The Basic Principles in Medical Office Accounting

The second Tuesday of each month, practice managers and healthcare industry service providers gather for the monthly Nashville Medical Group Management Association (NMGMA) meeting. As speaker for the May meeting, my presentation focused on the basic principles and elements of medical office accounting.

You Can't Manage What You Can't Measure

The presentation centered on the importance of creating financial statements that are meaningful for the practice. Because financial statements tell a practice's story, they serve a critical role in physician practice management. If designed appropriately, accounting programs can produce reports and subsidiary information that should eliminate the need to prepare separate schedules for management purposes like physician compensation. Strong accounting procedures can reduce the time a practice manager must spend generating additional reports and increase accuracy of the information presented.

Presenting the Reports: Cash or Accrual?

Most physician practices prepare the financial statements on the cash basis of accounting where income is not recognized until it is received, and expenses are not deducted until they are paid.

However, practices can also prepare financial statements on the accrual basis, recognizing income when it is earned (i.e., when the patient service is performed) and deducting expenses when they are incurred. The most significant estimate to determine when preparing financials on the accrual basis of accounting is the adjustment to accounts receivable for contractual adjustments (i.e., adjusting for third-party payer contractual adjustments) and bad debts. The revenue on accrual-based financials should reflect what the practice expects to collect for the services rendered after estimating the adjustments.

Deciphering the Reports

The balance sheet is a component of the financial statements that represents a snapshot of the practice's assets, liabilities, and equity on a certain date (e.g., month end). It's cleverly called a balance sheet, because assets = liabilities + equity. Considered another way, equity represents the difference between the practice assets and practice liabilities (analogous to equity in a home).

The income statement represents income less expenses over a period of time. (For example, an April 30 income statement for a calendar-year practice would reflect income and expenses for four months.) The income statement is a critical tool in practice management and can provide valuable information when compared to prior year results, budgeted amounts, and industry benchmarks. Areas of deviation can be identified and investigated through this analysis.

The statement of cash flows assists the practice manager in answering the age-old question, "Why is income more than cash?" The statement identifies cash flow from operations (i.e., patient service collections less practice expenses) and other factors that increase or decrease cash but may not impact income (e.g., repayment of a practice debt principal).

If You Don't Know Where You're Going, How Do You Know if You've Arrived?

The budgeting process is an essential component for financial management in the medical practice as it helps the practice to translate its goals and objectives into dollars. When compared to actual results, the budget can provide critical information alerting the practice to areas that need attention if financial goals are to be achieved. If the practice is adding providers, locations, or modalities, the budget is an essential tool because it helps estimates the financial impact of anticipated expansion.

Reconcile, Reconcile, Reconcile

Establishing checks and balances in the accounting process for the medical practice is one of the most important steps in protecting the practice from financial fraud. From an income perspective, deposits should reconcile with payments posted to the practice management system and should agree with income reported on the financial statements (cash basis). Setting up a system to approve vendor additions to the accounts payable system can alert the practice to fraudulent vendors. And proper documentation and approval should always be provided for all patient refunds.

Like an apple a day, proper processes can help keep the potential fraudster at bay!

Lucy Carter is a member (owner) of KraftCPAs PLLC member and practice leader of the firm's healthcare industry team.

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