The Fundamentals of Accounting for Healthcare Organizations

“All earnings are not earned equally.” ― Hendrith Vanlon Smith Jr, CEO of Mayflower-Plymouth.

Properly managed finances are essential to keep healthcare organizations running smoothly. This makes healthcare accountants indispensable as they ensure organizations are compliant with all relevant regulations. Their expertise also keeps organizations fiscally responsible, identifies growth opportunities, and develops strategies to capitalize on those opportunities.

GAAP for Health Care Organizations

The U.S. Securities and Exchange Commission and the Internal Revenue Service adopted an accounting framework that ensures healthcare accounting abides by the generally accepted accounting principles (GAAP).

We’re going to look at some of the principles below.

Accrual Accounting/ Cash Accounting

Accrual accounting is handy because it allows healthcare organizations to record revenue and expenses before any money changes hands, metaphorically speaking. Essentially, credits and debits are built into the system, but only after a facility produces the means to generate a transaction, like hospital bills or prescriptions.

Cash Accounting is the exact opposite, revenue and expenses are only recorded after the transaction has been finalized.

Healthcare Financial Reporting

To demonstrate their fiscal performance, healthcare organizations must produce a range of financial reports (cash flow, balance sheets, statements of operations, and changes in net assets) that contain detailed information regarding their financial well-being.

Organizations must embrace the principle of transparency because this information is available to the public, hospital trustees, and senior management.

Tax-exempt hospitals must also provide a list of uncompensated community care benefits, like charity care.

Asset Depreciation

Depreciation is like death for assets – it’s absolutely certain. In healthcare, assets include IT infrastructure, capital equipment, and commercial buildings. To work out their depreciation, accountants must calculate the asset’s cost and its useful life.

Medical Accounts Payable and Accounts Receivable

There are several ways to pay hospital bills, for example:

• Capitation: Hospitals are paid a fixed amount per patient per month (or year). This means that they get paid even if the patient didn’t use all the funds. But, it also means that they have to cover overruns.
• Payment per day
• Case-by-case basis: Through Medicare Severity Diagnosis Related Groups (MS-DRGs)

Healthcare Accounting Fundamentals

Accounting is seldom simple, but healthcare organizations take complexity to the next level. Just some of the reasons behind the complexity are the sheer variety of healthcare services, a bucketful of regulatory requirements, and diverse revenue sources.

We’ve summarized some fundamental aspects of healthcare accounting below.

Fund Accounting

Fund accounting tracks resources needed for specific purposes, like general operations and individual projects. The system ensures funds (donor restrictions, grant requirements, regulatory mandates) are allocated properly.

Revenue Recognition

Healthcare organizations need a way to recognize sources of revenue, including:

• Patient services
• Third-party payers (insurance companies, government programs like Medicare and Medicaid)
• Philanthropic contributions
• Investment Income

Revenue recognition is essential for compliance with healthcare accounting standards, including the Healthcare Financial Management Association’s (HFMA) Principles and Practices Board (PPB) Statement #5.

Cost Accounting

Cost accounting provides insight into the actual cost of services, including direct (medical supplies and labor) and indirect costs (facility overheads and admin expenses).

Activity-based costing (ABC) allocates costs according to specific activities, including patient visits and procedures.

Compliance and Regulatory Reporting

Several regulations and reporting requirements govern the healthcare industry, including:

• Health Insurance Portability and Accountability Act (HIPAA)
• Affordable Care Act (ACA)
• Centers for Medicare & Medicaid Services (CMS)

Compliance requires accurate financial information reporting for reimbursement purposes and adherence to billing practices and patient privacy laws.

Asset Management

Healthcare organizations rely on a diverse range of assets to deliver services. These include medical equipment, facilities, investments, and accounts receivable.

Accurate asset management requires depreciation tracking, capital expenditure management, and compliance with regulations for the use of restricted assets.

Financial Statements

Financial statements provide stakeholders (donors, investors, lenders, and regulatory agencies) with an accurate view of the organization’s financial status. Statements required include balance sheets, income statements, cash flow statements

Internal Controls

Healthcare organizations use strong internal controls to prevent fraud, intentional and accidental errors, and resource mismanagement. They implement and abide by policies and procedures to protect assets, ensure accurate financial reporting, and comply with regulatory requirements.

Budgeting and Forecasting

Budgeting and forecasting are essential for organizations to plan properly for future expenses, revenue, and resource allocation. This includes projected patient numbers, reimbursement rates, and untold factors that impact financial performance.

Audit and External Reporting

It’s not unusual for healthcare organizations to be audited by external auditors to ensure the accuracy of their financial statements and compliance with regulations. The process usually requires organizations to submit audited financial statements to regulatory agencies, bondholders, and stakeholders.

Ethical Considerations

Healthcare organizations are held to high ethical standards generally but especially in financial management. This requires the utmost transparency, integrity, and accountability, particularly regarding the accurate disclosure of financial information, conflicts of interest, and prioritizing patient care and community benefits.

Conclusion

Healthcare accounting plays a critical role in ensuring organizations are financially stable and comply with relevant rules and regulations. Fund accounting, revenue recognition, and compliance with regulatory standards from HIPAA and ACA are just some of the services healthcare accountants provide.

Accountants also ensure that healthcare financial systems demonstrate strong ethical principles and adhere to GAAP while sustaining the integrity of those systems.

Learn more about TydeCo™’s Healthcare Accounting Services.

Learn more about TydeCo™’s Outsourced Law Firm Accounting Services.

Sources:

The fundamentals of accounting for healthcare organizations

Accounting in Health Care: What You Need to Know