Types of Accounting System in Health Care, Research Paper Example

Abstract

The purpose of this study is to highlight the importance of accounting systems in the health care setting, recognizing that these systems are important tools for health care organizations to use to obtain and maintain reliable financial records. This is necessary for implementing and managing efficient and effective accounting information systems. Additionally, the study points out that accurate financial reporting is the law and not an option for business organizations. This signifies the importance of maintaining accurate financial accounts and detailed records of financial activities is in accordance with tax law. Accounting systems in the health care industry enable an organization to manage its assets, outstanding debts, sales projections, profit, operating losses or gains, return on assets, cash outflows and inflows, and stockholder information. Therefore, this study also highlights the benefits derived from implementing efficient health care accounting systems. In addition, health care accounting system types and their roles are explored in-depth. The objectives of this study were to analyze the use of health care accounting systems to measure and discuss uses of various cost accounting systems in the health care industry.

The Purpose of Accounting Systems

Before one can understand how accounting systems work, it is important to understand the meaning of accounting itself. Accounting, as defined by Merriam-Webster Dictionary, is “the skill, system, or job of keeping the financial records of a business or person” or “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results” (Accounting, n.d.). It is a major aspect of any business organization’s structure and strategic objectives. With this in mind, it is significant to note that accounting can also be defined as a process that identifies, measures, records, and communicates a company’s economic information for the purpose of allowing management to make informed decisions (Hoggett, Edwards, & Medlin, 2003). It is in any organization’s best interest to have accurate information for reporting tax information and in the event of the organization getting audited.

Importance of Accounting Systems

Any business organization without an organized accounting system is likely set up to fail because there is no efficient way of keeping track of the organization’s financial affairs. Accounting systems utilize financial transaction records, either manually or computerized. The purpose of gathering this financial information is to record, categorize, analyze, and report financial information in a timely manner. Accounting systems are important tools for companies to use to obtain and maintain reliable financial records. It is necessary for any company to implement and manage an efficient and effective accounting information system. By law, all business organizations in various industries, such as the health care industry, must maintain an accurate account and detailed records of its financial activities, which is also in accordance with tax law. This means that the organization must maintain an appropriate accounting information system that is designed to ensure that relevant, as well as, reliable information is accurately reported in its financial statements (Trigo, Belfo, & Estebanez, 2014). It is never a good idea for any organization to slack in this area. There is a risk of ruin for a business that does not accurately keep its financial records, as it could constitute an accusation of fraud.

As mentioned, a business organization does not just have the option of maintaining accurate accounting records; it is the law, with which the business must comply or face penalties. According to the Internal Revenue Service (IRS) businesses must prepare and keep financial records that may be audited at any time. The IRS code mandates that businesses be able to compute their taxable income with an understandable accounting system that reflects the business income accurately. Additionally, federal legislation mandates that if the business is public, such as a health care company, it must keep accurate and detailed records, books, transactions, and assets records. Besides being compliant with the law, keeping accurate accounting records can protect a business from losing revenue and helps business operations. To manage a business successfully, an accounting system must be in place. This includes the ability of the business to conduct appropriate financial analyses and to measure the business profitability, cash flow, growth, and financial condition estimates (Trigo, Belfo, & Estebanez, 2014).

It goes without saying that a proper accounting system will help a company make the best business decisions and show an accurate snapshot of how the business is performing, as well as give an accurate view of future projections. This is attributable to sustainability. An organization thrives when its financial health thrives. In addition, the organization’s management team members is better able to answer any financial questions because they have accurate data gained from an efficient accounting system. They are able to also assess an organization’s assets, outstanding debts, sales projections, profit, operating losses or gains, return on assets, cash outflows and inflows, and stockholder information.

The above information is true for any type of business or organization; however, this study’s focus is on health care organizations and the types of accounting systems used by them. Additionally, the study examines the purpose and efficacy of accounting systems in health care organizations.

Health Care Accounting Systems Benefits

Accounting systems in health care organizations are put in place to improve delivery of care and processes within the organization to improve patient outcomes. This is done through effective process orientation within health care organizations. According to Kastberg and Siverbo (2013), “The purpose of the process of orientation is to improve patients’ journeys through the health care system” (p. 247). Additionally, process orientation is affected by how a health care organization’s management accounting system (MAS) is designed. Effectively designed accounting systems are used for managing information, accounting, and control systems. With process orientation, accounting systems can help an organization manage allocating responsibilities, sourcing information, and supporting decision processes. This is essential to maintaining control of accurate financial accounting records (Kastberg & Siverbo, 2013).

Another benefit of accounting systems in health care is the ability for real-time financial reporting, as well as periodic reporting. Instead of only quarterly or annual reporting periods, modern accounting systems allow organizations to access current updated information to better focus on problems that concurrently arise due to changing demands. Types of accounting systems that use this new technology include those that can help organizations with process management, cloud computing, mobile devices, enterprise architecture, business intelligence, and enterprise application integration (Trigo, Belfo, & Estebanez, 2014).

Quality Improvement in Health Care

Accounting systems benefit the health care industry because they promote quality improvement in health care organizations. This is carried out through giving organizations the ability for public reporting, conducting performance evaluations, conducting standardized measurements, and initiating managerial control (Pflueger, 2015).

Health Care Accounting System Types

Some accounting systems are industry-specific such as for the health care industry. Accounting system requirements for the health care industry are different from those of other industries, and are based on the specifics of each industry. In health care accounting, specific types are often used, some of which are explained below.

Cost Accounting

Cost accounting systems should offer solutions within the software application. These systems are designed to use features to enhance the functionality of the software to expedite implementation, improve the integrity of cost data, allow all access and use within the organization, and minimize the need for onging maintenance. The best health care accounting system is a scalable costing method, enables assignment of expense accounts and job codes based on cost behavior, analyzes comprehensive data quality, has time-saving options, allows for real-time data extraction, has automatic and integrated calculation ability, Web browser-based, user-friendly interface, can automatically import CDM volume, and is integrated with a performance management system (Imus, n.d.).

Diagnosis Related Groups

A well-known and widely used type of health care accounting system is diagnosis related groups (DRGs), which is a provider payment system. This type of accounting technology helps with cost reduction and improvement of health care quality for health care organizations. This type of accounting system allows health care organizations to organize information related to payments to better reach organizational objectives with cost accounting methods through the use of DRGs (Leister & Stausberg, 2005).

Transition Cost Accounting

Another type of accounting system used in the health care industry is the transition cost accounting system. This system is an integrated system that combines financial information, resource allocation, and clinical information used among various hospitals for the purpose of calculating patient care costs. This is in response to the need for cost-effective approaches to managing financial information to facilitate better organizational outcomes. This initiative has prompted hospital administrators to implement cost accounting information systems into their health care organizations. This is the basis for implementing the transition system in health care to compare costs among various hospitals to measure treatment costs (Azoulay, et al., 2007).

In health care, the transition system depends on accuracy and cost estimates obtained from the technology used for this accounting system. There is a real possibility for error in costs measuring with this system; therefore, it is essential that users of the system understand its methods used for estimating product and services costs. This system can provide internal reports that administrators can use to formulate policies and make strategic plans. Additionally, data sources from this accounting system can be used to conduct studies on cost of illness and other health-related research studies (Azoulay, et al., 2007). The need for cost accounting in the hospital setting has been driven by the need for better fiscal control. This includes linking an organization’s cost accounting principles to activities such as budgeting and planning. This is also related to maintaining government regulatory compliance, payment mechanisms, and competitive advantage. Additionally, this type of cost accounting allows health care organizations to ascertain the true costs of providing services and the most cost-effective ways of treating patients. This is referred to as microcosting and it is comprised of collecting data, modeling costs, and analyzing costs. Microcosting allows organizations to analyze full costs by assessing costs for labor, materials, depreciation, and overhead (Sabin, 1987).

Organizational objectives of a system for cost accounting drives the initiative to generate information for various purposes that are determined by management. Management decides on what type of cost accounting system to develop depending on what type of information is routinely needed. Orgnanizational managers must figure out the information needs of the organization, which will coincide with installation of the system and coordinating the time of all managers within the organization. Efficient cost accounting systems should consider the organization’s support and service network, system functionality, cost elements and cost types, integration with clinical systems, integration with provider finanical systems, system speed, and price (Toso, n.d.).

Target Costing Systems

A reduction in health care costs can be obtained through the use of target costing systems, which can offer new services at affordable prices that are targeted to specific demographics, which increases volume. Targeted costs enables physicians, hospitals, and other health care providers to contain costs more effectively. This works only when physicians take initiative sto reduce costs based on targeted areas while keeping service quality constant (Davis, Davis, & Schmelzle, 2013).

Activity-based Costing

With activity-based costing, organizations can control costs through a two-step process. The first step involves hospital costs being assigned to different cost pools that respresent different activities such as blood tests, MRIs, urinalisys, etc. The second step involves charging the costs to a particular object such as a department within the hospital or to a patient (Davis, Davis, & Schmelzle, 2013).

Decision Support System

Another type of accounting system used by health care organizations is the decision support system (DSS). This system allows for the implementation of flexible budgeting, labor productivity reports, and monthly finanical reports. Specifically, the flexible budgeting feature allowed for assessing price, mix, volume, and efficiency. This system enables organizations to be more strategic and proactively manage operations. Additionally, DSS enables organizations to establish risk-sharing and rates parameters for contracts, as well as determine losses on contracts. Furthermore, using data from this type of cost accounting method enables health care organizations to analyze process outcomes to ascertain if the organization occurs any losses. Using data from cost accounting is also useful in assisting health care organizations in analyzing data for refinancing, expanding outpatient services, acquiring other businesses, strategic budgeting, and profitability studies (Toso, n.d.).

Roles in Health Care Accounting

Accounting plays a significant role in health care costs as well as allocating resources in the health care system. This directly affects all stakeholders in the health care system, which are patients, physicians, managers, insurance companies, and other medical professionals. Additionally, both health care institutions and individuals play important roles in health care costs accounting (Davis, Davis, & Schmelzle, 2013).

Health care accounting systems are able to undergo constant change, in line with the constantly changing nature of data. Health care organizations need this cost data so that management can make informed decisions and cost estimates. Without this ability, health care organizations would have a difficult time strategically managing their operations and minimizing losses (Imus, n.d.).

Another purpose for health care accounting is to structure information in the health care organization needed to ensure that health care providers are held accountable for costs and quality of their products, services and delivery of care. Additionally, organizations can use health care accounting data to reward employees who exhibit superior performance (Reinhardt, 2010). Health care accounting plays many roles in ensuring that health care organizations are able to provide the best quality care and services for patients and offer the best incentives to other stakeholders, such as employees and shareholders.

Conclusion

This study has shown that the health care system runs smoother with the roles that health care accounting systems play within it. Various aspects of the importance of health care accounting systems has been presented, as well as explanations of types of accounting systems, such as DRGs. It is significant to note how DRGs began an early trend of streamlining health care data information by helping health care evolve from being only revenue-based to being cost/profit-based and then to being investment-based. These and other types of changes in the industry have been instrumental in the development of automated accounting systems to manage health care data. Additionally, these changes have resulted in changes in how health care providers interact with their patients. The quality of patient care has drastically improved over the years. Additionally, this study emphasized the existence of managed care and cost control as initiatives of accounting system implementation. The objective of managed care and cost control is shown to increase quality and delivery of patient care, increase access to care for uninsured people, enhance continuity of care for every patient, and support the financial stability of health care organizations, which are positive outcomes to implementing health care accounting systems.

Other information examined in this study focuses on resource allocation information and how it can be used to compare the accounting systems of various health care provider organizations to determine the best costs and patient management strategies among different hospitals, physicians, and other health care organizations. No doubt, all of the many health care organizations in the industry make keeping up with competitive advantages a challenge. However, health care is a science that is very complex and it entails managing various aspects of the health care organization. These include keeping an account of such areas as facilities management, human resources, finance and all other areas within the health care organization. This means that it is not just up to the finance department to manage resources and control costs. Managers in all areas are charged with making financial decisions that impact the flow of information throughout the organization. This is why it is important for health care organizations to implement efficient accounting systems into their processes. This is the best way to manage finances and financial information to maximize the organization’s profits and achieve strategic goals while ensuring the best patient outcomes possible.

References

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