Demystifying Healthcare Accounting: An Essential Guide to Managing Finances in the Healthcare Industry

The healthcare industry is one big unique ecosystem encompassing clinics, medical practices, healthtech companies, insurance providers etc. And owing to its uniqueness, this ecosystem also has its own set of complex challenges. One such challenge is healthcare accounting. It is unlike any other industry-specific accounting and can easily get complex and overwhelming.

This guide is designed to demystify healthcare accounting, providing knowledge and references for healthcare professionals, administrators, and business owners. We’ll discuss critical areas, including budgeting, financial record maintenance, revenue cycle, and a brief case study to understand how outsourced accounting plays an important role in healthcare accounting.

Importance of Healthcare Accounting

Healthcare accounting is a critical component of the healthcare industry, serving as the backbone for financial decision-making and operational efficiency.

Infusing Transparency into the Healthcare System

If you are in healthcare accounting, you already know that it enables hospitals to track revenue and expenses accurately, allowing healthcare administrators to make informed decisions based on financial data. This transparency is crucial for the sustainability of healthcare entities, which often operate under tight budgets and fluctuating revenue streams.

Meeting Regulatory and Compliance Requirements

With robust healthcare accounting, you can ensure compliance with various regulations and standards that govern the medical industry. These regulations, which can vary by state and county, require you to maintain precise financial records and reporting standards.

By adhering to these guidelines, you not only avoid potential legal issues but also build trust with patients, stakeholders, and regulatory bodies. Moreover, effective accounting practices can serve as a competitive advantage, allowing you to allocate resources efficiently and enhance service offerings.

Robust Financial Planning to Secure Future Prospects

Financial planning and forecasting are prominent for the healthcare industry. The ability to analyze financial data helps you project future revenue and expenses, enabling you to budget appropriately.

This foresight is particularly important in an industry characterized by rapid changes in technology, patient expectations, and reimbursement models. By employing industry best accounting practices, you can navigate these uncertainties, ensuring financial viability and capabilities to meet the evolving needs of your patients and the community at large.

5 Key Financial Concepts in Healthcare Accounting

Let’s now understand the key financial concepts that are essential for healthcare accounting.

Concept #1: Fixed and Variable Costs

One of the foundational concepts is the distinction between fixed and variable costs is that fixed costs, such as rent or salaries, remain unchanged regardless of patient volume (e.g. MRI machine lease at $15,000/month whether used by 5 or 50 patients), while variable costs fluctuate based on the number of services provided (e.g. Per-patient medication costs ranging from $10-1000).

Analyzing these costs helps you determine pricing strategies and understand their breakeven points, which is mandatory for maintaining profitability in a highly competitive environment.

Concept #2: Revenue Cycle

Another important concept is the revenue cycle, which consists of all the administrative and clinical functions that are responsible for the capture, management, and collection of patient service revenue.

The revenue cycle includes everything from patient registration (i.e. Day 0) and insurance verification to billing and collections.

Revenue Cycle Management Example Workflow:

Patient schedules appointment (Day 0)

Insurance verification (Day 2, $150 co-pay identified)

Service provided (Day 3, $1,000 procedure)

Coding completed (Day 4, CPT code 99213 assigned)

Claim submitted to insurance (Day 5-20, $850 expected reimbursement)

Payment received (Day 21-30, $820 from insurance, $150 from patient)

A smooth revenue cycle is essential for ensuring that you receive timely payments for services rendered. Inefficiencies in this cycle can lead to delayed payments and increased accounts receivable days, which can strain your financial resources.

Concept #3: Operating Margins

Operating margin represents the profitability of healthcare operations, calculated as (Operating Revenue - Operating Expenses)/Operating Revenue × 100.

Operating margins reflect the difference between revenue and operating expenses, offering insights into profitability. Healthy hospitals typically maintain operating margins of 3-5%.

Concept # 4: Days in Accounts Receivable

The average number of days it takes to collect payment after billing, calculated as (Total Accounts Receivable/Average Daily Revenue) × 100.

Days in accounts receivable indicate how quickly you can collect payments. Industry benchmark is typically 45-55 days.

Concept #5: Net Revenue Per Patient

It is the average revenue received per patient after accounting for contractual adjustments, discounts, and write-offs.

It is calculated as (Total Net Revenue/Total Patient Visits)

For example, if your hospital generates $500,000 in net revenue from 1,000 patients, the net revenue per patient will be $500 (500,000/1,000).

This metric helps you assess your financial performance relative to patient volume and can make informed decisions regarding pricing strategies and resource allocation.

Best Practices for Managing Healthcare Finances

“A positive patient experience can generate new business through targeted recruitment and marketing initiatives or just simple word of mouth.”

- Kimberley Tuby, Vice President and Senior Credit Officer for Moody’s

Effective management of your healthcare finances involves implementing best practices that promote financial stability and operational efficiency.

Regular Budgeting

One essential practice is developing a comprehensive budget that aligns with your strategic goals. A well thought budget serves as a financial roadmap, guiding resource allocation and helping you prioritize spending on initiatives that enhance patient care and operational effectiveness.

Regular budget reviews and adjustments are crucial to ensure that you remain agile in response to changing circumstances.

Financial Record Maintenance

Another best practice is maintaining accurate and timely financial records. This includes documenting all financial transactions, from patient billing to payroll, in a systematic manner.

Deployment of accounting software along with deep domain expertise can streamline this process, reduce errors and ensure compliance with regulatory requirements. Accurate record-keeping not only facilitates smooth audits but also provides insightful financial analysis and decision-making.

By adopting these best practices, you can navigate the intricacies of financial management more effectively, ensuring long-term sustainability and growth.

Challenges in Healthcare Accounting

The landscape of healthcare accounting is thick with challenges that can complicate financial management.

Cumbersome Reimbursement Processes

One primary challenge is the complexity of reimbursement processes. You often deal with multiple payers, including government programs and private insurers, each with different reimbursement policies and procedures.

Navigating these complexities can lead to delayed payments and increased administrative burdens, ultimately impacting cash flow and financial stability.

Rising Delivery Cost

Another significant challenge is the rising cost of healthcare service delivery. As expenses related to medical supplies, labor, and technology continue to climb, you must find innovative ways to manage costs without affecting the quality of care.

This requires a delicate balance between operational efficiency and service delivery, as you strive to optimize financial performance while meeting the needs of patients.

Steep Technological Advancements

Furthermore, the rapid advent of technological progress presents both opportunities and challenges for healthcare accounting. While technology can streamline processes and improve accuracy, it also requires you to invest in new systems and ensure that staff are adequately trained to use them.

Moreover, the inclusion of electronic health records (EHR) and financial systems can be complex, often necessitating significant time and resources. Addressing these challenges is essential for you to grow in a dynamic and competitive environment.

Let us now look at a compelling case study that demonstrates the impact of outsourced healthcare accounting:

Transforming Financial Operations Through Outsourced Accounting: A Memorial Regional Hospital Case Study

Background

Memorial Regional Hospital, a 350-bed facility in the Midwest, faced significant challenges in managing its revenue cycle and accounting operations. With rising costs, staff shortages, and increasing regulatory complexity, the hospital struggled to maintain efficient financial operations while focusing on patient care.

Key Challenges

12% average claim denial rate, above the industry standard of 6-8%

$3.2M in unbilled claims due to staff shortages

45-day average accounts receivable cycle

15% staff turnover in the accounting department

$1.2M annual spend on accounting staff and related technology

Solution Implementation

In 2022, Memorial Regional chose to outsource accounting, implementing a comprehensive solution that met their business requirement:

Revenue Cycle Management

Full-service billing and collections

Denial management

Insurance follow-up

Patient financial services

Financial Accounting

General ledger maintenance

Monthly closing and reconciliation

Financial reporting

Regulatory compliance support

Results After 12 Months

Financial Impact

Denial rate decreased to 4.2% (65% improvement)

A/R days reduced to 32 (29% improvement)

$2.8M increase in annual collections

35% reduction in operating costs for financial operations

Operational Improvements

99.2% coding accuracy (up from 92%)

24-hour turnaround time for billing queries

100% compliance with regulatory reporting deadlines

Zero backlog in unbilled claims

Staff Satisfaction

40% reduction in overtime hours

95% satisfaction rate among remaining financial staff

Reallocation of 5 FTEs to value-added activities

Cost-Benefit Analysis

Annual Savings
Previous In-house Costs:	$1,200,000
Outsourcing Costs:	$720,000
Direct Cost Savings:	$480,000
Additional Revenue:	$2,800,000
Total Financial Impact:	$3,280,000
ROI:	356%

Key Success Factors

Comprehensive Pre-implementation Assessment

Extensive experience in HIPAA compliance allowed the outsourced accounting firm to deliver a comprehensive implementation assessment.

Phased Transition Approach

The operation was handed over to the outsourced team in a phase wise manner to limit daily operation impact.

Regular Performance Monitoring

All the critical financial parameters were monitored closely by the outsourced team to ensure there are no loopholes and mismanagement.

Strong Communication Protocols

Regular updates and information sharing should be in place to avoid any issues due to miscommunication between the in-house and outsourced team.

Continuous Process Improvement

The outsourced team closely tracked processes on a daily basis to ensure smooth financial operations of hospitals.

Final Thoughts

Mastering healthcare accounting is not just about numbers, it’s about ensuring that you can thrive in a challenging environment while delivering quality services to the patients.

By implementing best practices, leveraging technology, and hiring skilled professionals, you can effectively manage finances and ensure long-term sustainability.

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Author

John Bugh

John Bugh is the Chief Revenue Officer for Pacific Accounting and Business Services (PABS), responsible for the strategic direction, planning, vision, growth, and performance of the company’s marketing, branding, and revenue streams.

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