When it comes to fast-growing industries, few stand out like healthcare.
According to the Centers for Medicaid & Medicare Services, healthcare spending is projected to increase to $6.2 trillion by 2028. Meanwhile, employment in the field is expected to grow 13 percent between 2021 and 2031.
Yes, that’s trillion. With a T.
To keep up with this pace, new laws and regulations are emerging rapidly, and new technologies aim to improve outcomes for patients while making things less difficult for administrators.
Navigating a healthcare facility through this rapidly-changing field falls to financial managers. These brave souls must ensure their facility remains compliant with regulations, adjusts to new trends, and maximizes income.
While the top priority in healthcare is always quality patient care, you can only provide that care if you can afford to keep the lights on. In other words, strong financial management is the foundation that allows any healthcare organization to fulfill its primary purpose.
- Generating Income
- Making the Right Investments at the Right Times
- Risk Management
- Detecting Fraud
- Cash Flow Forecasting
- Lease Management
- Managing Working Capital
- Supply Chain Management
What is Financial Management?
Financial management includes all the steps taken to guarantee a healthcare organization can continue operating. This means reducing risk, ensuring a healthy cash flow, and finding the best investments.
But it also covers facets like compliance and fraud detection. There’s a lot to it, for sure!
An easy way to think about healthcare financial management is by using the four C’s: cost, capital, cash, and control.
Cost is the cost to run the facility – costs to buy gloves and medicine, pay staff, etc.
Cash refers to how much money is on hand. Finance managers need to make sure there’s enough to cover expenses like salaries and debt repayments while optimizing the length of their cash runways.
Next, we have capital. Extra capital can be used to invest in the organization’s growth, whether that’s buying new pieces of equipment or implementing new healthcare services.
Control means money is being spent in the right places and compliance standards are being adhered to.
But all this is simply the broad picture – let’s look at some of the specific pieces that make up financial management for healthcare.
Core Aspects of Healthcare Financial Management
Finding ways to increase income while staying true to the health organization’s vision is the first component of financial management.
This involves deciding on a project, estimating costs and profits, and then determining the best way to fund it. To make decisions like this, finance managers must be aware of how new trends such as telemedicine can create more income. For example, offering remote appointments after-hours lends a competitive edge. It also makes it less likely patients will miss their appointments (at a cost to the institution).
Negotiating with insurance companies is another, sometimes overlooked method of increasing revenue. These companies may insist on sizable discounts as part of directing patients to the facility.
But the benefits go both ways, and financial managers can – and should – attempt to bring the balance more in their favor. This can be by increasing insurer reimbursement rates for more common procedures or lengthening the amount of time patients have to file claims.
Cost of services should also be periodically reviewed to ensure they reflect market rates.
Other ways of increasing a healthcare facility’s bottom line include reducing readmission rates and unnecessary testing, as well as investing in software that centralizes data, streamlines operations, and saves time.
Federal and state regulations seem to change constantly, and it’s the responsibility of financial managers to keep up with these changes. Following these laws not only ensures facilities retain their tax-exempt status, but solidifies the quality of healthcare and the reputation of the institution.
Some of the most significant statutes financial managers must be aware of include the:
- Social Security Act (specifically, requirements for Medicaid, Medicare, and Children’s Health Insurance)
- Anti-Kickback Statute and Stark Law (which, collectively, prevent physician self-referral)
- HIPAA (related to safeguarding patient information)
In recent years, laws have also extended to cover technology, most notably the HITECH Act of 2009. This act can be viewed as an extension of HIPAA in regard to electronic health records.
Common compliance pitfalls include mimicking competitors who may not be compliant themselves, not having proper accounting documentation, and failing to establish medical necessity.
To guarantee healthcare compliance, a culture of compliance must be established.
Employees in all departments should have access to reference material, and accidents need to be reported without fear of blame. Teams must address this as, if mistakes aren’t reported, nothing can be done to make the proper changes.
Making the Right Investments at the Right Times
Healthcare facilities invest in research & development, equipment, and, potentially, new types of care. If financial managers determine now’s the time to buy a new piece of equipment, they need to know when it’s better to pay up front and when they should look at financing options.
Making the wrong decision can have a detrimental effect on cash flow. That’s why, sometimes, it’s better for the long-term health of your facility to pay interest, especially when – as is often the case in healthcare – the piece of equipment is very expensive.
In addition, financial managers must have an in-depth knowledge of innovations in the field. New trends such as artificial intelligence and automation can improve the facility’s functioning. The financial manager will know when and in what fashion to deploy these new technologies to save the most time and money.
Risk management involves reducing financial risk such as liquidity risk or credit risk (delayed payment of invoices can be a huge issue in healthcare). But risk management also includes ensuring patient safety and improving the overall efficiency of the hospital. All this can be facilitated by a newer approach known as enterprise risk management (ERM).
ERM is a proactive method. Risk managers should identify possible risks before they occur by conducting extensive interviews with staff and patients, and rank these risks in order of likelihood and potential damage caused.
Watch out for “near misses,” when a mistake is avoided coincidentally. This may alert financial managers to the existence of a risk they weren’t aware of before, and gives them time to put preventative measures in place.
Thomas Stanton of Johns Hopkins Hospital describes enterprise risk management as not an attempt to create more bureaucracy, but to facilitate discussion. This approach fits nicely with the culture of compliance healthcare facilities must create.
Many healthcare facilities allow physicians to order equipment and medicine they deem necessary. While this can be efficient to address supply issues as soon as they arise, it can also be an avenue for fraud.
To prevent this from happening, financial managers must perform regular audits.
Cash Flow Forecasting
Cash flow refers to how much money is coming into and going out of your clinic. By finding the difference between cash coming in from patients and insurance and expenses spent on operating costs, you determine your cash flow.
This metric is concerned only with liquid assets – pieces of equipment or accounts receivable do not count. This helps clarify the difference between money you actually have and money that is still hypothetical. In an industry with so many unfulfilled ARs, this can be quite useful for planning ahead.
Cash flow forecasting, on the other hand, uses data from your business’s history to estimate what its financial future will look like. New technologies in the field like machine learning can help fortify your cash flow forecast. Financial managers must use cash flow forecasting as a guide: it tells them when it’s time to invest, and when it’s time to scale back.
Finance managers must know how to negotiate leases to save money and headaches.
Some tactics include:
- Measuring the amount of useable space, as opposed to the raw square footage
- Making sure renewal terms are clear
- Conducting an inspection with a lawyer knowledgeable in medical leases
Tenant improvement allowances are another way facilities can add value to the property and boost their bottom line. A tenant improvement allowance is an agreement in the contract where the landlord agrees to pay for certain updates. In an industry like healthcare, where costs are high, this can be incredibly beneficial for lessees.
Managing Working Capital
Working capital is related to, but different from, cash flow. While cash flow refers to inflows and outflows over a set period, working capital is the difference between an institution’s current assets and current liabilities.
If liabilities are greater than assets, adjustments need to be made. Finance managers should look at the working capital ratio on a regular basis. To find a working capital ratio, divide current assets by current liabilities. If the result is higher than 1, it means the business has enough cash to continue operating. If it’s lower than 1, the institution needs to perform a course correction before it runs out of money.
It’s best to aim for a range between 1.5 and 2, as this leaves room for investment and growth, but also extra cash for potential unforeseen expenses.
Healthcare financial management must take note of fluctuations in the timing of cash flow – while at times things can seem unpredictable, other events such as flu season are fairly regular. To prepare for these regular events, they’ll want to have more working capital on hand than at other times of year.
Financing options for healthcare run the gamut from traditional bank loans and fundraising to donations.
When opting for a loan, a robust cash flow forecast is paramount – a running forecast helps finance managers know whether a certain type of debt will be sustainable, or if the facility should look into other forms of financing.
Finance managers also make the call as to whether it’s best to pay bills early, or keep extra cash on hand in case of emergencies – another area where cash flow forecasting, and especially scenario planning is critical.
Supply Chain Management
As the past few years have shown, supply chain management is one of the most critical issues for healthcare administrators. It’s not uncommon, for instance, for pharmaceuticals to expire. In fact, clinical waste accounts for a large percentage of U.S. healthcare spending.
To combat this, conduct waste audits, prepare clear inventories, and if necessary, reduce order frequency. Downturns are especially hard on supply chains. During a downturn, watch the financial health of your suppliers and always have backup options.
Scenario planning can help you determine what your business situation would look like should you suffer supply chain disruptions, and is an important part of any robust cash flow forecast.
Why Cash Flow Management Matters In Healthcare
Nearly all aspects of financial management depend on having a healthy cash flow. After all, a facility can’t do much without cash!
Evaluating your cash flow statement helps you determine whether a specific investment is supporting the facility’s long-term financial health, or whether it’s eating up cash and should be liquidated.
Financial managers also can’t know whether it’s a good idea to invest in something new unless they have a clear view of cash flow. That means one of the most important goals of finance management – using money in a way that boosts revenue and sustainability – depends entirely on the cash flow statement.
Further, it depends on that cash flow statement being accurate. Here’s one place where digitization can help immensely.
What Digital Transformation Looks Like for Healthcare Finance Teams
If you’re a financial manager, you’re probably aware that software has rapidly transformed the way treasurers do their jobs.
Whereas the old way of doing things – spreadsheets in Excel – is prone to error and takes days to fill out, treasury management systems offer automation and clear communication between different bank portals.
But in a sector where costs are high, legacy TMS can sometimes seem like too great of an investment. However, not all TMS are incredibly expensive – some even offer free models. As with any investment, finance managers must consider how much time and money they’ll be saving over the long-term.
When you have a clear view of the data, you can make the right decisions. When crisis strikes, automation keeps you from having to scramble to create new cash flow forecasts or execute scenario plans.
Earlier, I mentioned that healthcare cash flow can seem unpredictable. But artificial intelligence can examine your facility’s financial history, making predictions based on past records.
Overall, digitization makes healthcare financial management much more streamlined, helping to create the outcomes finance teams aim for.
Digitize Your Healthcare Facility Today
A healthy, transparent cash flow is the bedrock of any successful financial management strategy. Trovata’s cash flow analysis and cash forecasting software generates highly-accurate forecasts that can enable healthcare facilities to continue supplying excellent – and sustainable – service to patients.