Understanding Healthcare Accounting: How Income and Expenses Affect Growth

Like any other business, medical practices must adhere to accounting best practices to not only keep their books in order but to drive growth. Two key components of this are enhancing your income and expense tracking. Proper allocation of income and expenses better enables your organization to draw insights on revenue, overhead, expense reduction, and aid in the calculation of physician compensation (just to name a few). This blog will discuss each component further and provide some examples of how applying them to your practice could be beneficial.

1. Income

One of the most critical aspects of healthcare accounting is understanding and properly tracking income. As reimbursement models change, provider production and volumes change, new service lines emerge, or new locations are added, it’s important to track the related income accordingly. Proper income tracking allows you to gain perspectives and insights into income sources, as well as summarize and analyze trends in a variety of classifications – by individual provider, department, location, etc.

There are useful tools in many accounting systems to aid in this. For example, there is a feature within QuickBooks known as “class-tracking” that allow users to group income by a certain provider, location, department, or any other meaningful division.

Proper training of the data entry/allocation and review of these allocations may be necessary upon implementation of these features to ensure the allocations are accurate and meaningful. Relying on credible source information from the EMR system or other practice management reports can aid in this verification as well.

2. Expenses

The second aspect of healthcare accounting is proper expense tracking and classification. Tracking and allocating expenses in proper categories can aid in a variety of calculations, analyses, and management information. Some examples of these categories are as follows:

• Expenses shared equally – These are also sometimes known as fixed overhead. These costs may include rent, accounting, and administrative staff. For instance, if you’re a medical practice of three partners, each partner gets allocated 33.3% of the total overhead cost.
• Expenses split pro-rata – Also sometimes known as variable overhead. Some costs are not incurred equally among providers. These may include medical supplies, nursing staff, and other items that are not shared equally. So when determining such expenses, your accounting services provider will use a variable that reflects the percentage of the costs incurred by each partner.
• Direct expenses – These are costs that are easily traceable to a particular practitioner and that the practice would not incur without that individual. Examples may include the provider’s base compensation, expenses related to continuing education, malpractice insurance, benefits, and professional dues.

Here are a couple of additional tips to optimize expense tracking and drive growth in your medical practice:

• Track all your expenses – Keep tabs on every expense related to running your practice. You may find that certain areas of your practice cost more than others. For instance, if you own an X-ray machine, you’ll want to keep track of its maintenance costs.
• Use your accounting software to classify your expenses – As noted above, many accounting packages allow you to create reports that show how you’re doing financially. Reviewing these reports regularly will give you insight into where you could save money.

3. Compensation Models

Allocating income and expenses in this manner allows us to run reports specific to each “class” or grouping. For example, you could view a profit and loss by individual provider, location, department, etc. The individual provider profit and loss statements are extremely helpful when it comes to one of the most critical aspects of healthcare accounting: calculating physician compensation.

Not one calculation model is the same, but many models include some component of direct allocation of income and expenses to a provider. Proper tracking in the accounting process can aid in accurate calculation of provider compensation and alleviate duplication of efforts. These reports also help providers understand where the numbers come from if their calculation is more complex.

Partner with Lutz for Your Healthcare Accounting Needs!

At Lutz, we understand how critical it is to have accurate financial information. That’s why we’ve developed a comprehensive suite of healthcare accounting and consulting services designed specifically for private practices and medical providers. Our team of experts uses cutting-edge technology to help you stay on top of your practice. Contact us today to learn more about how we can help you grow your practice. You can also visit our website to understand our healthcare services or read related articles.