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Foundational Accounting Concepts in Healthcare Settings

Accrual accounting and cash accounting play an important role in organizational financial management. In accrual accounting, the results of transactions and other processes are recognized upon their occurrence (Zelman, McCue, & Glick, 2009). It implies that costs are conformed with received incomes (e.g., the cost of goods is written off at the moment of their realization), and are recognized within a period when they are induced (e.g., electricity costs are recognized in the month when this electricity was consumed, etc.). Thus, not only do financial statements created on the accrual basis inform users about past transactions related to payment and receipt of cash but also about the obligation to pay money in the future, as well as about cash equivalents to be received. This information is extremely important for making right economic decisions.

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In cash accounting, income is recorded only when money is received, and costs are recognized merely after an actual payment is made (Zelman et al., 2009). However, considering that in modern economy, loans are used as frequently as cash, this method may be not as efficient as accrual accounting, which can show all aspects of credit and provide investors and other decision-makers with detailed information about the company’s future cash flows (Benjemâa, Toukabri, & Jilani, 2014). In other words, by reflecting economic transactions at the time they occur and not just when money is received or paid, the accrual method helps predict the future financial status of a company.

The costs and revenues associated with such a task as patient assessment can be recorded by using both cash accounting and accrual accounting. In case the rendered service is covered by medical insurance, and the patient does not need to pay for it immediately, the latter method is more appropriate: the transaction will be recognized, recorded and reported in the statements for the period to which it relates. In this case, expected revenues will be stated as accounts receivable, and expected expenses − as accounts payable (Baker, Baker, & Dworkin, 2018). In cash accounting, the same cost will be recorded in a period when the payment is received, which may not necessarily be the same quarter of the year.

When using cash accounting in such large setting as UCLA Medical Center in Los Angeles, some challenges may arise. For example, this method will not provide an opportunity to know what payments the company should make to its suppliers in the near future and what receipts are expected from customers who received services on post-payment terms. It is more convenient to use cash accounting when an enterprise is small, and the results of its activities are highly dependent on incoming and outgoing cash flows.

Reimbursement for Services

Fee-for-service (FFS) payment systems are used in the majority of the US hospitals today. In this model, healthcare practitioners are reimbursed based on the volume of rendered care (Slattery, Clancy, Harewood, Murray, & Patchett, 2013). The given approach is highly criticized. It is considered that FFS systems “give healthcare providers strong financial incentives to deliver more services to more people, but often financially penalize providers for delivering better services and improving health” (Center for Healthcare Quality and Payment Reform [CHQPR], n.d., p. 1). At the same time, case-based payment (DRGs) reimburses practitioners based on the diagnosis of diseases in accordance with a pre-defined rate scheme. As Jin, Biller-Andorno, and Wild (2015) note, the pre-defined rate of a diagnosis “sets a limit to the overall expenses for individual patients, which presumably mitigates the prevalence of over-treatment in the fee-for-service system” (p. 135). For example, in regards of patients with acute pneumonia within an FFS system, their length of stay in the hospital may be longer compared to DRGs, and the cost for antimicrobial treatment much higher as well because practitioners may prescribe an excess number of procedures to gain financial benefits.

It is possible to say that such alternatives to the discussed payment models as episode payment and comprehensive care payment (CCP) may not be suitable for all types of settings. For example, CCP may be effectively applied in care centers specialized on chronic conditions as it is aimed at “reducing the number of unnecessary episodes of care for a particular condition or group of people” (CHQPR, n.d., p. 2). Episode payment method can be more feasibly implemented in primary care clinical settings such as Massachusetts General Hospital, etc. However, it is first necessary to identify the most frequently diagnosed conditions and excess costs associated with an overuse of expensive procedures prescribed to patients with those disorders.

As for nurse-to-patient ratios and their relation to payment models, it is essential to take into account that effective staffing is usually associated with lower mortality, greater patient satisfaction, and lower rate of medical errors (Moore & Waters, 2012). To increase the quality of care, hospitals may initiate financial incentives aimed either to penalize treatment-related complications in patients or to reward practitioners for all provided high-quality services as a whole (Kavanagh, Cimiotti, Abusalem, & Coty, 2012). DRGs may be associated with positive financial incentives more because they require practitioners to adhere to standard protocols. In this system, it is more likely that hospitals will aim to maintain a well-balanced nurse-to-patient ratio as well because it may contribute to better quality of care. Conversely, in FFS, it is rather irrelevant if the given ratio is balanced because patients who develop different complications (e.g., infections) are profitable for hospitals and, therefore, they may not prioritize service quality. To make the given system work better for the sake of patients, hospital management should aim to promote safety culture and create favorable workplace environment.

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Baker, J. J., Baker, R. W., & Dworkin, N. R. (2018). Health care finance: Basic tools for nonfinancial managers (5th ed.). Burlington, MA: Jones and Bartlett Learning.

Benjemâa, O., Toukabri, M., & Jilani, F. (2014). Accruals and the prediction of future operating cash-flows: Evidence from Tunisian companies. International Journal of Accounting and Economics Studies, 3(1), 1.

Zelman, W., McCue, M., & Glick, N. (2009). Financial management of health care organizations: An introduction to fundamental tools, concepts, and applications (3rd ed.). Hoboken, NJ: Jossey-Bass.

Center for Healthcare Quality and Payment Reform. (n.d.). Which health care payment system is best? Web.

Jin, P., Biller-Andorno, N., & Wild, V. (2015). Ethical implications of case-based payment in China: A systematic analysis. Developing World Bioethics, 15(3), 134-142.

Kavanagh, K. T., Cimiotti, J. P., Abusalem, S., & Coty, M.-B. (2012). Moving healthcare quality forward with nursing-sensitive value-based purchasing. Journal of Nursing Scholarship, 44(4), 385–395.

Moore, A., & Waters, A. (2012). Getting ratios right, for the patients’ sake. Nursing Standard, 26(31), 16-19.

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Slattery, E., Clancy, K. X., Harewood, G. C., Murray, F. E., & Patchett, S. (2013). Does the cost of care differ for patients with fee-for-service vs. capitation of payment? A case–control study in gastroenterology. Irish Journal of Medical Science, 182(4), 669-672.

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