Solid hospital accounting processes are necessary to ensure the organization remains compliant and profitable.
However, there are lots of nuances in the process that can make a CFO's job very tricky.
In this article we'll discuss the type of accounting used in hospitals and hospital accounting best practices. Additionally, we will go over the key questions to ask when evaluating hospital accounting software.
Hospital accounting covers everything that goes into a hospital’s income statement and balance sheet. That includes patient revenues, additional services like parking, expenses like rent and supplies, and salaries for hospital staff.
However, hospital accounting is often more complex than other sectors due to the number of parties involved. Parties include patients, insurance companies, healthcare providers, pharmaceutical companies, and government programs like Medicare and Medicaid.
The goal of hospital accounting is to:
While this may seem relatively straightforward, there are a lot of complexities in hospital accounting.
For example, most hospitals have multiple different entities within the larger parent company, each of which has its own separate financial data that has to be consolidated at the end of the month.
Additionally, hospitals have significantly more complex accounts receivables than traditional businesses as they typically receive a portion of their payments from insurance providers and a portion of it from patients.
To add to the complexity, insurance might not agree to pay for certain bills. As a result, this slows down the time between when a patient receives treatment and when the hospital receives payment.
This makes a hospital CFO’s job tricky and it’s critical that the accounting is up-to-date and accurate at all times.
There are two methods for cost accounting in hospitals. One is to assign standardized costs to each procedure or type of care, and the other is tracking specific costs.
Standardized costs can lead to inaccuracy because it doesn't track additional resources expended in complex cases. For example, different nurses may vary in how they use resources like essential medicines or bandages.
On the other hand, tracking specific costs can give much better information. This means it's easier for hospitals to control costs and conduct financial forecasts.
From a medical standpoint, better information about how each patient is treated can also improve patient outcomes as medical staff can monitor care-related trends.
Let’s discuss some of the specific hospital accounting processes below.
Like other entities that follow GAAP, hospitals produce financial reports indicating fiscal performance. Relevant audiences include the public, hospital trustees, and senior management.
These reports may include cash flows, changes in net assets, and balance sheets. In addition, tax-exempt hospitals have to itemize uncompensated community care benefits, such as charity care.
Many of the hospital's assets, like IT infrastructure, commercial buildings, and capital equipment, depreciate over time.
Like in other sectors, depreciation accounting involves calculating the asset's cost and useful life. Accountants will then record the asset's depreciation expense across each accounting period.
For example, if an essential piece of medical equipment is supposed to last ten years, it makes sense to divide the cost of buying the equipment over ten years instead of counting all of it in the first year.
In year one, writing off the total cost would lower the net income without recognizing that the equipment is an asset with useful life left. In the remaining years, the books must reflect the cost of having that asset.
Hospitals have complex accounts receivable setups.
Patients, insurance companies, government programs, charitable organizations, or others may pay hospitals. In addition, two or more entities are often responsible for paying for care, such as the patient and their insurance company.
Hospitals also have many different ways of billing. These include accounting for specific procedures performed and supplies used, flat fees, or daily rates.
Hospitals must be able to track all the money they're owed and allocate payments to the correct accounts. They also need to consider negotiated rates or balance billing restrictions to ensure that each patient account is billed appropriately.
In addition, hospitals may need to handle credit balances on patient accounts. For example, a patient may have a credit balance due to a billing error, overpayment, or adjusting an insurance claim.
Notably, when a hospital receives a payment from an insurer, those funds are usually only a portion of the total service value, and the rest is still a receivable owed by the patient. Sometimes, payers also have their own fee schedules. This means hospital accountants have to track a vast web of billings, receivables, and allowances.
A credit balance or outstanding check occurs when the patient or their insurer overpays a bill.
While this may not seem like an issue, hospitals have to pay back that money, which is a headache for accountants, and it also means the hospital needs to have money on hand to pay those bills.
The process is further complicated if the patient passed away or moved.
In some states, hospitals must turn over funds from uncollected checks to the state government because of unclaimed property laws.
Most hospitals operate as multi-entity enterprises with either multiple locations or independent departments.
This complicates the accounting process as each entity has its own balance sheet and accounting processes, yet all subsidiaries must be consolidated at the end of the month to provide an accurate report of the parent company's financials.
Unfortunately, it's time-consuming to manually execute multi-entity accounting processes as accountants have to do more than just combine numbers. They also have to perform processes like intercompany eliminations to ensure nothing is accounted for twice.
It's rare for hospitals to receive 100% of what they bill as insurance companies may challenge the terms, and patients may be unable to afford their bills.
Of course, this creates a cash flow challenge for the hospital.
From an accounting perspective, the hospital records 100% of the revenue owed at the time of the service. That being said, it may only receive a fraction of the revenue.
To solve this, hospital accountants use doubtful allowances to adjust the total revenue earned to reflect the total revenue it will likely collect.
Most accountants calculate the doubtful allowance based on an estimated percentage of revenue (typically between 2% to 5% of revenue).
Hospital accounting can be highly complex with multiple entities, strict regulations, and the sheer number of parties involved in accounts receivables.
Therefore, most hospitals require an accounting platform that is more robust than traditional small business accounting systems and therefore opt for a more robust ERP system.
Unfortunately, most ERP systems aren’t the perfect solution and still create unnecessary friction in the accounting processes.
Here are just a few common challenges with most ERP accounting systems.
Access to real-time data is essential so that your organization always has up-to-date financial data.
Unfortunately, only a handful of accounting platforms offer truly real-time data. This is because to offer real-time data, the accounting platform needs to be able to consolidate multiple entities, currencies, and other data automatically (rather than waiting until the month close).
So as you’re evaluating different software solutions, first look to see that they offer real-time data and then ensure that it automatically performs any additional calculations necessary (e.g., consolidating multiple entities, performing intercompany eliminations, etc.) to produce accurate real-time data.
Even though some software solutions advertise that they offer real-time data, they must be able to automatically perform these additional calculations as well to offer truly up-to-date real-time data.
Many ERP systems are built on older code and aren’t as flexible and adaptable as modern technologies. This can be problematic as building integrations with other apps may require you to hire a developer with proprietary knowledge of the ERP’s programming language, and even then, building integrations with these legacy systems is time-consuming and tricky.
So instead, look for a system that offers a REST API that makes it easy for anyone to quickly build new integrations with new apps.
This will allow your organization to adapt to new technologies quickly and adjust to the ever-changing healthcare landscape.
Plenty of ERP systems offer add-ons that allow you to automatically consolidate multiple entities and currencies, though few ERPs offer this as part of the platform’s core functionality.
In addition, many ERPs that offer the automatic consolidation add-on only combine the data – so they don’t actually perform any of the other calculations involved with the consolidation process, like intercompany eliminations.
This means that accountants still have to do a lot of the related calculations by hand.
Similarly, when performing automatic multi-currency consolidations, only a handful of solutions automatically handle foreign currency revaluations.
Most ERP systems cost thousands, if not hundreds of thousands of dollars to implement. So as you’re selecting a new provider, check what the implementation timeline looks like and if you’ll have to hire a third party to implement it for you.
Even once it’s implemented, many legacy ERP systems are highly complex to operate and require lengthy team training to use them effectively. Unfortunately, if your team doesn’t feel comfortable using the system, it’s likely that they’ll make mistakes and errors will crop up in your data.
Finally, many systems require expensive maintenance to be performed by someone with knowledge of that particular software.
While protecting any financial data is critical, hospitals have the added challenge of ensuring that patient data remains protected.
Therefore, check to see that the accounting provider you use offers a SOC 1 Type II report. This ensures the system and controls are designed to protect your patient’s data and remain compliant with both accounting and healthcare standards.
We couldn’t find a healthcare ERP that sufficiently solved all of the complexities we faced with healthcare accounting, so we built SoftLedger to solve the above-mentioned challenges.
It automates multi-entity accounting processes, the month-close process, and always provides up-to-date, real-time data for CFOs. In addition, it’s built with a REST API that makes the entire platform programmable via API so that you can easily build integrations and adapt it to new technologies and apps.
It also requires only about 45 days to implement and is well-designed to protect patient data according to healthcare accounting standards.
To see for yourself how SoftLedger can help you improve your healthcare accounting processes, take a look at our software today.
A CPA with more than 10 years of varied public and private accounting experience, Ben has led many complex financial projects to successful outcomes.
Ben holds a B.S. in Accounting from the University of Maryland.