Financial Management in Health Care

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The difference between accounting and finance

Accounting is the sphere of financial management of the hospital’s assets that does not involve any decision-making processes. It involves the arrangement of tools for assessing the current position of a hospital, i.e. through the preparation of financial and income statements, balance sheets, cash flows. An accountant is also responsible for preparing documents for paying taxes. It is a highly objective type of work (Castro, 2009).

Finance is more subjective in the discussed sphere and involves decision-making. It is based on the results of an accountant’s work, namely on the conclusions made by accountants. The worker of finance decides how to allocate financial resources and what aspect will gain profit or losses (Castro, 2009).

The difference between financial and managerial accounting

Financial accounting is a broader sphere of activity for accounting, as it “provides general-purpose financial statements and reports to aid a large number of decision-making groups, internal and external to the organization, in a variety of decisions” (Cleverley, 1989).

The process of financial accounting produces four types of outputs, that is financial statements: balance sheet, statement of revenues and expenses, statement of changes in financial position, statement of changes in fund balance (Cleverley, 1989). Nowadays the sphere of activities included in financial accounting has been expanded and includes additional financial reports.

Financial accounting is highly important in the process of every hospital’s functioning because hospitals submit their reports to a set of third-party payers. They include the Blue Cross, Medicare, Medicare, and other regulatory agencies. In addition, investors have to receive the reports with valid financial information as they are the key figures in the hospital’s work. For this reason, financial accounting is paid much attention to in the process of organizing the medical institution’s activities (Cleverley, 1989).

Managerial accounting is the sphere responsible for the preparation of financial information for specific purposes and mostly concerns internal users thereof. this is why the information submitted by managerial accounting personnel is less structured and formalized, the concepts of uniformity and comparability are less important and are taken into account less (Cleverley, 1989).

The relationship between financial risk and financial return

Financial risk in its essence is the fact of acceptance of the probability of losing the assets in case of failure of a financial operation. This concept is usually applied to some investments that involve a certain level of uncertainty of the outcome. Those who risk much are likely to achieve less stable financial profit because of the uncertainty of outcome accompanying their business ventures. However, according to financial science, the situation appears to be the opposite. Those who risk much are likely to achieve more profit, and those who are riskless are likely to receive a lower financial return.

Financial return in the present case is the actual outcome of the financial undertaking that was achieved by the one who risked his or her financial assets. It may be higher or lower than the initial investment. Judging from the proportion given out above, the higher level of risk results in higher financial returns and vice versa. However, one should keep in mind that the volume of return in the case of the high level of risk is only a potential figure and it does not always correspond to reality.

Why is the US healthcare system considered to be complex?

The US healthcare system is built in a completely another way than the healthcare systems of other countries usually are. The matter is that the main recipient of medical services is usually not the payer for them, and services of medical institutions are paid for by third-party participants, such as different governmental agencies, welfare organizations such as Medicare and Medicaid, Blue Cross, etc. Citizens of the US cannot receive medical care straight ahead in hospitals as they are all obliged to get medical insurances according to multiple health plans available within the USA and are served in special hospitals that work in partnership with these medical care providers or insurance companies.

For this reason, the result of the cooperation of hospitals with medical care payers is very complex, and calculations for charges taken from the patients the way they have to be paid by insurance companies are hard to grasp. This is why the sphere of accounting in a medical institution is a very responsible type of work – different agencies charge their insured clients on a different scale, with a set of discounts and peculiarities of health plans, resulting in a set of deviations in the calculation of overall charges.

Do health care organizations get paid on their established charges?

As it has already been stated, the recipient of health care services is not the one who pays for them. The scheme of payment is rather complex: “a provider agrees to service program beneficiaries in return for a payment amount that will be determined by a formula or established at a predetermined rate” (Cleverley, 1989).

Resulting from this, all recipients of health care services are paid for on different schemes and the charges presupposed by different health plans are disseminated for the medical institutions where the clients of these insurance plans received their medical care services. Thus, beneficiaries of different insurance companies pay for their health care in a different way that depends not on the services they received but on the insurance company they cooperate with.

Charges that are not reported as revenue in a health care organization

As for revenue recognition, one should remember that charges are not reported as revenues in a health care organization. Cleverley (1989) supports this idea stating that “third-party payers have for years paid amounts other than the hospital’s charges for the services they purchased”.

One factor contributing to this fact is the way contracts are concluded with HMOs or health plans that provide services at a lower price, giving some package offers. The hospital is not legally entitled to take additional charges higher than those presupposed by a specific health plan the person uses. Thus, there is a notion of “gross revenue” and “service revenue” which is the net revenue received by the hospital (Cleverley, 1989). This difference has to be thoroughly calculated and taken into account because of unexpected problems and complications that may arise from the fact that the hospital provided more services than it received in the monetary equivalent. However, the problem remains unsolved in the sphere of US medical care because there is still no unified medical care system that would allow making the system of providing and receiving health care services more homogeneous.


Castro, J. (2009). Finance, an Exciting Career. School of Business, LeTourneau University. Web.

Cleverley, W.O. (1989). Handbook of healthcare accounting and finance. Jones & Bartlett Publishers, 1043 pp.

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