Essential Strategies for Managing Finance in Healthcare

Healthcare financial management is challenging in an environment of rising costs and regulations, supply chain disruptions, reimbursement limits, required preapprovals, claims line item denial, star rating changes for Medicare Advantage and Part D plans, and long payment cycles between patient care delivery and reimbursement of patient care claims. These key healthcare industry challenges elevate the importance of using effective financial strategies in healthcare. 

The healthcare financial management team must achieve excellent cost control, cash forecasting, and analytic insights and obtain financing to bridge the timing gaps. This article defines what healthcare finance is, describes the issues and new developments in managing healthcare finances, and presents best practices and systems for financial managers in the healthcare industry. 

Understanding the Basics of Healthcare Financial Management

To understand the basics of healthcare financial management, consider

• Types of healthcare organizations
• Healthcare financial management goals
• HFMA (Healthcare Financial Management Association)
• Healthcare financial challenges
• Cost control strategies

Types of Healthcare Organizations

Healthcare financial management applies to many types of organizations in the healthcare sector. 

Healthcare organizations and businesses include:

• Healthcare providers
  • Hospitals 
  • Doctor offices
  • Dentists
  • Medical clinics
• imaging companies and labs 
• Nonprofits (including some hospitals)
• Public health services 
• Nursing homes 
• Home healthcare equipment rental businesses and caretakers
• Medical device and pharmaceutical businesses 
• Pharmacies and PBM middlemen
• Physical and occupational therapy services 
• Health insurance companies
• Government agencies such as the CMS

Healthcare Financial Management Goals

Proper healthcare financial management means that healthcare organizations manage their financial operations to provide quality patient care and optimize their financial results to enable them to provide these services on an ongoing basis. Optimized financial management isn’t the same as maximum profits, which would result in inadequate staffing and procurement and prevent quality patient care. 

HFMA (Healthcare Financial Management Association)

The HFMA is a professional association for financial management members in the healthcare industry. The HFMA provides educational training, certification, and current healthcare industry news updates. Through HFMA membership, healthcare financial professionals can increase their ability to achieve financial performance goals within the boundaries of adequate patient care. 

Healthcare Financial Challenges

After reduced utilization of hospitals and other healthcare services for elective procedures during the COVID-19 pandemic, patients are increasingly choosing to have their delayed surgery and get imaging and diagnostics to fix chronic knee or other health problems. 

Insurers offer healthcare plans, including HMOs and PPOs (including plans for the general population and Medicare Advantage for seniors). This HMO or PPO insurance segment is restricted to patients using their in-network providers at reduced costs. 

These in-network healthcare plans may require pre-authorization of surgeries and other medical services. When pre-authorization denials occur, patient appeals are possible but cause delays in healthcare services provision if eventually approved. Approval delays impact the timing of the revenue cycle for hospitals and outpatient surgical centers, causing problems for healthcare administration and financial managers. 

Area residents may incur automobile, sports, or travel injury procedures from increased activities and trips. Healthcare organizations must raise staffing levels and incur costs to handle this increase in elective procedures and injuries. 

Hospitals may need to assume more costs from uninsured patients who aren’t revenue sources due to poverty. During recessions, it may be more challenging to collect patient bill balances. 

Healthcare Cost Control Strategies

Cost control and error and fraud prevention when making payments can limit costs to a more reasonable level by eliminating unnecessary spending by a healthcare system or business.

Tipalti’s unified platform of finance automation software provides healthcare automation for accounts payable and cost control. It assists healthcare financial management in financial decision-making with an AI-driven (including an embedded generative AI Chat GPT for finance) solution for business intelligence in spending. 

Besides AP automation software, Tipalti offers mass payment software for making global payouts to independent contractors such as freelancers, creators for royalty payments, steamers, influencers, publishers, and ad networks. 

Tipalti also has advanced FX products, Multi-FX and Tipalti FX Hedging, which work with its AP and mass payments software. Tipalti Expenses helps your healthcare organization manage employee expense reimbursement. Tipalti also offers a Procurement automation solution. 

With Tipalti Procurement, employees and their designated supervisors with approval responsibility create and approve purchase requisitions. The Tipalti Procurement software automatically creates purchase orders from approved PRs and manages suppliers, digital contracts, and other electronic documents. 

A detailed look at critical strategies applicable to finance in the healthcare industry follows. 

Key Strategies for Effective Healthcare Financial Management

Four key strategies for effective healthcare financial management are called the 4 C’s:

1. Costs
2. Capital
3. Cash
4. Control

Costs

Costs include all expenditures to run a healthcare organization, including salaries, wages, & benefits, medical and office supplies, facilities, utilities, and equipment. Some expenditures are expenses, while others are inventory purchases or depreciation of fixed assets such as equipment. 

Capital 

Capital is allocated by healthcare organizations through capital budgeting analysis and budget approval. Capital may include major facility expansion or acquiring medical equipment. Healthcare organizations should conduct post-project reviews to evaluate actual project spending and ways to improve future capital spending projects. 

Cash

Cash flow management is one of the most essential aspects of financial management. Cash flow must be projected and managed to have adequate cash balances when needed. Excess cash can be invested in short-term financial instruments as cash equivalents. Cash flow management includes cash flow forecasting, revenue cycle management, cost management, and expenditures management. 

Converting working capital (current assets minus current liabilities) to cash quicker increases available cash balances sooner. An example is faster collection of accounts receivable. Financing can be obtained by healthcare financial management to bridge gaps in cash timing or adequacy to pay obligations and for capital projects. 

Control

Control includes having an adequate system of internal controls, fraud reduction strategies, spending control, and global regulatory compliance. Control includes ongoing performance monitoring with financial statements and metrics, breakeven analysis using variable and fixed costs, budget vs. actual, and standard cost variance analysis. 

Healthcare financial planning is a process used to ensure that finance professionals prepare revenue forecasts, capital budgets, expense budgets, and cash flow forecasts to achieve the goals related to the four C’s levers. Periodically, the finance team updates revenue forecasts and budgets. The company may use a rolling budget technique for updates. 

Best Practices for Compliance and Risk Management

Compliance and risk management best practices are essential for good healthcare financial management.

Many segments of the healthcare industry use global suppliers to make purchases. Medical device manufacturers often operate globally as multinational companies with worldwide operations and entity locations. 

With global spending, risks of fraudulent suppliers and invoices increase. Your organization needs to achieve global regulatory compliance for payments and healthcare operations. Medical supplies and pharmaceutical products dispensed must be FDA-approved rather than knock-offs by unscrupulous vendors that can harm patients. 

Union strikes by port workers, truckers, or railroads and bridge collapses can cause shutdowns to ports and other transportation systems. The impact on healthcare service providers and the finance team is not receiving products on time to deliver healthcare services when needed, causing procedure scheduling delays that add time until revenues can be billed, and inflation risks for future increased costs. 

Best practices for accounts payable are built into AP automation software from Tipalti. Tipalti has ERP integrations with several financial systems. 

Tipalti AP automation software:

• Provides a self-service Hub for onboarding a payer’s suppliers
• Validates suppliers with their tax ID numbers (TINs)
• Screens suppliers, using automated global regulatory compliance steps, against sanctions lists like OFAC/SDN and other blacklists
• Approve invoice payments with automated routing to approvers
• Lets you pay global supplier invoices in large, efficient batches
• Syncs data with your ERP or accounting system
• Provides real-time payment reconciliation for batch payments
• Includes simple tax preparation reports for completing 1099s and 1042-S filings

Blacklist screenings and TIN (taxpayer ID number) verifications help your organization avoid financial penalties for non-compliance and 1099 form inaccuracies. With Tipalti AP automation, global payments using the payee’s preferred payment method can be made to 196 countries in 120 currencies. 

Financial Reporting and Performance Monitoring

Financial reporting includes routinely preparing financial statements consisting of a balance sheet, income statement, cash flow statement, and statement of shareholders equity for stakeholders, including employees, banks, and shareholders of for-profit entities. Employees and stakeholders of the healthcare industry organization or business can assess its financial performance and financial health. 

CPA firms audit financial statements for many organizations in the healthcare industry. Larger companies have an internal audit department consisting of employed finance professionals to conduct operational audits and issue suggestions for improvement in reports.

Accountants and financial management in healthcare also issue and analyze detailed financial statements within the company, using them as internal financial statements. ERP systems often have dimensional reporting and drill-down features for different perspectives to slice and dice the information and find underlying transaction details for analysis and account reconciliation. 

In budget variance analysis, these detailed financial statements prepared by the accounting system compute and compare actual amounts to budgeted amounts. Accountants and finance managers pinpoint reasons for the differences and identify action items to improve future performance. 

Real-time dashboards help financial managers and executives understand progress on reaching performance goals. 

Healthcare financial analysis for performance monitoring Includes:

• Actual revenue and margins vs. forecast 
• Spend categorization and analysis for business intelligence
• Standard costing and variance analysis
• Budget vs. actual variance analysis
• KPIs, financial ratios, and metrics trends with benchmarking to industry competitors
• Breakeven analysis

Financial ratios include liquidity ratios like the current ratio (current assets minus current liabilities) and the quick ratio which excludes inventory from current assets. Other metrics include days sales outstanding (DSO) for accounts receivable and days payable outstanding (DPO) for accounts payable. The debt-to-equity ratio compares total debt on the balance sheet to shareholder equity. Healthcare businesses and other for-profit entities may calculate return on investment and use the more complex DuPont analysis to compute return on equity (ROE). 

Finance managers or CFOs in the business of healthcare may prepare a financial valuation analysis of their company at least when they are involved in M&A negotiations to purchase their business or periodically.

Enhancing Patient Financial Experience

Healthcare providers and hospitals can enhance patients’ financial experience by offering pricing and cost transparency, telemedicine appointments, and eliminating surprise billing for out-of-network medical expenses. In appropriate cases, remote patient monitoring may be beneficial. 

Government regulations can be used to reduce pharmaceutical costs for patients either through imposing price control limits or authorizing more generic medicines controlled by the FDA for quality and efficacy. 

Three examples of government price control for medicines positively impacting patients are:

1. $2,000 limit on out-of-pocket Part D Medicare and Medicare Advantage drug plan expenditures beginning in 2025 
2. $35 insulin cost limit for Medicare-insured patients with prescription drug coverage plans
3. Phased-in Medicare-negotiated prices on the most widely used and expensive prescription drugs, beginning with ten selected drugs in 2026

Leveraging Automation to Streamline Finances

Third-party finance automation software integration with a healthcare organization’s ERP system can streamline back-office processes, control spending with better real-time analysis, and reduce costs. Cost reduction occurs through greater efficiency, requiring less staff time and hiring needs, and taking timely early payment discounts from suppliers on time with faster, digitized, automated invoice processing. 

Tipalti end-to-end AP automation software delivers on these promises by saving organizations and businesses up to 80% of the time processing payables, reducing payment errors by 66%, reducing fraud risks, and speeding the accounting close by 25% with real-time payment reconciliation. 

Future Trends in Healthcare Financial Management

Future trends in healthcare financial management are:

• Increasing focus on value-based care and payment models
• Growth and financial impact of telemedicine and remote healthcare monitoring 
• Adapting to changes in healthcare regulations and reimbursement policies

Value-based Care and Payment Models

Value-based care is a healthcare payment model that replaces fee-for-service billing with compensation based on patient results delivered. 

According to the AMA, a medical association, value-based care has “five key goals:

1. Provide the best patient experience.
2. Advance health equity.
3. Improve patients’ health outcomes.
4. Deliver health care services at a reasonable cost.
5. Support the well-being of the health care workforce.”

According to the AMA, one application of value-based care is the “alternative payment model” statutorily defined by Congress for the Medicare program in the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA).

The Financial Impact of Telemedicine and Remote Healthcare Monitoring 

Telemedicine and remote healthcare monitoring are two recent trends that can increase healthcare revenue. 

Telemedicine

Telemedicine is real-time video conferencing between a physician or other medical service provider and a patient. It has a positive financial impact and offers convenience for the provider and the patient. Insurance coverage for telemedicine or telehealth by private insurers, Medicaid, and, to some extent, Medicare expanded during the COVID-19 pandemic. 

For the patient, telemedicine saves travel time and costs of physically meeting with care providers in a medical office or clinic. Patients in rural areas benefit the most from reduced travel and the ability to talk to specialists. However, urban patients also benefit from telemedicine appointments when it’s difficult to get transportation or risky to meet a healthcare provider in their physical location due to frailty or contagious disease transmission. Caretakers can also participate in telemedicine meetings to gain required information about caring for a patient. 

Telemedicine may reduce the need for unnecessary emergency room visits and costs, saving money for hospitals with uninsured patients, insurance providers, and patients with deductibles and copays. Some procedures, like imaging with X-rays, MRI, and CT scans, still require an in-person visit to an equipped healthcare facility. 

The physician or other health practitioner increases patient volume by adding patients who can’t visit the doctor’s office as a health precaution when sick with a contagious disease or due to immobility from a severe health condition. Telemedicine saves costs by reducing required supplies and staff time. 

Remote Healthcare Monitoring

Remote healthcare monitoring is an online health system that can be accessed from a patient’s home. Some insurers, including Original Medicare plans and related supplemental Medigap (Medicare Supplement Insurance) plan coverage, have accepted and reimbursed the provision of remote monitoring services. 

Providing remote medical equipment such as Internet-connected blood pressure monitors, weight scales, and blood glucose monitors with diabetic test strips has become a lucrative industry for equipment rental, supply companies, and remote monitoring service companies and physicians paid by insurers for their enrolled patients’ participation in a remote monitoring program.

Although remote monitoring leads to increased healthcare provider revenue as an almost passive income source, discretion should be used by doctors to enroll only patients with health conditions or age levels that medically justify the need and cost for remote monitoring.

As a positive application, remote healthcare monitoring is justifiably used by some hospitals to monitor post-surgery patients living out-of-area from the hospital at which the surgery was performed. 

Changes in Healthcare Regulations and Reimbursement Policies

Some recent changes in healthcare regulations and reimbursements include:

• Lower Costs, More Transparency (LCMT) Act, which was passed by the House of Representatives in December 2023 
• Updates to HIPAA privacy rules expected in late 2024
• IRF Prospective Payment System (PPS) Final Rule by CMS for 2025 Medicare rate

Transparency includes hospital pricing, insurance plan transparency, cost transparency of Pharmacy Benefit Managers (PBMs) as pharmaceutical middlemen, and reductions in pharmaceutical costs for patients. 

The 2024 HIPAA privacy rules update will strengthen patient access to their health records and add HIPAA rules for the opioid crisis. 

For 2025, CMS (The Centers for Medicare and Medicaid Services) will increase Medicare Inpatient Rehabilitation Facility IRF payments by a net of 3%, which is a basket rate of 3.5% less a 0.5% productivity adjustment. 

CMS includes coverage for Medicare, Medicaid, the Children’s Health Insurance Program (CHIP), and the Health Insurance Marketplace (Obamacare). 

Summing It Up 

Healthcare financial management relies on decision-making and control in the context of current healthcare challenges that impact revenues and costs. Patient care quality levels must be achieved with excellent financial management. 

With lower reimbursement rates by insurance companies and Medicare or other CMS entities, financial and other healthcare management professionals must better forecast revenue streams, financial planning and analysis, cash flow management and achieving cost control over spending. 

Proactive financial planning, cash flow management, and financial reporting, as well as achieving efficiency, strengthening regulatory compliance and controls, and using the best systems to control spending in a global environment, are essential for long-term success in managing finance in healthcare. Learn more about integrating Tipalti healthcare industry solutions to automate end-to-end payables processes for paying global supplier invoices and improve spend control.