Financial management is critical for the longevity of any business. But for healthcareorganizations, the ability to balance rising costs while providing quality care andexemplary patient experience makes sound financial management even more crucial, as itdirectly impacts the well-being of individuals and communities. This is why many healthcareorganizations — whether a small dental practice, a regional chain of hospitals andclinics or a national healthcare provider — are expecting their finance teams to gobeyond their traditional accounting, costing, control and reporting duties to play anincreasingly strategic role in addressing long-standing issues related to healthcare access,equity and costs. At the same time, however, many working in healthcare financial managementstruggle with limited resources, outdated systems and processes, and data challenges thathamper their ability to provide additional value, such as performing data analysis andgenerating operational insights.
What Is Healthcare Financial Management?
Healthcare financial management comprises all of the processes required to ensure that thehealthcare organization is solvent and can continue operating and delivering patient care.In addition, healthcare finance and accounting teams must be able to effectively plan,control and manage finances amid frequently changing business and economic conditions.
At a high level, healthcare financial management involves what some refer to as the “4C’s”:
- Costs: The funds it takes to run the facility or organization.
- Cash: The money the healthcare organization has readily available tocover short-term expenses, such as salaries and insurance premiums.
- Capital: Funds that can be invested in large assets and growthinitiatives, such as renovating a facility or implementing new digital healthcareexperiences.
- Control: Making sure that funds are spent in the bestway and that relevant regulations and standards are met.
Key Takeaways
- Effective healthcare financial management is essential to balancing rising costs whiledelivering quality healthcare services.
- Healthcare financial management involves a range of processes that ensure that theorganization remains solvent and can deliver patient care.
- Financial management in the healthcare sector is singularly complex, requiringindustry-specific understanding and insight.
Healthcare Financial Management Explained
The foremost goal of healthcare financial management is relatively straightforward: toeffectively manage funds and mitigate risks in order to achieve an organization’sgoals. That said, financial management in the healthcare industry is quite complex. Financeteams must be aware of changing regulations, manage increasing volumes of financial andpatient data, understand medical leases and financing options, offer investmentrecommendations and maintain compliance with evolving rules and guidelines. At the sametime, financial managers must ensure that their organizations offer quality, affordable andaccessible care while continuing to invest in future improvements.
Good financial health is essential to a well-functioning healthcare organization. Though thespecific parameters of financial management may vary from organization to organization,common healthcare finance functions include financial planning, budgeting and forecasting,revenue management, compliance, investment recommendations, supply chain management, frauddetection, financing decisions, lease negotiation and management, cash flow management,working capital management and contract management.
The healthcare sector requires many of the same finance and accountingskills as other industries, but its financial managers must also be adept at dealingwith industry-specific nuances. They must, for example, understand issues of costtransparency, complex and drawn-out reimbursem*nt schedules, revenue integrity andprofitability challenges. Healthcare organizations also need finance pros who grasp the insand outs of billing, collections and claims processing.
Importance of Healthcare Financial Management
The healthcare industry faces a host of challenges, many of which can be addressed with soundfinancial management. Challenges include government mandates, patient safety issues,personnel shortages, increasing operating costs, intense competition and limited funding forcapital improvements, to name a few.
At the same time, many healthcare organizations are shifting their metrics for determiningsuccess from those focused on patient or treatment volumes to those focused on value. In theU.S., for example, Medicare payment models are factoring quality of care and patientsatisfaction into their contracts with healthcare organizations, and private payers areincorporating performance and risk-based payment structures — wherein providers arepaid a fee per patient and assume the responsibility and “risk” involved intreating the patient within this budget. Moreover, this is all happening during a time ofrising healthcare costs and increased price sensitivity on the part of payers, be theyindividuals, insurance providers or government agencies.
It’s no surprise, then, that healthcare organizations are leaning more heavily on theirfinance and accounting teams to help them navigate these issues. They need the efficiency,agility and — perhaps most of all — the actionable, timely insights that aneffective financial management function can provide. A 2022 survey conducted by IMA andDeloitte, in which 82% of healthcare accounting and finance professionals said they werecurrently working in a finance function undergoing or having completed a transformation,underscores that the industry realizes those needs, too. Leading finance functions in thehealthcare industry are evolving to contribute more to strategic decision-making byanalyzing profitability, delivering timely insights to business decision-makers,interpreting and sharing financial data as part of cross-functional teams, and developingtools to democratize financial data and insight across the organization on demand (ratherthan on a monthly or quarterly basis). They’re also delivering accurate financialreports and analysis for external stakeholders.
Elements of Healthcare Financial Management
At a high level, healthcare financial management involves analysis, planning,decision-making, management and risk mitigation. Some of the specific tasks that thefinancial management function is responsible for in a healthcare organization include thefollowing:
Evaluation and Planning
One of the most fundamental aspects of financial management involves evaluating thefinancialcondition and effectiveness of the healthcare organization’s operations.Equallyessential is the work financial managers do to plan for the company’sfinancialfuture.
Budgeting and Forecasting
Budgeting andforecasting work hand in hand in healthcare financial management. Ahealthcareorganization’s budget outlines how much money the company will earn and spendover aspecific period. A financial forecast zeroes in on analyzing the probable future,helping todetermine how funds should be allocated so the healthcare organization hits itsbudgetedtarget. Expected shifts in demand — flu season, for example — as well asunexpected changes, like a pandemic, should also be taken into account.
Generating Income
Those charged with financial management in healthcare organizations play the pivotalrole ofidentifying ways to increase income while maintaining focus on theorganization’s coremission of patient care. This work might involve negotiating with insurancecompanies forhigher reimbursem*nt rates, modeling price increases when supply costs go up,exploring theuse of telemedicine to boost income or benchmarking prices against market averages,forexample.
Compliance
The healthcare industry is subject to distinct federal and state regulations;financialmanagers must keep up with these changing requirements. In the U.S., for example, itisnecessary to maintain compliance with regulations mandated by such entities as theSocialSecurity Act (with a focus on its requirements for Medicaid, Medicare andChildren’sHealth Insurance), the Health Insurance Portability and Accountability Act (HIPAA,with itsrequirements for safeguarding patient data) and the Anti-Kickback Statute and StarkLaw(which, together, prevent physician self-referrals).
Investment Decisions
To remain relevant, healthcare organizations must continue to invest in improvements,whichcould include funding research and development initiatives, purchasing new equipmentorimplementing new types of care and patient experience improvements. Financefunctions canplay a key role in these capital investment decisions, whether it’s building anewhospital or investing in medical research. The financial analysis of demand, totalcosts,returns, key success factors and financing options are vital to such strategicbusinessdecisions.
Supply Chain Management
A healthy supply chain is critical to healthcare administration, whether that meansresponding to sudden shocks to supply and demand, as occurred during the COVID-19pandemic,or managing the long-running issue of costly waste in the healthcare system.Financialmanagers in healthcare are involved in supply chainmanagement at a number oflevels, keeping an eye on the financial health of suppliers, conducting wasteaudits,analyzing inventories and order frequency, and performing scenario planning toestimate thefinancial impact of potential disruptions.
Fraud Detection
Just as costly as waste is outright criminal misuse of funds, which can also havelife-and-death consequences when leakage impacts cash flow or erodes funding thatcouldotherwise finance better prevention, more innovation or increased access to care.Financialmanagers in healthcare perform regular audits to weed out fraud and misuse of funds.Advanced analytics and artificial intelligence can help make the process ofmonitoring anddetection more efficient and effective.
Financing Decisions
When healthcare organizations make the decision to invest in a new asset orinitiative, theyhave a choice in how to fund the project. Internal or external funding? Debt orequitycapital? Short-term or long-term financing? Bank loan or fundraising? Financialmanagers canuse cash flow forecasting (addressed below) and scenario planning capabilities toanalyzethe financing options for these investments.
Lease Negotiation and Management
Financial managers in healthcare organizations must know how to analyze the complextermsinvolved in medical leases and negotiate them effectively for their organizations.It maynot sound as sexy as advanced analytics or as nuts-and-bolts as supply chainmanagement, butlease negotiation and management is another critical issue in the financialwell-being of ahealthcare business.
See AlsoCFA Free 101 ConceptsCash Flow Forecasts
Cash flow describes the income coming in from patients and payers and the expensesgoing outof a healthcare organization — the idea being that the former should exceedthelatter. Cash flow covers only liquid assets (i.e., those that can be quicklyconverted tocash). Cash flowforecastinginvolves analyzing historical data to estimate what future cash flow will be. Thisintelligence is essential for financial managers and other healthcare leaders andmanagerscharged with making the best-informed decisions about investments, cost-cutting andoverallcost management.
Working Capital Management
Working capitalmanagement— also known as short-term asset management — is focused on the handlingof ahealthcare organization’s cash, marketable securities, receivables andinventory.Working capital is calculated as the difference between current assets and currentliabilities. Finance managers regularly look at their working capital ratio (currentassetsdivided by current liabilities) to determine whether to make changes to ensure thatthehealth care organization has enough cash on hand to support operations. A workingcapitalratio higher than 1 is a good sign; between 1.5 and 2 is even better, as it createsacushion for investment, growth or disruption. Anything below 1 is cause for concern.
Contract Management
Organizations in healthcare negotiate, sign and monitor many important contracts,such aswith managed care organizations, third-party payers, vendors and suppliers. Thefinancialmanagement team typically maintains oversight of these contracts, as well as theirimpact onfinancial and other operational decisions.
Financial Risk Management
Healthcare financial managers are involved with mitigating financial risks related toliquidity and credit, as described above, as well as other business risks related topatientsafety or facility efficiency. A proactive, enterprisewide risk-management approach,wherebya healthcare organization identifies possible risks and ranks them by likelihood andimpact,can be beneficial to measures put in place to prevent or mitigate a range of risks.
Healthcare Financial Reporting and Analysis
Effective financial reporting and analysis are critical components of measuring and assessinga healthcare organization’s financial condition and its planning for the future. Somekey approaches to financial reports and analytics form a core toolset for the healthcareindustry’s financial managers and provide regular updates and insights to internal andexternal stakeholders.
Healthcare Financial Reports
There are four types of financial reports that are most important for managing the financialwell-being of hospitals, clinics and other healthcare facilities:
- Balance sheet: The balance sheet is one the most importantfinancial statements for any organization, illustrating its financial position at aspecific point in time. Financial managers produce these balance sheets, but they areused throughout a healthcare organization for decision-making. The balance sheet liststhe healthcare organization’s assets, liabilities and shareholder equity. Thisreport illustrates the organization’s liquidity, operating efficiency andpotential return on investment. It does not, however, provide any information onrevenues or cash flow.
- Income statement: Financial managers prepare an income statement toreport on a healthcare organization’s revenue, expenses and resulting profit orloss from a specific accounting period. Sometimes referred to as a profit and loss (akaP&L) or earnings statement, this report is used to assess the healthcareprovider’s profitability, efficiency and growth.
- Cash flow statement: Healthy cash flow is essential to operating ahealthcare facility. Thus, an accurate cash flow statementplays a lead role in ensuring that a healthcare organization is using its funds in aprofitable and sustainable manner. Financial managers prepare cash flow statements andanalyze them for anumber of purposes. They may be used to decide whether an investment is providinglong-term value to an organization or whether it’s burning through cash andshould, perhaps, be liquidated instead. A cash flow statement can also help theorganization’s leaders determine whether to invest in a new initiative, such as anew telehealth system, or build a new hospital wing.
- Statement of changes in equity: For a look into a healthcareorganization’s net profit or loss, financial managers prepare a statement of changes in equity. Sometimescalled a statement of retained earnings, this report indicates the change inowners’ equity over a specified accounting period. The statement of changes inequity connects the dots between a healthcare organization’s balance sheet and itsincome statement, including information not available in either report, such as dividendpayments, equity withdrawals, accounting policy changes and corrections of previouserrors. This document helps owners and investors make more informed decisions.
Healthcare Financial Analysis
Financial managers working in healthcare are involved not only in producing the reportsdescribed above, but also in financial performance analysis. With the availability of advanced analytics, more healthcareorganizations are looking to their financial management functions for data-derived insightsthat support strategic decision-making.
Some of the most important types of analyses that healthcare financial managers performinclude:
- Ratio analysis: Ratio analysis uses data from financial statements todeliver insights about profitability, liquidity, solvency or operationalefficiency. Some ratios that healthcare financial managers use include operatingmargin (a profitability ratio), debt-to-capitalization ratio (a leverage ratioparticularly germane to companies with big capital expenses and long-term debt, likehealthcare organizations) and the cash flow coverage ratio (particularly relevant forhealthcare organizations that must often wait for payment).
- Trend analysis: This is a method financial managers use to uncoverpatterns in a healthcare organization’s financials. Analyzing financial reports tolook for trends can enable financial managers to forecast future performance. Forexample, a hospital might look at profitability, liquidity and solvency metrics over afive-year period to deliver insights for future decision-making.
- Comparative analysis: Alternately, financial managers can compare datafrom different financial reports to give some context to financial data. This mightinvolve analyzing the healthcare organization’s financial reports from differenttime periods or comparing its own results to those of others in the industry.
- Pro forma analysis: Latin for “as a matter of form,” proforma is a type of financial analysis that incorporates projections or presumptions intothe equation. This kind of analysis can assist financial managers and others in thecompany in forecasting or modeling theimpact of hypothetical decisions or situations on the financial performance of thecompany. A chain of urgent care clinics might perform pro forma analysis to explore theimpact of a proposed merger on future revenues and expenses, for example. Thecompany’s leaders can then make a better decision about the prospect, havingconsidered best, worst and most likely results in greater financial detail.
Digitize Your Healthcare Facility Today
For financial managers seeking to maintain financial stability and growth within a dynamicenvironment, manual processes and outdated systems can stymie the best-intentioned efforts.The complexity and scale of data and analytics required to effectively consolidate andassess financial statements, particularly across a large hospital group or healthcaresystem, demands a digitized, automated approach designed to meet the sector’s uniqueneeds.
The implementation of a robust, cloud-based enterprise resource planning (ERP) system, suchas NetSuite ERP, can form the bedrock for more efficient andeffective digital financial management processes and operations at a time of continuedregulatory changes, escalating cost pressures and increasing competition. NetSuite’srobust financial management capabilities increase visibility and transparency, reduceadministrative costs, bolster supply chain management, streamline reporting and compliance,improve strategic and financial planning and — ultimately — enable a healthcareorganization to provide better care to patients.
When situations change, as they often do, an integrated ERP system withconsolidated financials and simple data extraction and sharing capabilities also makes iteasier for financial managers to create updated cash flow forecasts or perform scenarioplanning. NetSuite’s cloud-based business managementsuite, which integrates financial management with back-office, sales and serviceprocesses, enables healthcare organizations to quickly adapt to changes in marketconditions, evolving customer requirements, and new government and industry regulations.
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While the utmost aim for healthcare organizations is quality patient care, that is onlypossible with the effective financial management required to sustain operations. Solidfinancial management is the foundation upon which healthcare organizations are able to meetthe needs of their patients. As healthcare organizations contend with cost pressures,regulatory concerns, evolving patient needs, supply chain issues and increased costpressures, they are increasingly looking to their financial managers to deliver the data andinsights necessary to make the best operational and strategic decisions. Financialmanagement teams, armed with integrated enterprise software and advanced financial reportingand analytics capabilities, are best positioned to expand their roles as strategic partnersin their healthcare organizations.
Healthcare Financial Management FAQs
What is the role of a financial manager in healthcare?
The role of a financial manager in healthcare is multifaceted. A financial manager isresponsible for the day-to-day financial operations of a healthcare facility or organizationand also provides reporting and insight to guide strategic decision-making. The healthcarefinancial manager may be involved in any of a number of processes to ensure that thehealthcare organization remains solvent, including budgeting and forecasting, managing cashflow and making investment recommendations.
What are the elements of financial management in healthcare?
At a high level, financial management in healthcare is focused on the “4C’s”: costs, cash, capital and control. Typical elements include financialevaluation and planning, budgeting and forecasting, generating revenue, mitigating risk,detecting fraud, and complying with regulations. The financial management function is alsoresponsible for producing regular financial reports, as well as performing various types ofanalysis of the healthcare organization’s finances for use by internal leaders andmanagers and external stakeholders.
What is the career path for healthcare finance?
Those seeking to work in financial management for healthcare providers have many careerchoices to choose from, each with opportunities for upward mobility. A finance pro whostarts out in medical billing could eventually be promoted to supervisor, manager, director,and even vice president of revenue cycle management, for example. An entry-level hospitalaccountant could progress to accounting manager, then controller, then director ofaccounting and on up to chief financial officer (CFO). Likewise on the finance side, someonemight start as a financial analyst, advance to a senior analyst role and then ascend theranks to manager, director, vice president and, perhaps, CFO.
