Solid hospital accounting processes are essential to keep healthcare organizations compliant, efficient, and profitable. However, there are lots of nuances in the process that make a CFO's job very tricky.
In this guide, we discuss the types of accounting used in hospitals, best practices, and key considerations when selecting hospital accounting software to streamline financial operations.
Hospital accounting encompasses all aspects of managing a hospital's finances, including tracking patient revenues, additional services, and staff salaries. Hospitals face unique accounting complexities due to the diverse parties involved, such as patients, insurance providers, healthcare suppliers, and government programs (e.g., 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.
Hospitals use two main approaches to cost accounting: standardized cost assignments and specific cost tracking. The standardized method assigns set costs to each procedure or type of care, which can simplify processes but may lead to inaccuracies in complex cases where resource usage varies. For instance, two nurses might use different amounts of medical supplies, affecting the true cost of care.
Alternatively, tracking specific costs provides a more detailed view, allowing hospitals to control costs more precisely and improve financial forecasting. This approach also supports better patient outcomes by giving medical staff insights into care-related trends, enhancing patient care management.
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.
Hospitals hold significant assets, including IT infrastructure, commercial buildings, and medical equipment, all of which depreciate over time. As with other sectors, depreciation accounting in hospitals involves estimating an asset’s useful life and spreading its cost over that period. This systematic approach allows hospitals to reflect an asset’s expense gradually, rather than absorbing the full cost upfront.
For instance, if a piece of essential medical equipment is expected to last ten years, spreading its cost over that period maintains an accurate view of the hospital’s net income each year. Recording annual depreciation expenses ensures that the asset’s value is represented correctly on financial statements, supporting informed decisions on asset management and budget forecasting.
Hospital accounts receivable (AR) systems are uniquely complex due to the variety of payment sources, including patients, insurance companies, government programs, and charitable organizations. Often, multiple entities contribute to a single payment, such as a patient and their insurance provider.
Hospitals also use multiple billing methods—ranging from itemized charges for procedures and supplies to flat fees and daily rates. Effective hospital accounting software must track all incoming payments and assign them accurately to respective accounts, while also considering negotiated rates and balance billing requirements to maintain compliance.
Additionally, hospitals must manage credit balances resulting from overpayments, billing adjustments, or insurance claim corrections. In many cases, payments from insurers cover only a portion of service costs, leaving a remaining balance owed by the patient. Further complexity is added by insurers’ unique fee schedules, requiring hospital accountants to monitor a web of receivables, payments, and allowances for an accurate financial overview.
In hospital accounting, a credit balance or outstanding check occurs when a patient or their insurer overpays a bill. While this may appear minor, these overpayments must be refunded, creating additional administrative tasks for hospital accountants. Hospitals also need to maintain sufficient cash flow to cover these refunds, adding another layer of complexity.
The process becomes even more challenging if a patient has moved or passed away. Additionally, unclaimed property laws in some states require hospitals to remit uncollected funds from outstanding checks to the state government. Navigating these regulations is crucial to ensure compliance and maintain accurate financial records in healthcare.
Many hospitals operate as multi-entity organizations with multiple locations or independent departments, making hospital accounting more complex. Each entity within the hospital system has its own balance sheet and accounting processes, but all financials must be consolidated monthly to give an accurate overview of the parent company’s finances.
Manually managing multi-entity accounting is time-consuming, as it requires more than combining numbers; accountants must also conduct intercompany eliminations to avoid double-counting. Utilizing robust hospital accounting software with built-in multi-entity capabilities streamlines this process, allowing for accurate, efficient consolidation.
In hospital accounting, it’s uncommon for hospitals to collect the full amount billed, as insurance companies may dispute claims, and patients may struggle to pay their portions. This creates a significant cash flow challenge for hospitals, as they must manage the gap between services provided and revenue collected.
Hospitals record the total billed revenue at the time of service but often collect only a portion. To address this, hospital accountants use a doubtful allowance—an adjustment based on an estimated percentage of revenue, typically between 2% to 5%, to more accurately reflect the revenue likely to be collected. This adjustment ensures a realistic financial overview and helps maintain effective cash flow management.
Many traditional ERP systems struggle to address the unique needs of hospitals, leading to inefficiencies in data access, integration flexibility, and real-time reporting. Here are some common challenges:
In healthcare, access to real-time data is critical for up-to-date financial decision-making. However, many hospital accounting software solutions lack the capacity to offer true real-time data due to limitations in multi-entity and multi-currency consolidation. To achieve real-time insights, a platform should automate consolidations across entities and currencies without waiting until month-end, along with necessary calculations like intercompany eliminations. Ensure the software provides comprehensive real-time capabilities to maximize data accuracy and operational efficiency.
Many legacy ERP systems lack the flexibility to integrate seamlessly with modern apps due to outdated code. This lack of adaptability can be a barrier in healthcare, as it often requires hiring specialized developers to build integrations, adding time and cost. Look for hospital accounting software with a REST API, allowing easy and rapid integration with new applications. This feature ensures that the system adapts quickly to the evolving healthcare landscape, supporting efficient and scalable operations.
While many ERP solutions offer add-ons for consolidating multiple entities and currencies, few provide these capabilities as core features. Additionally, many solutions fail to automate calculations such as intercompany eliminations, leaving accountants to perform these manually. Look for multi-entity accounting software with built-in support for consolidations and currency revaluations to streamline financial management and save valuable time.
Implementing traditional ERP systems can be costly and time-intensive, with expenses reaching into the thousands, plus ongoing training and maintenance fees. Additionally, many systems require hiring third-party experts for implementation and regular maintenance. When evaluating new software, consider the total cost of ownership, including implementation time, ease of use, and long-term maintenance requirements, to ensure the solution fits both your budget and operational needs.
Hospitals face added challenges in securing both financial and patient data, making data protection critical. Choose a healthcare accounting platform with a SOC 1 Type II report, which ensures that the software’s design and controls are compliant with healthcare industry standards. This safeguard is essential for maintaining data privacy and meeting regulatory requirements.
Healthcare ERPs couldn’t keep up - so we built it ourselves. SoftLedger is purposefully designed to conquer the complexities of healthcare accounting, simplifying multi-entity management, the month-close process, and providing real-time data for CFOs. Built with an adaptable REST API, SoftLedger integrates seamlessly with other apps, supports rapid implementation (about 45 days), and ensures data protection aligned with healthcare standards.
Discover how SoftLedger fills the gaps other ERPs can’t—purpose-built for healthcare accounting, our software streamlines your processes with unmatched precision. Explore Your Solution today.
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A CPA with more than 10 years of varied public and private accounting experience, Ben has led many complex financial projects to successful outcomes.
He began his career at Ernst & Young, followed by in-house management roles at Fannie Mae and other public companies.
Ben holds a B.S. in Accounting from the University of Maryland.
