By Ashley Preen

November 25, 2019

The Importance of Accounting in The Healthcare Industry

The accounting department can be considered the backbone of any institution that has to deal with funds. Consequently, it plays a significant role in the healthcare industry, allowing it to work at its true potential. An accounting department is essential for any organization to achieve cost-effectiveness in its finances.

The Generally Accepted Accounting Principles (GAAP)

These are the universal rules of accounting that have set up a standard. These standards and procedures are applied to any institutions to maintain its finances, reports and statements. In simpler words, it is the universally accepted method of doing your bookkeeping.

Every organization operates on its mechanism. In any case, all of them have to follow the same accounting guidelines. These guidelines help to manage and record their finances decided by the state. Organizations can go beyond these standards, but the basic principles of accounting remain the same.

Essential aspects of Accounting and Financial Management

For any organization to work seamlessly, four essential elements need to be followed with regards to accounting and finance. These include the following:


Any organization should plan for the future if they wish to grow. It should have set up guidelines and goals to make sure that success will be achieved in the present as well as the future of the medical office.



Control is essential as, without restriction, things can go wrong. And if these things are not fixed at the right time, they can become irreversible. Therefore, power needs to be maintained to make sure that all the guidelines and goals are being followed and in case they are not, an immediate fix is made. 

Organization and Directing

Anything that is not organized and directed can never go in the right direction. Therefore, this element is essential for medical facilities. The organized and directed medical office will work at its full potential. It requires day to day working in the financial department to make sure that nothing goes wrong. If anything does go wrong, positive directions are necessary to make it right. And in case the system is not organized, it will become difficult to fix things. 

Decision Making

Decision making is the last element as it needs to be backed by all the other three features. If planning, controlling, organization and direction are practised effectively, decision making will become a piece of cake. Sound financial decisions will lead to better working at the medical facility and success. 

The Medical Office and Accounting

The Medical Office and Accounting

Now let’s look at these two in relation to one another closely. It can be said without any doubt that the accounting department is essential for the success of the medical office. The accounts department makes sure that all the guidelines by GAAP are followed, which will save up a lot of costs in terms of fines and charges. Moreover, it also saves up the reputation of the medical office.

A medical facility’s utmost priority is to satisfy the patient it is treating. It has to do so by keeping the whole treatment cost-effective. This is where it becomes painful. For a medical facility to work effectively at its full potential, it has to provide cost-effective treatment that is effective too. In simpler terms, the doctors and finance department have to work hand in hand to ease up the pain of the patient, both financial and physical.

In general, when people think about the healthcare industry, it is unlikely that they would think about the accounting department because relating accounting to healthcare does not make much sense. However, you will be surprised to see the role Accounting plays in the healthcare industry. It is pretty significant and works in several areas.

To understand it better, we will be using the Revenue Cycle Management RCM. Revenue Cycle Management explains why there is a need for accounting generally as far as you would know. Accounting deals with managing the funds such as expenses, payments, income and the due taxes on them. It is also universally understood that without these necessary funds, businesses could not prevail and succeed. Let’s dig more into Revenue Cycle Management and see how accounting benefits the healthcare industry.

RCM and Its Importance!

Healthcare deals with funds, too, like any other institution. Nothing in this world that involves selling or buying services or products can work without finance and accounts. Revenue Cycle Management looks after revenue generation, payments, and claims of a medical office. It is essential to effectively manage the revenue cycle of a patient in a medical facility. It usually requires the facility to make use of software for billing. Consequently, software and technology-based on computer kicks in and becomes essential to keep accurate track of the claiming process of patients. 

If we list down, the whole revenue cycle process manages some necessary accounting procedures in the healthcare industry. These include:

  • determining patient eligibility
  • collecting patient co-pay
  • making sure coding is conducted accurately
  • collecting all payments
  • claims tracking
  • following through on denied claims

Problems That can be avoided with the aid of accounting

The hospital usually receives payments from patients. Or if we put it the right way, the bills are more commonly paid by insurance companies. In a scenario where the accounts person in your medical office fails to ensure that patients or insurance companies are making payments and does not keep a record, you won’t be able to provide the medical services to people anymore. Since you won’t be receiving the money, your bills will be left unpaid, and you won’t be able to pay the staff. Therefore, you need someone who will be keeping track of all the payments that are to be received and those which have been received. 

Apart from keeping a record of payments and bills, there are several other areas where accounting holds great importance. Let’s have a look at some of the situations where bad accounting can mess things up: 

If the person employed to handle accounts is not adequately trained in the field

To understand this better, let’s make a comparison of Revenue Cycle Management with chain supply. Whenever there is fault even in a single part of the supply chain, the whole chain suffers and dysfunctions. Similar is the case for Revenue Cycle Management. In case anyone of your accounts people is incompetent and does not have proper training, it will affect the whole medical system. Again, if funds are not managed properly, you won’t be able to provide the best services to the patients.

Weak communication between the staff

It may not seem necessary for staff in different departments of the medical facility to communicate with each other. All of them usually have a lot of work on their plates. However, all staff members have to contribute to the accounting process; otherwise, things can get messy. Frequent meetings among staff members are a must. In this way, the accounts department can stay on top of their financial reports and make sure they are not missing out on anything.

Inadequate workflow


For a medical facility to function seamlessly and smoothly, there is a specific procedure to be followed in connection. The staff is required to adequately confirm the eligibility of the patient, their insurance status, and the appropriate copay amounts. Moreover, the team also needs to compare all the slips charged to the missing charges. This is in case there are any. Someone is also supposed to stay on top of the claims that need to be followed up. To do all of this effectively, there needs to be a robust workflow system between the staff. There is no room for any mistakes at any step of the process. If there are any mistakes, it can cost the medical facility a reasonable amount of time, effort and money. Not so surprisingly, all of this requires sound knowledge and staff body of accounts.

Apart from these, there are several other essential functions of accounting in the healthcare industry. These include:

Meeting Different Financial Goals

No business can prosper without proper financial management. Medical facilities are based on business structures as well. Hospitals act as a platform that provides facilities for patients. These facilities are bought in the form of physician practices. Doctors work as an employee at the hospitals. Hospitals develop a system to offer their services as their own to the patients. Consequently, a method of payment comes into existence where the patient pays the hospital, and the hospital pays the doctor after keeping a margin.

As a result, hospitals can buy in equipment and other medical facilities to treat the patients and diagnose. These robust and steady payments systems need to be backed with a similarly healthy and stable accounting department. If it is not looked after properly, everyone will lose the hospital, patients and the doctors.

Managing Treatment Costs

This is another area where medical facilities require the aid of accounting. Cost-effectiveness is extremely important due to how the whole framework of the system is designed. Health insurance companies need cost-effective treatments and medicines to be used. As a result, those doctors are appointed who are willing to use these methods of treatment and drugs. All of this cost-effectiveness lead to the requirement of improved and effective financial management for which a robust accounting system is required. The accountants can’t work alone here as all of this also requires good medical knowledge. 

The treatment needs to be useful to avoid additional costs. The doctors, on the other hand, cannot afford for things to go wrong as it could lead them to lose their career and reputation. As a result, cost-effectiveness comes hand in hand with excellent medical knowledge.

Preventing Expensive Medical Conditions

No medical facility wants to go for the rare medical condition: many hospitals and recurring patients who come to them for years. The hospitals try their best to keep the cost of treatment as low as possible. Cost-effectiveness plays a role here as well. However, to keep the prices low, a medical facility needs to do research. Now research cannot happen without funding. So, to keep the treatment cost-effective, research becomes mandatory. For research, funds are required, which are again to be managed by the financial department. They have to stay put and figure out how much can be spent on research and make informed decisions on how much should be paid.

With change comes new challenges

With change comes new challenges

Accounting deals with a lot of industries and adapts easily. However, the health industry is increasingly and rapidly changing by the minute due to intensive ongoing research. Moreover, to accommodate patients, there are always new laws and discoveries coming out. In such a changing industry, financial managers are faced with significant challenges that they have to tackle down. Since they handle the funds, all changes have to go through them.

In Conclusion

 It is clear by now that medical offices work on the same structure as business organizations. Therefore, the need for a robust accounting department is a basic need. Moreover, reliable communication among the whole staff is also needed. This is for the accounting department to stay on top of the financial records. From managing treatment costs to meeting different financial goals, everything falls under the workings of a commercial department within the medical facility. Thereby, it plays a pretty significant role which may not be as evident in real life.