes
Technology moves fast. Look how much has changed even since the early 2000s when social media was a novelty and smartphones were a vision of the future. Now, the explosive power of artificial intelligence (AI) is being adopted at a rapid pace. Advancements in technology in the healthcare field are no exception. Today, organizations are turning to automation to boost the quality and speed of their accounting processes. It’s a complicated topic that can be revisited in another article, but let’s say that automation, if done correctly, can streamline a business’s operations, help reduce errors, and aid in maintaining compliance with state and federal regulations.
Outsourcing Healthcare Accounting: A Viable Option?
Another notable trend is how many organizations are beginning to outsource their healthcare accounting requirements. This can offer a viable solution and may be an even better route for organizations (versus technology automation) as it gives access to personalized expertise and knowledge of the latest industry practices without the accompanying overhead costs and personnel management of an in-house accounting department. Outsourcing allows internal staff to concentrate on critical tasks, can lead to enhanced efficiency and accuracy in financial reporting, and ultimately improve financial performance.
The Growing Role of Healthcare Accountants
In the complex and ever-evolving landscape of the industry, the role of healthcare accountants has grown significantly, becoming more integral to the strategic management of healthcare organizations. These professionals do more than just manage books; they provide the financial insights that guide the broader strategic directions of these organizations. Their work ensures that financial transactions adhere to GAAP (Generally Accepted Accounting Principles) and that all financial activities are documented accurately. This indeed plays a critical role in managing both revenue and expenses for the business.
Take the case of Midtown Medical Center, a mid-sized hospital facing looming financial difficulties. Despite an increase in patients treated at the facility, the hospital was not gaining a corresponding increase in revenue, let alone profits. It was a puzzling situation that had Midtown’s executives scratching their heads. Some were even concerned about the durability of the hospital itself.
The hospital’s Board recognized the need for outside help to diagnose the problem and enlisted seasoned healthcare accountants to look through the records and processes, the first step to understanding why revenues were stagnating. By meticulously analyzing the reporting data, the accountants began to get insights into the problem. By also reviewing billing and coding processes in place at the facility, they were able to discern whether the services provided were billed correctly. Therein lay the problem, as significant discrepancies in the billing methods used resulted in either un- or under-billed services due to coding errors. Compounding the issue was a substantial backlog in accounts receivables as countless insurance claims weren’t pursued aggressively.
As a result of this outside accounting review, the accountants were able to analyze the situation, formalize the financial reporting procedures, and recommend a significant overhaul of the billing department. This included implementing a more robust software system to increase coding accuracy, as well as hiring an insurance specialist to better manage claims. Another key recommendation was for the hospital to conduct routine financial audits to comply with billing best practices and to make sure revenue cycle processes were streamlined so payments were guaranteed to the hospital.
And so, realized was a critical turnaround of Midtown Medical Center’s trajectory and signified that while healthcare accounting may be thought of as just “keeping the books,” it’s evidence for its part in the operational and financial health of an organization. Having the right accounting practices is not simply good business but is truly essential to the mission of healthcare itself.
