Core Accounting Principles Help Health-Care Providers Manage Change

Staff Writer
Columbus CEO

Health-care providers are facing unprecedented challenges with respect to access, cost and quality of patient care due to recently enacted reform legislation. As a result, continually shrinking margins may make providers feel as though their only choice is to accept declining revenue and increasing costs.

But as the American health-care system stands on the brink of massive change, the same tried-and-true accounting principles that have worked for decades to optimize operating results remain valid.

It's true that health-care organizations can't directly control reimbursement rates from Medicare and Medicaid, which often pay at or below cost for services provided. But they can apply a disciplined approach to internal processes and actions while also keeping external pressures in mind.

Though health care looks much different today than it did in the 1980s and '90s, organizations that keep a careful eye on the bottom line can navigate the uncertainty while protecting their assets and preserving the organizational missions of maintaining quality and access to patient care.

Here are five steps to get started:

Review debt capacity to help in strategic planning efforts. Knowing how much you can borrow before you need to borrow it establishes a controlled approach to capital spending. Too often, health-care organizations only look at debt capacity immediately before seeking financing or, worse, not at all. Just like a consumer seeking to buy a new home or car, an organization needs to understand how much debt it can afford in order to make informed decisions.

With capital access tight, lenders need more evidence than ever that their investment is a sound one. They want to see a heightened focus on strategic growth tied to volume and consistent future earnings.

Develop a roadmap for information technology goals. Less than 2 percent of U.S. hospital systems have truly paperless electronic health records. The significant upfront expense has meant that larger, more sophisticated organizations have typically been the first adopters. However, it's time for all providers to make the necessary investment in technology in order to streamline communications and care delivery. Fully integrated paperless systems eliminate duplication, improve access to critical medical information and standardize data in an otherwise fragmented health-care delivery model.

Because these systems can cost millions of dollars, most organizations cannot fund such initiatives from operations. An understanding of debt capacity will help bridge the gap between technology goals and how quickly they can be achieved.

Review the revenue cycle for maximum performance. One of the most common problems with health-care billing systems is leaving rightful revenue on the table. Organizations should strive to collect 100 percent of amounts owed, starting with an accurate determination of the initial bill and following through to track and manage the timely and accurate receipt of payment.

Any consumer can tell you that health-care billing is confusing. The "bill and rebill" process many organizations follow every 30, 60 and 90 days is neither efficient nor effective. It's imperative to monitor and pursue amounts outstanding from third-party payers.

The industry is working to make statements more patient-friendly. Streamlining the billing process will go a long way toward improving cash collections and increasing patient satisfaction.

Perform a labor and productivity analysis. Always ensure a department is working at maximum efficiency and effectiveness before considering additional hires. By benchmarking against internal trends as well as industry productivity standards, managers can make better-informed decisions on staffing requests, particularly if existing employees have transferable skills that can be leveraged in other areas.

For organizations with more than one location, the need for comprehensive analysis grows exponentially, as there may be underutilized talent available at lower-volume sites that could be reallocated.

Conduct a product and service line analysis to measure resource utilization and profitability. Some departments are recognized as loss leaders, where services are provided regardless of profitability due to the organization's mission. Hospital intensive-care units, with a high caregiver-to-patient ratio coupled with heavy equipment and supply usage, are a prime example. Understanding the profitability of revenue-producing departments allows health-care entities to make well-informed decisions.

Profitable service lines can serve as a model for best practices that can be applied to less-profitable areas. If losses are inevitable, minimizing such losses becomes a crucial strategy, especially in today's environment.

The health-care industry is always changing. However, core business practices will continue to make sense no matter how care and compensation change. The same basics of health-care financial management that have been in play for decades still apply today. By focusing on these strategies, an organization can stand out from its competitors and thrive instead of merely survive.

Matt Weekley leads Plante & Moran's health and human services practice from the accounting firm's Columbus office. He can be reached at (614) 222-9073 or

Reprinted from the December 2010 issue of Columbus C.E.O. Copyright © Columbus C.E.O.