Healthcare Revenue and Accounting
Important Terms and Definitions
The healthcare industry follows the Generally Accepted Accounting Principles (GAAP) to ensure proper accounting and financial management. Patient services such as medicines, nursing services, laboratory work, and surgery form a large portion of hospital revenue. However, the process of collecting payments can be complex as hospitals deal with a multilayer of healthcare payers such as the government and private insurers.
The current trend in the industry is adopting a value-based payment model which requires healthcare organizations to account for both the value and costs of their services. Overall, effective running of finance and revenue functions impacts the quality of care patients receive.
Healthcare Accounting Definitions
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.
How Revenue Affects Patients
Patient satisfaction is interconnected to hospital revenue. In an HCAHPS survey, a five-point increase in hospital ratings caused a 1% increase in the profit margin. For healthcare organizations looking to improve their revenues, how they treat their patients is significant.
While revenue outcomes are keenly followed by senior management and hospital shareholders, they also impact the experience of patients. First, healthcare organizations need revenue to hire medical staff such as receptionists, security, nurses, and physicians. They’re crucial in ensuring the effective administration of inpatient and outpatient services. In addition, they need to purchase important medical equipment and restock their medical supplies and medicines. If hospitals fail to meet their revenue targets, patients suffer by way of poor attendance, long waiting times, and decreased recovery rates.
Hospitals deal with a complex system of billing and payers to ensure reimbursement of their services. It’s expected that these payers will interact with patients. The payers mustn’t interfere with decisions made between the physician and patient to optimize the best health outcome. The upside is that payers are encouraging hospitals to adopt a value-based payment model which gives priority to the quality and cost of services received by patients. Here, the patients receive the best care at a low cost.
Research plays a big role in ensuring patient-centered care. Healthcare systems are increasingly adopting evidence-based research to ensure standard patient care practices. Hospitals are known to perform clinical research to help deal with disease management. However, research can be capital intensive and hospitals have to mobilize for finances. Adequate healthcare revenue for research will translate to better patient care.
Managing Healthcare Accounting and Revenue
Healthcare accounting is predicted to continue evolving in the coming years considering the ever-changing trends in healthcare. Healthcare organizations have been forced to reevaluate their accounting processes to accommodate the impacts of Covid-19 such as loss of revenue. There are also other factors such as technology and cybersecurity, as well as expected changes in accounting and auditing standards. The most important action is for health organizations to maintain their accounting systems as per the set standards and laws while constantly following up on arising changes to stay up to date.
VIE Healthcare Consulting is a reliable partner in helping healthcare organizations to manage healthcare management costs to achieve a high profit margin and optimize relevant data insights to make informed decisions. We have considerable experience and resources to help an organization navigate through the concepts of healthcare accounting as well as effectively implement them in daily accounting practices. If you have any questions, please contact us today.