Healthcare Revenue and Accounting

Generally, the healthcare industry applies accrual and cash accounting to generate financial reports.

The accrual accounting method records revenues and expenses when they’re earned or incurred by a healthcare organization instead of when payment is received or made. This method impacts the reliability of the income statement and balance sheet. It’s commonly practiced compared to cash accounting because it provides a true picture of the actual profits. However, it can be an uphill task to track and account for transactions such as accounts receivables and payables, especially for a large hospital.

Cash accounting is easier to apply as it reports cash transactions. Revenue is recognized when cash is received and expenses are only recorded when cash is paid out. One major drawback of this accounting method is not showing the accurate financial health of a company. As a result, it’s not practical for hospitals as most transactions occur on an accrual basis.

Health organizations are obligated to generate financial statements including cash flow statements, balance sheets, changes in net assets, and statements of operations. The recipients of these reports include shareholders, management, and the government. As for hospitals not liable to tax, they need to report their uncompensated community care benefits.

Healthcare institutions have different payment methods which compensate for their services. One of them is per diem, in which a set fee is paid based on the number of days a patient has received services. The set fee is determined by the payer or through the Medicare Severity Diagnosis Related Groups (MS-DRGs).

There’s also value-based payment which considers the quality of care. This is in contrast to the fee-for-service payments which are received by hospitals based on an approved list of services. The Centers for Medicare and Medicaid Services oversees the value-based payment model. Types of value-based payments models include capitation, bundled payments, shared savings, and shared risk.

The payer mix of a hospital involves multiple sources of reimbursement for its services. These include out-of-pocket payments by patients, Medicare, Medicaid, and private insurance plans.

Since pricing can be complicated in hospitals, they rely on chargemasters to compute prices. A chargemaster is a list of prices of goods and services offered by the provider. It’s recommended that the payor mix from payers such as Medicare and Medicaid be lower while maintaining a higher payor mix for private insurance and self-pay. A payor mix is a portion of the revenue received by a healthcare provider from the payer.

It’s coverage for medical expenses and can be private insurance, social insurance, or government-sponsored insurance coverage. There are five types of health insurance plans; preferred provider organizations (PPOs), health maintenance organizations (HMOs), point-of-service plans (POS), high deductible health plans(HDHPs), and exclusive provider organizations (EPO).

Healthcare organizations sustain their operations by following a revenue cycle. According to the Healthcare Financial Management Association, the revenue cycle is, “all administrative and clinical functions that contribute to the capture, management, and collection of patient service revenue.”

It’s simply a process that tracks revenues from the moment the patient engages the healthcare provider to the point when payment is made for a specific service. A healthcare organization needs to manage its revenues so it can meet its expenditures, which can be substantial.

Operating revenue is income received by a hospital for services it provides. Healthcare organizations obtain income from both public and private sources. The three main payers of their service include Medicare and Medicaid, private insurance, and self-paying patients. Other forms of revenue include grants, donations, and the sale of assets.

Medicaid is a state and federal sponsored program that covers eligible low-income individuals and families. As of March 2020, 21.8% of all net hospital revenue was from Medicare, while 12.8 percent was from Medicaid. Medicare is a federal program targeting persons over 65 years, or those less than 65 years but with a disability.

Gross patient revenue is the total revenue received on billed services for the year. It’s commonplace in hospitals for their billing amount to exceed the reimbursement amount.

Net revenue is the total actual revenue of a health organization. This includes inpatient and outpatient revenue, specialty services, and other sources such as the cafeteria.