What is the role of accounting and Bookkeeping in healthcare business?

The healthcare system is arguably one of the most important sectors in every nation’s economy as it offers services that enhance the fitness of people. However, as healthcare gods strive towards offering quality services, the operations management of their financial matters most of the time takes the back seat. This is where bookkeeping and accounting come in, which is important to ensure financial success, discipline, and stability amongst others. In the absence of an appropriate and effective accounting structure, healthcare institutions would experience disorder in financial management that would adversely affect their operations and provision of care to patients.

In this blog, we’ll discuss the bookkeeping and accounting processes in the healthcare industry, their importance, and the factors that make it impossible for healthcare providers to do without efficient financial management.

What is the Role of Bookkeeping in the Healthcare Industry?

At its core, bookkeeping refers to the recording of all financial transactions in a systematic and organized manner. In the healthcare industry, bookkeeping tracks everything from patient bills and medical expenses to healthcare workers' payroll.

Maintaining Financial Accuracy: Bookkeeping ensures that every transaction, from small operational costs to large medical equipment purchases, is recorded accurately. This helps in maintaining a clear picture of the organization's financial health.

Supporting Efficient Billing: The healthcare industry deals with complex billing procedures that involve multiple entities like insurance companies, patients, and government agencies. Proper bookkeeping ensures that billing and payments are handled efficiently, minimizing delays and errors.

Expense Tracking: With rising medical costs, healthcare providers need to track where their money is going. From utilities to surgical supplies, bookkeeping ensures that every dollar spent is accounted for.

Facilitating Budgeting and Forecasting: Well-maintained books provide a solid foundation for budgeting and financial forecasting, enabling healthcare organizations to plan effectively for future expenses, investments, and expansions.

Why is Accurate Accounting Essential for Healthcare Providers?

Accurate accounting isn’t just about knowing your profits and losses—it directly impacts how healthcare organizations operate and provide care. Here’s why it’s crucial:
Improved Financial Health: Healthcare providers, whether large hospitals or small clinics, need accurate accounting to stay financially healthy. A Deloitte study reported that around 70% of healthcare organizations faced cash flow challenges due to poor accounting practices.

Cash Flow Management: Cash flow in healthcare can be unpredictable due to varying payment cycles from patients and insurance companies. Without proper accounting, it’s easy to run into liquidity issues, which can lead to operational disruptions.

Accurate Financial Reporting: Healthcare organizations often need to produce detailed financial reports for investors, regulatory bodies, and internal audits. Accurate accounting ensures that these reports reflect the true financial state of the organization, which is key for transparency and credibility.

Supporting Growth and Expansion: If a healthcare provider is looking to expand services or invest in new technology, solid accounting ensures they have the financial stability to do so. It allows decision-makers to evaluate whether they can afford these investments without jeopardizing other areas of their operation.

What are the Unique Accounting Challenges in Healthcare?

The healthcare industry faces accounting challenges that other sectors may not encounter, due to its complexity and highly regulated nature. Here are some of the unique challenges:
Third-Party Payers: Dealing with insurance companies, Medicare, and Medicaid can complicate revenue streams. Delayed reimbursements, denied claims, and varying coverage policies add layers of complexity to healthcare accounting.

Regulatory Compliance: Healthcare providers must comply with numerous regulations, such as the Health Insurance Portability and Accountability Act (HIPAA) and the Affordable Care Act (ACA). These regulations influence how financial records are managed and reported.

Complex Cost Structures: The cost structure in healthcare includes a wide range of expenses like salaries for healthcare professionals, medical supplies, research, and facility maintenance. Accurately allocating these costs across departments and services can be tricky.

Unpredictable Expenses: Healthcare providers deal with unpredictable expenses, such as emergency medical equipment or sudden increases in demand for specific treatments. Managing these unforeseen costs requires robust accounting systems.

How Can Accounting Help Manage Healthcare Costs?

Healthcare costs have skyrocketed over the years. According to the Centers for Medicare & Medicaid Services (CMS), U.S. healthcare spending reached $4.1 trillion in 2020, accounting for 19.7% of the nation’s GDP. Effective accounting can help manage these spiraling costs through:

Cost Allocation: Accounting helps allocate costs to specific departments, services, or patient treatments, enabling healthcare providers to identify where cost savings can be made.

Inventory Management: Tracking medical supplies and equipment ensures that healthcare providers are not overstocking or understocking, both of which can lead to financial inefficiencies.

Reducing Wasteful Spending: By maintaining detailed financial records, healthcare providers can spot patterns of wasteful spending, allowing them to streamline operations and reduce unnecessary costs.

Effective Budgeting: With accurate financial data, healthcare organizations can create realistic budgets that account for fixed costs, variable expenses, and potential emergencies, helping them stay financially prepared.

What Are the Key Financial Metrics Healthcare Providers Should Track?

Tracking the right financial metrics is essential for evaluating the financial performance and sustainability of a healthcare organization. Here are some of the key metrics that healthcare providers should monitor:
Operating Margin: This measures the profitability of the healthcare provider's operations. A high operating margin indicates that the organization is managing its costs effectively relative to its revenue.
Accounts Receivable Turnover: This metric shows how efficiently the organization is collecting payments from patients and insurance companies. A high turnover rate means that the organization is collecting payments quickly, improving cash flow.

Days Cash on Hand: This indicates how many days the organization can continue to operate with its current cash reserves, which is critical for financial stability.

Debt-to-Equity Ratio: Healthcare providers often take on significant debt to finance expansion or purchase medical equipment. A lower debt-to-equity ratio means the organization is not overly reliant on borrowing and can sustain its operations through its revenues.

Cost per Patient: This helps healthcare providers understand the cost of providing care for each patient. By tracking this, providers can find ways to optimize resources and reduce costs without sacrificing the quality of care.

How Does Accounting Help Ensure Compliance with Healthcare Regulations?

Regulatory compliance is a significant concern in the healthcare industry. The complex web of rules and regulations governing healthcare providers requires meticulous record-keeping, and this is where accounting plays a vital role:

Accurate Reporting for Audits: Healthcare organizations are often subject to audits from regulatory bodies like the Centers for Medicare & Medicaid Services and the Internal Revenue Service. Proper accounting ensures that all financial records are accurate and audit-ready.

Adhering to Tax Laws: Tax compliance is another area where healthcare accounting is essential. Filing accurate tax returns while leveraging deductions specific to the healthcare industry can save organizations money and avoid penalties.

Maintaining HIPAA Compliance: Financial records must be handled with care to maintain compliance with privacy regulations like HIPAA. Accounting systems that integrate data security measures can help prevent breaches and ensure that patient information is handled responsibly.

Why Should Healthcare Providers Consider Outsourcing Bookkeeping?

Outsourcing bookkeeping and accounting functions can be a game-changer for healthcare providers, offering multiple benefits like cost savings, increased efficiency, and compliance with regulations. Here’s why you should consider outsourcing to a specialized service provider like Global FPO:

Cost-Efficiency: Outsourcing can reduce operational costs significantly. Instead of maintaining an in-house accounting team, healthcare providers can rely on expert services at a fraction of the cost.

Expertise in Healthcare Accounting: Healthcare accounting is complex and requires industry-specific knowledge. Outsourcing to a provider like Global FPO ensures that you have access to experts who understand the unique financial challenges and regulations of the healthcare industry.

Improved Accuracy and Compliance: Global FPO offers a team of experienced accountants who specialize in maintaining compliance with healthcare regulations, ensuring your books are accurate and audit-ready at all times.

Focus on Core Operations: By outsourcing, healthcare providers can focus on what they do best—providing quality care—while leaving financial management to professionals who specialize in it.

Healthcare Accounting Solutions with Global FPO

In the fast-paced and highly regulated healthcare industry, proper bookkeeping and accounting are essential for financial stability, regulatory compliance, and operational success. Outsourcing these functions to experts like Global FPO can help healthcare providers reduce costs, improve financial accuracy, and stay compliant with industry regulations.
If you’re a healthcare provider looking to streamline your financial operations and focus on delivering exceptional care, consider partnering with Global FPO for expert bookkeeping and accounting services. We’re here to help you manage your finances with precision and professionalism. Contact us today to learn more!

FAQs 

What is the difference between bookkeeping and accounting in healthcare?

Bookkeeping involves recording day-to-day transactions, while accounting encompasses analyzing, reporting, and interpreting financial data to help make informed decisions.

How can healthcare organizations choose the right accounting software?

Healthcare providers should select accounting software that integrates billing, regulatory compliance, and inventory management and offers features tailored to healthcare's unique financial needs.

What are the benefits of automating bookkeeping processes in healthcare?

Automation reduces human error, saves time, ensures accurate record-keeping, and simplifies compliance with regulations such as HIPAA.

How do healthcare providers manage accounts receivable efficiently?

Providers often implement policies for faster insurance claim processing, ensure accurate patient billing, and use accounting tools to track overdue payments.

What is the role of financial audits in healthcare accounting?

Financial audits verify the accuracy of financial records and ensure compliance with tax and healthcare regulations, helping healthcare organizations avoid penalties.