Understanding the Bottom Line in Healthcare

To understand this dynamic, you need to know who the customer is.

One of the key questions arising from looking at financial statements is this: how do we “get to the bottom line” in healthcare? In our society and culture, we have a fascination with the term “net income,” but it may have little meaning for providers. 

In healthcare, the first hurdle is that “customers” may or may not be the actual beneficiaries of the services. When a patient is covered by Medicare, Medicaid, or another third party, is the patient the “customer?” Current accounting guidance says that when a patient is covered by a third party, the true customer is that third party.

The next issue is determining what the agreed payment will be for the service. In healthcare, this occurs after the customer has left the facility. Providers often do not know for sure who the customer really is until long after the service is provided. Once a bill goes out, that is when the negotiation for the amount of the payment starts. In almost no case does the payment have anything to do with the amount charged for the service.

There is also a huge difference between net income and operating income in healthcare. Many providers have gone bankrupt while still showing net income on their financial statements.

Many times, these providers were offsetting losses on operations with income from shrinking investment funds. Swings in the investment markets can leave a provider in a hole they can’t escape.

Increasingly, I am seeing a variety of accounting adjustments related to operating income that seem to distort it. These include unrealized gains and losses on investments, revaluations of pension liabilities and adjustments, and self-funded healthcare liabilities for employees of a provider. I offer no solutions, but I hope as Medicare moves forward setting rates based to some extent on operating income reported on Medicare cost reports, we find a way to make sure that healthcare continues to “break even,” or even prosper.