Healthcare Organizations & Cost Accounting Challenges

Healthcare Organizations & Cost Accounting Challenges

Along with external challenges like healthcare regulations in flux, finance leaders at healthcare organizations encounter challenges with performance reporting and cost accounting.Economic optimism has been rampant in the U.S. over the past year or so, with leading economic indicators rising and consumer confidence levels soaring. But healthcare organizations are a glaring exception to all the economic blue sky and sunshine. Uncertainty and frustration due in large part to the lack of definitive legislative policies affecting healthcare costs and delivery systems is proving to be especially challenging for hospitals and medical groups.

A growing number of executives and CFOs in the medical field are finding it increasingly difficult to effectively manage the delivery systems and evolving payment models in their current operating environments. Hospital CFOs are especially concerned about their organizations’ inability to handle the financial aspect with changes in business conditions and performance management reporting.

Especially Daunting Challenges for Healthcare Organizations

Operating a hospital or medical facility at peak performance is challenging enough in normal times. But with lingering questions about legislative issues that will impact the long-term direction and future of the healthcare industry, tasks like preparing forecasts and operating budgets and conducting strategic planning have become especially daunting.

In a survey1 of healthcare finance leaders recently conducted by management consulting firm Kaufman Hall and reviewed in an article on, only 15 percent of respondents said they believe that their organizations are “very prepared” to manage evolving payment and delivery models with current financial planning processes and tools. And just 25 percent reported being “very confident” that their teams will be able to easily and quickly adjust their plans and strategies.

Perhaps most discouraging, fewer than one out of 10 respondents (just 8 percent) reported being “very satisfied” with their organizations’ abilities to report on performance management. These responses are close to those of a Kaufman Hall survey completed one year ago. This indicates that there has been little if any progress when it comes to the readiness of healthcare organizations to deal with the financial impact of changing business conditions in the industry.

This should serve as a red flag “of serious concern to all healthcare organizations,” stated the authors of the survey report. “Healthcare leadership teams must know how they are performing in managing populations and reducing costs, with increasing accountability for value in both inpatient and outpatient settings,” the authors note.

Improving Performance Reporting

The main challenge for healthcare organizations today is to improve performance reporting with reliable cost measurements. There are numerous potential negative impacts when failing to do this, including the following:

  • An inability to control costs.
  • Limited profits or even losses in a worst-case scenario.
  • A breakdown in proper planning or capital allocations.
  • Limited use of value-added analysis.

Nearly a third (29 percent) of the healthcare finance leaders surveyed said that “identifying and managing cost-reduction initiatives” is their top financial priority. But almost two-thirds (70 percent) said that their cost accounting tools provide untrustworthy data or are too simplistic.

The survey concluded that it is critical for hospitals and medical facilities to have a reliable cost accounting solution. Such a solution should:

  • Use rolling forecasts to stay agile in an ever-changing environment.
  • Implement reliable cost accounting systems to capture productivity modeling.
  • Provide modeling that forecasts proper utilization and labor costs.
  • Capture accurate, specific patient costs as well as costs associated with service-line offerings.

Healthcare organizations can realize many positive outcomes by implementing a reliable cost accounting solution, including the following:

  • Improved reporting on operating performance and strategic decisions.
  • Proactive responsiveness to changing market conditions.
  • Improvement in managing patient populations.
  • Accountability for both inpatient and outpatient outcomes.
  • Increased profitability and a stronger bottom line.

Concluding Thoughts

Healthcare organizations present a glaring exception to the recent economic optimism. Uncertainty and frustration due in large part to the lack of definitive legislative policies affecting healthcare costs and delivery systems is proving to be especially challenging for hospitals and medical groups. In this environment, implementing a reliable cost accounting solution is critical for healthcare organizations. Greater Los Angeles healthcare organizations can benefit from working with a project CFO or part-time CFO from a CFO services firm. A former enterprise CFO applies authoritative expertise in setting up rolling forecasts, cost accounting systems and accurate forecasts.

1 Hospital CFOs Struggle to Keep Up with the Times; David McCann;; January 4, 2018

John W. Braine, Partner, CFO Edge, LLC

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