Financial Management Content Find Articles Address Financial

Financial Management

Content Find articles address financial reporting practices ethics standards health care finance, including * generally accepted accounting principles * corporate compliance, ethics, and fraud abuse

Financial management: Literature review

Healthcare institutions, like all organizations, are continually confronted with the four basic elements of financial management: deciding what to invest in or produce; how to finance those investments or products; how to manage assets, and how to report those assets in a manner that is useful and also complies with all necessary regulations. This paper will provide an overview of two recent articles, one on the necessity of uniform accounting procedures to ensure ethical and legal compliance amongst healthcare institutions and the other on the financial consequences of failing to do so for the institution itself.

Article 1: Maintaining the strength of your convictions

According to Larry Tyler's 2004 article "Maintaining the strength of your convictions" "Most financial executives can avoid being caught in an ethical maelstrom by maintaining the strength of their convictions. Their gut feeling about what is right or wrong is intact and can provide the needed guidance. Sometimes, however, financial executives might be asked to compromise their convictions. Or they themselves might wish to 'bend' their convictions a bit, in effect letting down their moral guard" (Tyler 2004: 1). One of the most common criticisms of GAAP (Generally Accepted Accounting Practices) is that it is overly technical in terms of how it specifies cost allocations, thus allowing accountants to frequently flout the law in contrast to International Financial Reporting Standards [IFRS]. "While U.S. GAAP is based on rules and specific details, International Financial Reporting Standards tend to be more broadly based on principles" (Adam 2007). The IFRS's reliance on principles over rules-based accounting increases the potential for different interpretations between managers, but also puts the ethical obligation of honesty upon the shoulders of the organizational heads and the accountants. Tyler's stress upon the need for managers to rely upon their 'gut' as to what is ethical is in keeping with the concept of principles-based accounting.

The U.S. is shifting to adopting the international standards practiced by most nations, which indicates additional pressure to adhere to principle, rather than strictly the letter of accounting law, will increase in the future. In healthcare organizations today, particularly given the epidemic of cost-cutting, there is frequently pressure to focus on the need to show profits and to meet specific benchmarks. "Constituencies may want to 'make the numbers look better.' The heat is on the CFO to 'do the books differently'" (Tyler 2004:1). According to Tyler, the ethical tone of the company is set by management who must "lead by example. Promptly address ethical issues that staff members bring to you. Encourage discussions about ethical financial reporting in staff meetings. Ask job applicants to describe a conviction-shaking incident and how they addressed it. Hire those with high ethical standards" (Tyler 2004:1).

Besides adhering to GAAP, the idea that standards must also be principle-based should be enshrined in the ethical codes of all healthcare organizations. Healthcare organizations should have their own, institution-specific principles of transparency as well as strive to adhere to GAAP. Accounting by healthcare institutions exhibits tremendous variation from place to place. For example, "some hospitals remove credit balances from their receivables and report them as liabilities (this is correct), while others effectively report them as deductions from total receivables, understanding the receivable…some hospitals report receivables at the amount expected in payment from patient guarantors or other third parties," while others do not eliminate "all discounts, deductions, and contractual adjustments" (Rode 1990). Organizations must strive to comply with currently defined standards as well as set a personal mission to adhere to the most comprehensive and transparent principles possible regarding reporting. The challenge of doing so, however, can be financially burdensome even when the facility is not engaging in deliberate deception -- comprehensive audits can be costly, and there can be a temptation to be lax when overseeing small credits and deficits that can have a significant eventual impact upon the organization's bottom line. Regardless, the conclusion of the article is that greater principled guidance within institutions is called for, but there also must be greater agreement as to what specific practices uphold agreed-upon ideals of transparency and accuracy.

Uncovering pharmacy department risks and opportunities

A different perspective is offered by the article by Gary R. Fong, Randy Wiitala

and Frederick Stodolak entitled "Uncovering pharmacy department risks and opportunities," which details the difficulty of overseeing the bureaucracy of sprawling healthcare organizations. Specifically, one of the most notoriously unreliable departments regarding financial data is the pharmacy: "with gross revenue levels and cost increases in pharmaceutical and medical supplies exploding over the past decade, improper billing, coding, and pricing for pharmacy items can materially affect a hospital's net revenue, even with a small change in payer mix. And let's not forget, missing HCPCS codes, payable under Medicare, can result in lost reimbursement. Improper billable units and poor documentation for medical necessity are both targets for denials. The consequences for ignoring pharmacy department coding, compliance, pricing, and reimbursement responsibilities can be an onslaught of items that are unbilled, improperly billed, or under-billed; revenue take-backs by payers; and even public relations nightmares" (Fong et al. 2011:1). Financial mismanagement can thus result in a loss for the hospital, as well as mire it in a legal quagmire if proper financial accounting procedures are not observed.