Healthcare organizations have specific accounting needs not found in other industries. They also have strict, non-negotiable regulations and compliance requirements. They’re responsible for your health and sometimes your life, after all. As a result, accounting processes tend to be complex, which means you need healthcare-specific accounting specialists or even a specialist team and they don’t come cheap. 

Outsourcing to experts who go above and beyond the fundamentals saves costs and actually improves your organization’s financial health.

We’re going to look at the fundamentals of healthcare accounting, so you know what to expect from your outsourced financial wizards.

Regulatory Compliance

There are many (many) regulations based on US laws and international standards, including:

  • Generally Accepted Accounting Principles: GAAP is a US standard that covers accrual accounting (very important in healthcare), asset depreciation, and financial reporting.
  • Health Insurance Portability and Accountability: HIPAA is all about data protection, specifically patients’ personal health information (PHI) and financial data. 
  • Affordable Care Act: ACA contains its own set of requirements, including Community Benefit Reporting (charity care) and VALUE-based Payments (quality-based payments).
  • Centers for Medicare & Medicaid Services: CMS sets reimbursement rules for things like payment tracking and claims submissions.
  • Internal Revenue Service Guidelines: IRS healthcare-related tax laws include tax exemption for nonprofits (IRS 501(c)(3) requirements and revenue recognition (revenue streams). 

Non-compliance with any of these results in severe penalties, including stratospheric fines.

Types of Services

What are the fundamentals that we’re talking about?

Accrual accounting

Accrual accounting takes income and expenses as given, regardless of whether accounts have been settled. It’s a more accurate view of a healthcare organization’s financial wellbeing because it matches transactions to the relevant accounting period and not some unknown future date.

Cash accounting only records income and expenses when cash changes hands. It’s a more limited view of a healthcare provider’s financial performance. It hampers financial analysis and informed decision-making. Two important processes you don’t want to mess with.

Balance sheet

Balance sheets weigh total assets against total debts to reveal an organization’s net worth. This means that accurate AR and AP are essential to ensure your balance sheet’s accuracy. The best way to ensure accuracy? Automation software that eliminates manual processes, including manual data entry and exporting spreadsheets.

Balance sheets aren’t limited to net worth. The data can also be used to determine metrics and ratios. For example:

  • Current ratio: Current assets over current liabilities
  • Debt-to-equity: Total liabilities divided by equity

These calculations are used as a base for financial analysis.

Revenue recognition

Healthcare organizations have several revenue sources, including patient payment for services, third-party payers (insurance companies, Medicare, etc.), contributions and donations (fundraisers and the generous wealthy), and investment income.

Revenue recognition is not a suggestion. It’s one of those non-negotiable compliance requirements that apply to healthcare accounting. Accurate and transparent revenue recognition must comply with IRS guidelines and the Principles and Practices Board (PPB) Statement #5, which is brought to you by the Healthcare Financial Management Association (HFMA).

Budgeting and forecasting

Budgets help you manage costs through resource allocation, for example, $$$$ for equipment maintenance and $$$ for PPE. The thing is, costs depend on external forces;  PPE becomes more expensive, a new COVID variation causes a spike in patient numbers that increases equipment use and maintenance requirements. Insurance providers change their rates, which impacts your revenue.

You don’t want to scramble to stay on top of these changes, you want to be prepared. And that’s where forecasting or predictive modeling comes in. Healthcare accountants must be familiar with factors that impact healthcare organizations, so they can provide rolling forecasts that take the “un” out of the unexpected.

Real-time data and automation are indispensable here.

Multi-entity accounting

Healthcare accounting gets complicated when organizations have multiple departments or additional practices in other areas. Some even cross state lines. Often each has its own accounting system, which keeps things orderly and manageable without degenerating into a chaos of ledgers and reports.

However, systems don’t always align, making data transfer difficult. For example:

  • Allocating revenues and costs to each entity is something of a challenge. A centralized accounting system (a single platform) standardizes practices and processes.
  • Keeping entities on the same system. This facilitates data transfer.

Revenue, expense, and performance tracking is suddenly a breeze. Financial analysis floats on the breeze and informed decision-making is the result. 

Healthcare accountants that stick to the fundamentals provide services that include:

  • Revenue and expense tracking, measurement, and analysis
  • Depreciation calculation
  • Report generation
  • Budget development
  • Tax and billing management
  • Payroll preparation
  • KPI tracking and reporting

And more.

As you can see, healthcare accounting has unique needs. To meet these needs, you need a specialist healthcare accountant. Luckily, this needn’t be your problem. Outsourcing accounting is the way to go to keep your financial health in tip top condition and (oh so very importantly) ensure you are always, always audit ready to withstand the eagle-eyed taxman.