Everything You Need to Know About Health Care Accounting

Efficient accounting is the key to delivering high-quality healthcare services at affordable costs. With it, you can meet your financial goals and keep your employees happy. Healthcare accounting is a complex and challenging career path but can also be rewarding. A solid understanding of the industry can lay the foundation for an efficient and successful healthcare accounting practice.

Balance Sheet

The Balance Sheet is an essential financial statement that lets you assess the health of your practice at a specific point in time. It is also a necessary tool for long-term planning and financing. This statement is particularly relevant in health care accounting because of the complexity of many transactions. For example, insurance payments can be delayed or require back-and-forth communication, patients may pay late or cannot afford to, and supplies from multiple vendors must be sourced appropriately to keep costs low. This is an essential task for healthcare accountants, who maintain the finances of hospitals, health insurance companies, and private physician practices in good order. They must also comply with federal, state, and local laws and regulations about healthcare accounting.

Cash Flow

Cash flow refers to the amount of money and cash equivalents flowing into and out of a company at any given time. The net change in cash and cash equivalents represents a company’s ability to create shareholder value. For example, if a hospital’s cash flow is positive, it has enough money in the bank to meet its short- and long-term expenses. On the other hand, if it has negative cash flow, it spends more than it receives, which could lead to debt issues. One way to improve cash flow is to streamline payment processes. For instance, remote deposit capture (RDC) can eliminate the need for a manual process such as mail delivery or data entry. RDC also enables clinics and hospitals to collect patient payments directly from their patients’ check accounts and instantly deposit them into their accounting software.

Revenue Cycle Management

The Revenue Cycle Management process involves all administrative and clinical functions a healthcare practice needs to execute to receive payment for their services. The process is vital to healthcare accounting, which can help improve financial performance and operational efficiency. Several internal and external drivers drive a healthcare practice’s revenue. These include the fees the practice charges, the patient base served, front and back-office workflows, the skill of the staff, and the quality of care delivered. Many drivers control the practice, while others may be out of control. Those outside the power of the practice can range from healthcare regulations to reimbursement schemes. Regardless of which drivers are out of the practice’s control, there are steps they can take to mitigate revenue cycle issues and ensure the financial health of their health system. These include reducing scheduling gaps, collecting patient information and copayments up front, and improving coding and charge capture.

Accrual Accounting

Accrual accounting is an accounting method that recognizes revenues and expenses when they are earned or incurred, not when cash changes hands. It supports the matching principle, which states that all income and payment must be reported within a period to measure profits and losses accurately. In the healthcare industry, revenue and expenses are recorded when a service is performed, or an item is purchased. This accounting method also allows for more accurate tracking of current costs and future liabilities. As a result, it helps demystify the ambiguity that often arises between revenue and expenses.

Moreover, it provides more complete financial statements to help companies make strategic decisions and improve patient care. However, implementing accrual accounting can be challenging, especially in healthcare. For example, hospitals may receive less than 100% of the revenue they bill patients for services. Similarly, insurance companies and patients may challenge the bills, impacting a hospital’s financial status.