Healthcare accounting is complex. In addition to typical challenges stemming from issues such as revenue recognition and accrual accounting, hospitals and doctor’s offices must also navigate an intricate system of payers in the U.S., spanning private insurers and government programs such as Medicare and Medicaid. Plus, the ongoing shift of the healthcare system away from fee-for-service compensation and toward value-based reimbursement means that holding providers accountable for cost and quality is more important than ever.
At a high level, what are the most important facts to know about healthcare accounting? Let’s start by reviewing how it compares to accounting in other fields and what healthcare-specific challenges you can expect to encounter.
Healthcare Accounting Overview: Accrual Accounting, Hospital Reimbursement and More
Health providers follow generally accepted accounting principles (GAAP), the adopted accounting framework of the U.S. Securities and Exchange Commission and the Internal Revenue Service. Accordingly, many basic and advanced concepts of general accounting apply, including but not limited to:
Accrual and cash accounting
Accrual accounting recognizes revenue and expenses when they are earned or incurred, regardless of when the provider gets paid. For example, a patient in a bed receives a service, for which the hospital bills them. Under accrual accounting, the associated expenses and revenue would be recorded at that point.
The main advantage of doing so is accuracy, as it offers a good picture of what’s occurring during a given quarter. Large organizations will usually default to accrual accounting for this reason. The downside is complexity that requires software that can handle complicated functions including accounts payable and receivable.
In contrast, cash accounting is much simpler. Revenue and expenses are only recorded when actually paid. While this model works in some industries, it’s often a poor fit for many health providers, since payment can take months to be received, if it’s received at all.
Like other entities following GAAP, healthcare organizations produce financial reports indicating their performance. Relevant audiences for this information include the public, hospital trustees and senior management.
Details in these reports may include cash flows, balance sheets, and statements of operations and changes in net assets. Tax-exempt hospitals are also required to itemize uncompensated community care benefits such as charity care.
Healthcare providers are major users of IT infrastructure, capital equipment and commercial buildings, all of which depreciate with time. As with depreciation accounting in other sectors, this process involves calculating the cost of the asset in question as well as its useful life.
From there, the asset’s depreciation expense will be recorded across each accounting period. Events such as land appreciation do not appear in depreciation calculations.
In addition to these aspects of GAAP that healthcare accountants follow, there are numerous healthcare-specific concepts that apply as well:
Payments and receivables related to medical services
Hospitals can be reimbursed in multiple ways. They might receive capitation, which involves a fixed amount per patient per month/year. In this system, providers receive payment regardless of service utilization, but are on the hook for all overruns. Alternatively, they could be paid per diem (day), at an amount typically set by the payer, or on a case basis, for example through Medicare Severity Diagnosis Related Groups (MS-DRGs).
Value-based payments regulated by the Centers for Medicare and Medicaid Services are also an increasingly important consideration for providers, especially doctor’s offices. These payments are alternatives to traditional fee-for-service, which is tied to the number of visits.
Notably, when hospitals receive payment from insurers, those funds are usually only a portion of the services rendered, leaving the rest as a receivable. It’s also common for payers to have their own fee schedules, meaning accountants regularly face the complexity of keeping track of a huge web of different billings, receivables and allowances.
Payer mixes and chargemasters
Most providers are paid by a mix of public and private entities. At a large hospital, accountants may recognize revenue from literally hundreds of different payers. The portion of revenue from each type of payer is critical to hospital profitability in particular.
When it comes to what providers actually charge these payers, transparency is a major concern, and one in which accountants are often involved. Some hospitals use a chargemaster, fee-for-service list or bundled set of payments like MS-DRGs to determine prices. These are all complex systems designed to link the financing of services to how they’re paid for. A side effect is that patients and the public often don’t know what to expect in terms of care costs and may be surprised by practices such as balance billing.
Credit balances and outstanding checks
A common situation that healthcare accountants run into is an accumulation of credits in accounts receivable. This happens when the amount collected via payers and/or patients for a service is greater than the amount owed. It is easy for all such credits to total in the millions of dollars.
Writing a check is one response to this credit accumulation. However, providers like hospitals often end up with numerous outstanding checks due to recipients who have died or moved. In some states, funds from such uncollected checks must be turned over to state government.
Preparing for Healthcare Accounting Challenges with The HCMBA
As you think about the next step in your career, earning an online Healthcare Master of Business Administration (HCMBA) degree from the George Washington University (GW) can develop your knowledge of these accounting practices and challenges, along with many others.
The GW HCMBA curriculum includes traditional MBA coursework in financial and managerial accounting alongside electives in topics such as healthcare quality, trends in health systems and regulatory affairs. After graduating, you will be prepared to pursue senior positions connected to healthcare accounting.