Healthcare Finance Ethics: Accounting Principles and GAAP

Introduction: Ethics in Healthcare Finance

Because healthcare focuses on a fundamental human concern, it is especially important to maintain a strong sense of ethics in this field. This becomes even more critical when the concern involves finance, accounting, and accountability. It is vital that accountability be maintained in healthcare funds, since the concern often involves public money and its application. If these funds are poorly managed or unethically applied, the cost may extend far beyond the financial. Indeed, human lives can be at stake.

For this reason, cost principles and generally accepted accounting principles can and should be applied when considering finance in the healthcare field. Two published articles have been selected to demonstrate these accounting principles in a practical context: the first concerns a single-payer healthcare financing system, while the second focuses on pharmaceutical companies and their role in financing drug trials.

Core Cost Principles in Accounting

In the accounting field, there are four main principles that must be taken into account in terms of the ethical management of funding. The first is the cost principle, which dictates that the actual cost of assets should be recorded rather than their market value or an inflation-adjusted estimate. Recording the actual cost of assets at the time of purchase creates a more accurate accounting ledger for inventory and other purchases, rather than relying on estimates of what their value might be at a later time.

The second principle focuses on revenue recognition. According to this principle, revenue should be recorded at the time it is earned rather than at the time payment is received. Such recording prevents accounting errors that can arise from delayed payments.

Third, the matching principle states that expenses and revenue should be matched. Expenses are recorded at the time they contribute to revenue, rather than at the time they are generated. In this way, the profitability of goods and services can be evaluated clearly. It also creates a direct connection between expense and income, linking goods and services with the revenue they produce. Expenses such as administrative costs and employee salaries are recorded as expenses for the current period and cannot be directly linked to specific revenue streams.

Finally, the disclosure principle holds that all financial information should be released in a clear and comprehensible manner. The scope of disclosure should also be balanced against the cost of generating and releasing the information. Financial statements should be included either in the body of the financial documents, as footnotes, or in the form of supplemental documents. While the disclosed information should be sufficient to support corporate and executive decision-making, unnecessary or redundant information should be streamlined to minimize the cost of disclosure.

Generally Accepted Accounting Principles (GAAP)

Generally Accepted Accounting Principles (GAAP) involve several key components. The first is competence, which means that accounting and financial professionals should not only possess a sufficient educational background to perform their work effectively, but should also continue learning as new principles and methods are developed over the course of their careers. They must also maintain ethical standards that are both professionally and socially acceptable.

A second component is objectivity, which requires professionals to remain objective while avoiding conflicts of interest. Where accountants have a vested interest in a particular company, they should not perform financial services for that company. Dishonest practices must be avoided at all costs, even in cases where a conflict of interest is difficult to eliminate entirely.

The third component, confidentiality, refers to the protection of private information such as contact details for employees and business associates. Accounting ethics require that this information be kept confidential unless a court of law orders its release. Professionals should not disclose such information for an unethical or illegal advantage.

Conclusion: Ethics, Public Interest, and Human Health

Hsiao, W.C., Knight, A.G., Kappel, S., and Done, N. (2011). What other states can learn from Vermont's bold experiment: Embracing a single-payer health care financing system. Health Affairs, Vol. 30, No. 7.

Schott, G., Pachl, H., Limbach, U., Gundert-Remy, U., Lieb, K., and Ludwig, W-D. (2010, April). The financing of drug trials by pharmaceutical companies and its consequences. Deutsches Ärzteblatt, Vol. 107, No. 17.