Health management concepts and organizational practices

Health Management and Financial Statements

Describe the four basic financial statements. What are some ways in which accounting for health care organizations (HCOs), especially not-for-profit (NFP) ones, tends to differ from accounting in other industries?

According to the textbook Essentials of Health Care Finance, "the primary outputs of financial accounting are four financial statements that detail the organization's current financial position and how the organization reached that position over some period of time (usually 1 year)" (Cleverley, Song & Cleverley, 2012). These four financial statements are 1.) Balance Sheet, 2.) Statement of Operations (or income statement or statement of revenues and expenses), 3.) Statement of Cash Flows, and 4.) Statement of Changes in Net Assets (or statement of changes in net assets). Health care organizations (HCOs) utilize each of these four financial statements under guidelines known as the Generally Accepted Accounting Principles (GAAP) to ensure an accurate financial accounting of their operation takes place on an annual, semi-annual, and quarterly basis.

While the body of rules and regulations in GAAP govern the four financial statements, HCOs and other providers of health care services, including not-for-profit (NFP) institutions, must be aware that financial accounting within the health care and medical industries can become incredibly complex. The fundamental difference between HCOs and typical businesses engaged in commercial activity is that most businesses have just a single type of payment -- billed charges -- while "in contrast, the typical healthcare firm may have several hundred different contractual relationships with payers, which specify different rates of payment for an identical basket of services" (Cleverley, Song & Cleverley, 2012). When the convoluted nature of the nation's current health insurance system is taken into account, which allows hospitals and health care providers to include the high individual cost of equipment and medicine within their balance sheets despite paying wholesale prices, it becomes clear that HCOs engage in a different type of accounting than typical businesses. The fact that U.S. Health & Human Services Secretary Kathleen Sebelius recently called for changes to this system, which would "require hospitals to use net revenue as their main revenue figure rather than the much higher gross revenue figure that can include inflated patient charges" (Friedman, 2013), only underscores the widespread nature of this problem.