Summary of the Four Elements of Financial Management
Healthcare industry is riddled with high operation costs. In most instances, the revenues generated from offering medical services far exceed the revenue received from offering such services. As a result, facilities incur huge losses during their operation periods. Financial management information is very vital for controlling these costs through its four elements. To begin with, financial management begins by measuring the quantitative and qualitative performance of a healthcare facility. In addition to measuring the financial strength of the facility, they also measure the quality of care and the level of patient satisfaction. By using diverse categories of measures, health facilities can determine the efficiency with which it implements its admissions, billing and paper analysis procedures. Secondly, financial management assists a health facility in managing its revenue cycle. The problem of determining the revenue cycle in health sector is more complicated as a result of the billing department’s receipts of payments from payers including government agencies other than the patients to whom the services are offered. Health facilities therefore register, verify, bill and collect their revenue in a complex scenario in which a lot of bills could go unidentified or unbilled. Unrecorded bills would result into lost revenues for the healthcare facility. Thirdly, health sector relies of financial management to analyse the profitability of the operations of small and large health facilities. By relying on financial management information, these facilities can discover areas or departments in which most of its revenue is lost. Finally, health care providers rely on the knowledge of financial management to plan and forecast it future operations. For successful operations in the future, healthcare providers must predict and budget for expected changes in the number of patients they would receive. This prevents situations in which adequate materials and supplies are procured well in advance even before the period during which they would be used.
Summary of the Generally Accepted Accounting Principles and Ethics in Reporting
As noted by the Financial Accounting Standards Board (July 2011), the revenue recognition is applied selectively in the health care industry. While some patient service revenue recognizes revenue as soon as they offer their services to such patients, others recognize such revenue when they receive cash from the patients or the paying authority. This complicates the comparison of the performances of the different service providers since they would record different amounts of revenues and bad debts for completely similar transactions. To ensure consistency in financial reporting, service providers are required to reclassify the provision for bad debts arising from patient service revenue. Rather than recording this amount as an operating expense, it should be deducted from the amount of revenue expected from the patient under consideration. In this regard, the amount of bad debts is separately disclosed in a separate line after which the net revenue is disclosed. Of greatest concern is the power of service providers to develop and implement a policy in which it can determine an objective amount of bad debts and revenues arising from its operations during any of its financial periods. The matching concept of accounting dictates that revenues must be matched with the expenses incurred in generating them. Using the principle, all the revenues generated by offering services to its patients must be matched with the expenses incurred in generating the revenues.
The second most important aspect of the GAAP relates to the determination of the amounts of revenue at dates on which the services are offered. In case a health facility does not assess the ability of its patients to pay the debts they owe the company must disclose not only the timing and the amount of uncollectible revenue, but also the changes in the qualitative and quantitative information relating to each transaction.
Examples
The Financial Accounting Standards Board (FASB) amended the reporting standards to be used by the industries operating in the health care sector in order to promote the prudence principle of accounting. Under this principle, businesses are obliged to objectively report their earnings with little or no bias. This in essence requires the matching of the business’ revenues against its expenses so that the amount of profits reported is as fair as possible. With increasing costs incurred by health care providers, most governments have subsidized the expenses incurred in these facilities by allocating them some revolving funds. It is therefore prudent for the management of these facilities to objectively report fair surpluses they generate from their operations. Secondly, the FASB (July 2011) has instituted a yard stick by which the amount of reported accounts receivable should be measured. The board has proposed that the accounts receivable be reduced by the amount of allowance for doubtful debts. This is very critical more so in cases where medical bills are settled by insurance schemes such as the national medical schemes operated by governments. Since these bills are paid at a later date, the possibility of their uncollectibility rises. In its submission, FASB (July 2011) gives this example. Reference is made to entity A whose allowance for doubtful accounts for self-pay patients increased from 90 percent of self-pay accounts receivable at December 31, 20XI, to 95 percent of self-pay accounts receivable at December 31, 20X2. In addition, the entity’s self-pay write-offs increased by $ 1,000,000 from $ 8,000,000 in 20X1 to $ 9,000,000 in 20X2. This refers to an entity that does not accept third party pay methods.
Ethically, there are some health care providers who may serve patients in respect of whom the ultimate collection of all or portion of the amounts billed or billable cannot be determined at the time the services are rendered (FASB, July 2011). For instance, consider those entities that are tasked with providing their services to patients and recording the type of services they offer their clients regardless of the patients’ ability to pay. Consider the emergency department of hospitals which are legally bound to treat emergency conditions regardless of assessing the patients’ ability to pay for those services. In most cases, these services are offered even before the entity assesses the ability of the patients to settle the bills accumulated from the services they received. In this regard, FASB (July 2011) requires these departments to show the total patient service revenue, provision for bad debts and the net revenue receivable from its patients. This information must be reflected at the face of the financial statements. This provision ensures that health care entities do not deviate from their key objective of providing their services to all patients irrespective of their ability to settle the bills incurred thereon.
References
Financial Accounting Standards Board [FASB] (July 2011). Accounting Standards Update No. 2011 -07: Health Care Entities. Norwalk: FASB. Retrieved on 30th January 2013 from http://www.fasb.org/cs/BlobServer?blobcol=urldata&blobtable=MungoBlobs&blobkey=id&blobwhere=1175822797036&blobheader=application/pdf
McLean, R. A. (2003). Financial Management in Health Care Organizations. New York: Cengage Learning
Weekley, M. (2010). Core Accounting Principles Help Health Care Providers Manage Change. Retrieved on 29th January 2013 from http://www.plantemoran.com/industries/hospitals-health-systems/Documents/Core-Accounting-Principles-Help-Health-Care-Providers-Manage-Change-12-10.pdf
