Health care accounting: A beginners guide

For those new to it, health care accounting can feel about as confusing and daunting as conducting an open heart surgery. Health care businesses and medical practices might struggle to keep up with the constant changes in regulations, rules, and laws that govern the industry. 

But with the right tools and knowledge, health care accounting doesn't have to be overwhelming—it can even become an asset to your company or firm. Let’s explore health care accounting, how it differs from general accounting, and the importance of recordkeeping in health care. 

Health care accounting vs. general accounting

Health care accounting is distinct from general accounting and other industry-specific accounting in that it focuses specifically on the financial management of health care organizations and entities. 

General accounting covers topics like bookkeeping, tax preparation, and auditing. However, health care accounting focuses more on budgeting, financial reporting, and compliance with laws and regulations.

A health care accountant handles everything across the accounting cycle, including putting together the financial records for a health care organization. Other functions of health care accountants include:

• Managing accounts receivable
• Running payroll
• Collecting patient payments
• Making account adjustments
• Tracking insurance claims
• Preparing financial statements

Health care accountants also have extensive knowledge of billing processes and reimbursement rates that can be beneficial when negotiating contracts with insurers or other third-party payers. 

With the complexities of medical accounting, an experienced professional who understands all relevant laws is crucial. They can help ensure a medical practice or facility remains profitable while staying compliant.

Health care accounting types

Health care accounting includes two main types—financial and managerial. Financial health care accounting tracks the money flowing in and out of a health care organization. 

Managerial health care accounting analyzes data to make informed decisions about the practice’s operations. Financial accounting ensures the accuracy of income and expenses, but managerial accounting provides insight into spending. 

How health care accounting works

Health care accountants and accounting professionals are responsible for accurate billing, budgeting, and negotiating contracts with third-party payers. Health care and medical accounting professionals also help organizations with regulatory compliance while providing accurate financial reporting to stakeholders.

Ensuring compliance

Health care accounting professionals must be aware of any changes in federal or state regulations related to health care. They must also maintain compliance with Generally Accepted Accounting Principles (GAAP). 

Generally Accepted Accounting Principles are accounting standards for preparing financial statements. In the health care industry, GAAP is important, as it provides investors and stakeholders with reliable financial information. 

GAAP provides a consistent method for organizations to report financial information, allowing for accurate comparisons among different entities.

Additionally, health care organizations must maintain accurate recordkeeping to comply with regulatory requirements. Proper documentation of patient information enables providers to monitor payments and medical treatments while keeping patient info private. 

To abide by federal law, hospitals and other health care providers should keep comprehensive patient records. 

Monitoring key expenses

Monitoring certain expenses is a key part of health care accounting. It involves tracking and analyzing health care spending across many areas. The goal of monitoring expenses is to find cost savings opportunities. This can include everything from payer contracts and supplies costs to staffing levels and equipment rentals.

One of the key steps in expense monitoring is to collect data on all relevant expenses by assessing the income statement. By identifying areas where expenses are higher than necessary, organizations can make strategic decisions about how to optimize their budget and use accounting software to manage cash flow. 

Tracking depreciation

Depreciation tracking is an important part of health care accounting. This process involves tracking and recording the cost of depreciable assets over time. Depreciable assets are replaceable items such as computers, furniture, and medical equipment. By tracking depreciation costs, organizations can plan for future purchases and budget accordingly.

Depreciation tracking should begin by creating an inventory of all assets owned by the organization. This list should include purchase dates, estimated useful life, expected residual value, and other pertinent information about each item.

Health care accounting terms

Health care accounting includes a variety of terms that you might not find in general accounting—or they might have a different meaning. Understanding these terms, especially when starting a health care practice, can help health care providers better manage their finances and ensure accuracy in their financial statements.

Here are some of the most common terms you’ll want to know:

• Bad debt: Unpaid patient accounts that a health care organization considers uncollectible and writes off as a loss.
• Charge description master (CDM): A comprehensive listing of all billable services and items provided by a health care organization, including procedure codes, descriptions, and associated charges.
• Contractual allowance: The difference between the full amount for services a health care provider charges and the negotiated reimbursement rates with third-party payers. 
• Cost-to-charge ratio: A calculation that uses billed charges to estimate the actual cost of providing health care services.
• Gross patient revenue: The total amount a health care company charges for services, before any adjustments or discounts. 
• Net patient revenue: The total revenue a health care organization earns for patient care services after contractual allowances, adjustments, and discounts.
• Relative value unit (RVU): The value of medical procedures and services, considering the resources and time it takes to perform them. It helps determine physician compensation and reimbursement rates.
• Revenue cycle management (RCM): The process of efficiently managing a health care organization's revenue stream. RCM includes: tracking claims, ensuring accurate billing, managing accounts receivable, and collecting payments.
• Third-party payer: A company, such as an insurance company or government organization, that pays for health care services on behalf of patients.
• Uncompensated care: The sum of charity care and bad debt expenses, representing the cost of unpaid health care services. 

By understanding these health care accounting terms, health care companies can more accurately keep track of their finances.

Streamline your accounting and save time 

Health care accounting is vital for medical providers who must track their budgets to ensure they stay within limits set by government regulations and insurance companies.

And thankfully, accounting software like QuickBooks helps you create financial records and manage accurate time tracking within your health care business.