Healthcare industry plays a vital role in ensuring the provision of quality medical solutions and services to the society. In the past, healthcare providers were receiving reimbursement from the government or other funding institutions thus did not attempt to evaluate the necessity of minimizing operational cost. But as the patient mix is changing and escalation of medical costs, the main financial providers of the healthcare institutions have reduced their funding by either paying a fixed fee for particular treatments or funding a pre-approved annual budget ( Seetharaman, Raj & Saravanan, 2010 ). Therefore, healthcare providers are facing the immense challenge of providing quality patient care. At the same time, they face increasing pressure to present evidence that the healthcare institution has the ability to manage the quality and operational efficiency. Therefore, accounting takes the lead for quality improvement in the healthcare sector. In this paper, the importance of healthcare accounting in the provision of quality healthcare services and the reduction of operational costs is elucidated.
Firstly, healthcare accounting is essential for the estimation and classification of costs incurred by the institution. Analysis of the cost can be done at the institutional or departmental level although it can also be done at the patient level. Gapenski and Reiter (2016) states, the estimation of cost done at the individual patient level is the best. Seemingly, the authors acknowledge the importance of cost accounting in the healthcare institution. Different techniques of estimating and classifying cost incurred are used in the healthcare sector. For example, activity-based management (ABM), activity-based costing (ABC), Target costing, and balanced scorecards (BSC) among others (Bonner, et al., 2012). Thus, the integration of such techniques to estimate and analyze the operational costs makes sure that unnecessary costs are not incurred by the healthcare institution.
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Secondly, healthcare accounting is essential to provide insight to healthcare provider the best approach to improve the costs and at the same time maintain high-quality services. Healthcare providers are eager to know the general financial capabilities of their facilities may it be a clinic, hospital or private practice. It is almost impossible to calculate the accounting data of the institutions by hand in the fast-growing industry. Therefore, healthcare accounting systems provide a well analyzed forecasted data that helps the provider to make informed decisions on how to advance the current spending and without sacrificing the quality of patient care. Also, healthcare accounting assures healthcare providers that they can balance spending and the quality of care they provide ("Understanding the Need for Healthcare Cost Accounting", 2018).
Thirdly, healthcare accounting is essential for recording and summarizing the healthcare institution’s transactions and balances. The process is often referred to as book-keeping. It is essential in the management of a healthcare facility in that the recorded data can be summarized to form financial statements. The statements play a major role in informing the healthcare provider the amount he or she has invested, the usage of the funds, and profit or loss in the institution. Additionally, financial statements are an important source of information concerning liabilities, receivables, and other assets in the healthcare institution. While the information is fundamental to healthcare managers, it is also important to other stakeholders in the institution.
Fourthly, healthcare accounting provides the basis for planning on the allocation of the institution’s limited resources towards maintaining high-quality healthcare services. The resources include the finances, labor, equipment, and even material assets. The allocation is done through the use of budgeting, an important aspect of managerial accounting. The budgets enable the healthcare institutions to plan forth by predicting what it will need and the resources required. Additionally, planning enables the coordination of different department within the healthcare institution.
Also, healthcare accounting ensures accountability of the different segments of the healthcare institution. It offers a foundation for performance examination over a specific period. Scheduled performance analysis based on the healthcare accounting information ensures accountability across the different departments of the healthcare institution. Besides, shareholders are also able to hold the healthcare managers accountable for the overall performance of the healthcare facility by use of performance appraisals. The shareholder base the performance appraisal on the accounting data published in the financial statements.
Additionally, healthcare accounting plays a vital role in monitoring and controlling of targets set by the healthcare institutions. The process of controlling in healthcare provision begins with the stipulation of measure of performance such as budgets and standard costs. Then, the measurement of the results is done, and the analysis of the deviation between the results and the targets is done and the corrective measure was undertaken. Similarly, healthcare accounting is important in examining and control of expenditure and effectiveness of all routine processes as well as projects under the healthcare institution’s mandate. Equally important, healthcare accounting enables managers to set targets for different departments and monitoring them so that the overall institution’s targets of providing quality patient care are met.
Moreover, healthcare accounting information is essential for stakeholders such as tax authorities, financial institutions, management, customers, suppliers and competitors (Carroll, & Lord, 2016) . The reliability of the information is vital to tax authorities to determine the tax returns filed by the healthcare institution. The data’s accuracy can be achieved through the use of an internal or external auditor. Sometimes, healthcare institutions may need to seek finances from external financial institutions such as banks in order to improve the quality of their patient care services. The use of financial statements generated by healthcare accounting is of used by the institution to access credit. The financial institutions assess the credit risk by analyzing the healthcare institution’s liquidity and financial position. Likewise, healthcare management uses information provided by healthcare accounting to evaluate the institution’s risk managing practices. On the other hand, accounting information provides knowledge to healthcare consumers on its prices and fairness in the healthcare market. Additionally, the information is essential to suppliers who are able to determine the financial well-being of the healthcare facility, and if it is struggling the information offers an early warning. Lastly, the information is essential since it helps to create goodwill for the healthcare facility and portrays its competitiveness to a current and prospective competitor.
Furthermore, healthcare accounting presents information that provides the basis for auditing of the quality of services ("Purpose of Accounting", 2018). It is the provision of law that every organization files returns for taxation. The returns are filed by use of financial statements. The statements are subject to auditing by external auditors to provide their opinion regarding the authenticity of the financial statements. Additionally, auditing offers verification that the data provided by the healthcare accounting is reasonable. As much as the audited financial statements do not provide clear assurance that the financial statements are free of misstatements, it provides a clear picture as to whether the facility is inclined towards the realization of quality healthcare.
Lastly, healthcare information enables price transparency amongst the different segments of healthcare institutions and the consumer. Thus, it creates a market pressure so that the facility regulates its pricing to be on par with the costs of providing individual services. Additionally, the information on pricing enables the healthcare provider to communicate the complex information on prices, quality, and the monetary liability to consumers more efficiently and understandably. Ultimately, the impact can be an increased number of consumers and revenues depending on the decision the patient opt to make. If the patient chooses to shop for low costing services, the provider will need to set the prices level that reflects the cost of the patient care (Carroll, & Lord, 2016). Overall, healthcare accounting serves the long-term interests of the healthcare facility. Truly, healthcare accounting is one of the major components of healthcare institutions upon which healthcare professionalism and integrity lie. Healthcare accounting is crucial in the estimation and classification of costs incurred by the institution. Additionally, it provides insight into the healthcare provider the best approach to improve the costs and at the same time maintain high-quality services. Also, healthcare accounting plays a vital role in recording and summarizing the healthcare institution’s transactions and balances. Likewise, it provides the basis for planning on the allocation of the institution’s limited resources towards maintaining high-quality healthcare services. Moreover, accounting in the healthcare institution ensures accountability of the different segments of the healthcare institution. Similarly, healthcare accounting is crucial in monitoring and controlling of targets set by the healthcare institutions. At the same instance, it provides the necessary information needed by stakeholders such as tax authorities, financial institutions, management, customers, suppliers, and competitors. Moreover, healthcare accounting presents information that provides the basis for auditing of the quality of services. Lastly, information provided by healthcare accounting enables price transparency amongst the different segments of healthcare institutions and the consumer. Indeed, the healthcare accounting is an integral domain in the healthcare sector, and its integration is necessary.
References
Bonner, S. E., Hesford, J. W., Van der Stede, W. A., & Young, S. (2012). The social structure of communication in major accounting research journals. Contemporary Accounting Research, 29(3), 869-909.
Carroll, N., & Lord, J. C. (2016). The growing importance of cost accounting for hospitals. Journal of Healthcare Finance , 43 (2).
Gapenski, L. C., & Reiter, K. L. (2016). Healthcare Finance: An Introduction to Accounting and Financial Management, Sixth Edition. Chicago, IL: Health Administration Press.
Purpose of Accounting. (2018). Retrieved from https://bizfluent.com/about-4679149-purpose-accounting-.html
Seetharaman, A., Raj, J. R., & Saravanan, A. S. (2010). The changing role of accounting in the healthcare industry. Research Journal of Business Management , 4 (2), 91-102.
Understanding The Need For Healthcare Cost Accounting. (2018). Retrieved from https://www.stratadecision.com/healthcare-cost-accounting/
