Understanding Modified Accrual Reporting for Healthcare Practices
As a healthcare practice owner or manager, understanding the financial health of your practice is critical. Your team needs to be able to track and analyze your revenues and expenses in order to make informed decisions about the future of your business. One method that can provide a more informed view of your financials is modified accrual accounting. Let’s discuss what modified accrual accounting is, why it’s important for healthcare practices, what challenges practice face when performing modified accrual accounting, and how Ballast can help.
What is Modified Accrual Accounting?
Accrual accounting is a method of reporting revenues and expenses when they are earned or incurred (versus when they are received or paid, in the ‘cash-basis’ method). Modified accrual accounting applies a ‘reasonableness test’ to this function: essentially acknowledging that some revenues and expenses that are unreasonable or immaterial to report on an accrual basis can be reported on a cash basis. This saves unnecessary costs and delays to deliver timely and useful financials to management.
Why Should Healthcare Practices Use Modified Accrual Methods?
For healthcare practices, this method can provide valuable insights into their operations by giving them a better understanding of what their revenues and expenses are at any given time. By recording transactions when they are earned or incurred, healthcare practices have a more accurate view of the costs required to deliver their services and earn revenue in relation to how much revenue was earned. Practices reporting cash-basis accounting may have skewed data because of time-delays between receipt of claims reimbursements vs. payment of expenses. Additionally, this method reduces the risk of incurring losses due to delayed payments or inaccurate estimates.
What Challenges Do Healthcare Practices Face When Reporting Modified Accrual Revenue and Expenses?
The three biggest challenges healthcare practices face when reporting modified accrual financials are revenue, labor, and inventory. Most other expenses can generally be reported using modified accrual methods, but we are happy to help your practice understand them further. Let’s focus on the big three:
Revenue
Challenge: the main challenge healthcare practices face when recording accrual revenue is the lag-time between visit date and adjudication date. Often that lag-time can be weeks or months, which means a practice may not know the dollar value of the visit earned on that day for a while. An accountant using unmodified accrual may have to wait months to close the books, but by then, the data is stale and less useful.
Solution: Ballast solves this by using reasonable estimation for insurance write-off rates relative to the gross claim value of the visit. This works especially well when practices have plenty of historical data that show a consistent relationship between gross charge and final reimbursement (we call this the ‘allowed rate’). By applying an estimate using a client’s allowed rate, we can get a reasonable understanding of how much revenue was earned that month. In subsequent months, once all or nearly all claims for that visit month have been adjudicated, we will replace the estimate with actuals in a retroactive adjustment. This provides timeliness of useful information in the short-term, and accuracy in the long-term. Truly, the best of both worlds.
Labor
Challenge: proper payroll accounting can be a complicated process for companies that do not have an experienced accountant or bookkeeper, and many practices expense the paychecks at the date of bank draft or check deposit. However, the expense of your labor is often incurred in a different period than the date it is paid.
Solution: Ballast has significant experience developing customized processes to ensure proper recognition of expenses of various labor costs, breaking out types of compensation by role and benefits, and creating a payroll liability on the last ‘earn date’ of the payroll period, to be subsequently relieved with the bank drafts and check deposits. We also perform monthly payroll accruals for payroll periods that overlap month-ends to ensure a full-month recognition of payroll expense to match with a full month recognition of revenue.
Inventory
Challenge: To appropriately recognize the cost of supplies using modified accrual methods, a practice must record the quantity and value of supplies used to treat patients, but it is far more difficult to track this than to track the purchase of those supplies.
Solution(s): Ballast employs multiple methods to solve this problem for our clients:
We implement barcode scanning systems to report inventory usage. This works for practices with more robust systems and a consolidated group of medical supply partners that have this technology available (the big distributors such as McKesson, Cardinal, and Medline all have these but they can be a heavy lift to implement).
We use beginning and ending inventory physical counts of supplies. If you know the beginning and ending inventory counts and amounts purchased, you can mathematically solve for supplies used:
Beginning Inventory + Purchases During the Period – Ending Inventory = Cost of Goods Sold (Supplies Used)
How Does Ballast Overcome These Challenges to Provide Useful Data for Its Healthcare Practice Clients?
The above solutions may feel like overwhelming tasks that your existing accounting and finance team does not have the capability or bandwidth to solve. That’s why we’re here to help! Ballast has extensive experience implementing proven, streamlined processes enabling practices to gain insights from accurate and useful financial information in a timely manner. Contact us today if you’d like to learn more about how we can help you gain greater visibility into the health of your practice!
