Healthcare Revenue and Accounting Terms You Need To Know

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.

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Healthcare Accounting Definitions

Accrual and Cash 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.

Financial Accounting Standards Board (FASB)

The FASB is a non-profit independent organization that sets financial accounting standards to ensure reliable and accurate financial reporting for stakeholders and other users. Its role is to oversee and improve the financial and accounting standards in companies and non-profit organizations that follow the GAAP. Healthcare organizations are also expected to comply with the FASB standards in their reporting.

Generally Accepted Accounting Principles (GAAP)

These are accounting standards, principles, and procedures administered by the FASB. Healthcare organizations are expected to integrate these principles into their operations.

Financial Reporting

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.

Payments and Receivables for Healthcare Services

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.

Payments and Receivables for Healthcare Services

Payer Mixes

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.

Asset Depreciation

Depreciation of fixed assets in healthcare organizations should be taken into account. Healthcare organizations have various types of assets that support operations, including buildings, medical equipment, vehicles, and land. They commonly value their assets based on the acquisition or historical value.

Credit Balances

It’s typical to have accumulated credits in accounts receivables. This occurs when there is an overpayment of services by patients and payers which exceeds what is due. This is risky as it does not provide accurate accounts receivable reporting. Accountants need to write checks for outstanding balances.

Medical Insurance

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 Revenue

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

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 Vs. Net Revenue

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.

Operating Costs

This is where revenue is allocated to help manage the operations of the organization. They include salaries and wages, drug prescriptions, utilities, and office supplies.

Medical Claim

It’s simply a medical bill that a healthcare provider creates and submits to the insurance provider. It comprises various codes showing the services provided to a patient. Some of the items that are coded are diagnosis, procedure, medical supplies, and pharmaceuticals.

Charity Care

It’s a service provided to persons who cannot afford medical treatment. Clients receive both inpatient and outpatient services for free or at a discount. Non-profit hospitals are expected under the Affordable Care Act to provide charity care to comply with IRS regulations on nonprofit status. Hospitals usually don’t expect to be reimbursed.

Operating Budget

A hospital depends on an operating budget to predict future revenues and expenses. It guides the hospital management to monitor their expenditure so that the actual budget does not exceed the forecasted projection.

Healthcare Revenue and Accounting Terms You Need To Know