Financial Accounting in Health Care

Shaun H. Ruff

The health services industry continues to deliver services to patients through various arrangements such insurers, self payers and government programs. However, the institutions need to observe financial health and accounting practices in order to gauge their performance. This is whether such organizations provide for profit or not-for profit health care.

Financial management

One element of financial management in the heath care organizations is heath care revenue cycle. This entails working with various payers, the government agencies and individuals in verifying payments and collecting revenue (James, 2004). The health care providers strive in having efficient billing systems, manage payer contracts and enhance cash collections. Another aspect of health care financial management is profitability and financial analysis. Hospitals and other health care providers frequently loose revenue and face escalated cost of providing the services due to the overwhelming data and complex reimbursement systems. As such, health providers also strive to provide on demand financial accounting in all departments for better monitoring of profitability. Indeed, the payer mix and accounts receivable are also analyzed. Financial management also involves planning for the future. The heath providers utilize the history of the financial statements in forecasting targets and making projections, enabling use of past data in decision making, use the information in delivering quality services to the patients and streamlining the its functions with the providers. Finally financial management involves internal control and accounting. This could involve managing and controlling expenditure of the common supplies like medicine and other medical products which constitute a third of the operating expenses.

Financial Reporting

According to (Sarah, Elizabeth and Victoria, 2001) the hospitals obtain revenue by providing medical services, non medical services, through donations sourced from individuals, institutions and other donors or through returns from investments. This can generally be categorized into three where firstly operating revenue is obtained for the care given to a patient. On the other hand, revenue is also obtained from non patient care activities (Sarah et al, 2001).  Finally non operating revenue could be obtained from other business activities in which a heath care provider is involved. Services which can help a health care provider like a hospital to create operating revenue are the shops and other hospitality services-related businesses that may be within its premises. On the other hand the non operating revenue may be derived in investments made for instance in real estates, stock, securities and donations received.

In studying the health care finances it may be necessary to study some terms synonymous with the environment. For instance, a charge is the price the hospital or any other heath care provider has determined for each type of care being provided. However, the sticker price is usually subject to negotiation. A payment on the other hand refers to the amount of money the heath care provider actually receives for the service provided. It is worth noting that, this amount varies among the insurers and the individuals who are not insured. Finally there is also the cost which refers to the cost the hospital incurs in providing the service (Sarah et al, 2001).

There are some financial reporting practices that are unique with the heath care providers. For instance, the bad debts in a health care provider must be written off and then recorded as expenses. In addition, for any credit the provider gets it is required to pay an interest expense for the funds that have been borrowed. AICPA (1996) observes that the heath care provider do not pay the non salaried physicians who are instead paid by the insurer or the patient. Further more, the cost of equipment and other assets is also spread over the estimated life with the appropriate portion of the cost of purchasing the product treated as an expense with each accounting period. This spreading of cost over the estimated life of an asset is referred to as depreciation for tangible goods and amortization for intangible goods.

The financial statements for a health care provider are prepared by an independent auditing firm. In particular, the auditing firm examines the evidence that supports the disclosures in the statements. There are several documents used in the financial accounting of a health care provider. In brief, the income statement generally offers a presentation on how the provider has gotten the money and how money has been spent. The total margin is reflected in the income statement and is indicative of the provider’s performance and profitability. ¬†However, non-profit providers may make profit but is ploughed back into the operations and not awarded as dividends. The excess revenues over expenses could also be hidden in instances where the contractual settlements with the payer are not certain.

The balance sheet is another statement which gives a quick reflection on the provider’s financial health. For instance receivables could be recorded as an asset with the accounts payable being recorded as liability. On the other hand, a cash flow statement gives an accurate account of the money out and in after subtracting the operating expenses. AICPA (1996) continues to observe that, non-profit health care providers are required by the law to file an IRS Form 990 on its financial information.

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