THE CONTEXT OF HEALTH CARE

ACCOUNTING
Chapter One

1
• Rising Healthcare cost is the major concern area in
all nations and key issues affecting health care
service delivery. To know the cost of activity, we
need to maintain the financial record of each
activity. Hence, in this concern, accounting concept
play an important role.
• But before understanding this concept we need to
know certain other things such as reason for rising
health care costs, efforts to control costs, and cost
control issues with ethical overtones.
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Reasons for rising costs
1. New technology e.g. MRI, organ transplants, renal dialysis, patented drugs to treat HIV/AIDS
2. Population ageing
3. Epidemiological transition
4. Medicalisation of social problems
5. Rising expectations of the public e.g. expect better “hotel services” in hospitals
6. Systems of health care financing without proper cost control mechanisms
7. Unwise spending by government e.g. building more and more hospitals
8. Inefficient privatisation e.g. privatisation of Government Medical Store in Malaysia
How do we pay for health care?
1. Out-of-pocket i.e. patient and family pays
2. Employer pays e.g. employer reimburses the employee who sees the doctor
3. Private insurance scheme
4. Charity or PVOs (private voluntary organisations) like National Kidney Foundation
5. Government i.e. through money raised from taxes (Britain’s National Health Service) or through a National Health Insurance scheme (South Korea and Taiwan)
6. Medical Savings Accounts (Singapore’s Medisave)
7. Foreign aid (important in poor countries)
How to control costs?
I). New Technology

1. Control import and introduction of new technology e.g. technology assessment law and “certificate of need” law
2. Get doctors to practise medicine more cost-effectively e.g. prescribe generic drugs, do not order expensive lab tests unnecessarily
3. Better planning and utilisation of facilities e.g. whole of Australia has fewer MRI machines than the Kuala Lumpur region! Reduce the number of machines but utilise them more
fully.
How to control costs?
II). Population Ageing

1. Promote healthy lifestyles among the young as well as the old

2. Alternative ways of caring for the aged e.g.
care at home rather than in institutions if possible
3. Place aged in long term care facilities rather than hospitalise them
4. Avoid “heroic medicine” if patient is a incurable
case
How to control costs?
III). Epidemiological Transition

1. Prevention and health promotion at the individual level

2. Spend more on environmental health and occupational health programmes
3. Better regulation of food industry (including the fast food industry and the processed food industry)
How to control costs?
IV). Medicalisation of Social Problems

1. Non-medical programmes to tackle social problems such as smoking and drug/alcohol abuse e.g. ban cigarette advertising, heavy taxes on tobacco and alcohol
products
How to control costs?

V). Rising expectations

1. In government hospitals, do not provide unnecessary “hotel services”

2. Patients should be made to pay more if they want better “hotel services”
3. For chronic conditions, teach patients and their families better self-care so as to avoid expensive complications (teach patients that not all diseases can be cured)
4. Insurance companies should not pay for newer drugs and medical procedures i.e. those that have not been subjected to rigorous clinical trials
How to control costs?
VI). Financing schemes without proper cost control mechanisms

1. Pay doctors and other health care providers

through capitation, salaries or negotiated fees. 2. Lessen “fee-for-service” payments to reduce “supplier-induced demand”
3. Utilisation reviews to identify high cost doctors and hospitals
4. More cost-sharing by patients e.g. co-payments, deductibles and co-insurance (to reduce unnecessary care-seeking, to promote more appropriate care-seeking)
How to control costs?
VII). Unwise spending by the government

1. Spend more on prevention and health promotion e.g. spend more on prenatal care rather than on neonatal intensive care
2. Reduce hospitalisation rates (i.e. wherever possible, treat on an outpatient basis) and have quicker discharges of hospitalised patients
3. Utilise lower cost health personnel to treat routine medical problems e.g. use nurse practitioners, medical assistants to do routine physical examinations & treat simple cases
4. Don’t build so many hospitals
How to control costs?
VIII). Inefficient Privatisation

1. Privatise only if this will increase competition and result in greater efficiency (lower prices, better service quality, better access)
2. Better laws and better enforcement of existing laws regulating the private sector e.g. one (controversial) proposal would be to allow doctors and hospitals to
advertise and inform the public about their charges for various procedures
3. Where privatisation is failing, the government should take over from the private sector
Cost Control Issues with Ethical Overtones

• There are literally hundreds of questions with

ethical overtones that arise because of
pressures to cut costs.
• Among the most common are:
-How to control costs without cutting quality.
-How to control costs, yet expand access to
services, especially in remote or inner-city areas.

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-How to control costs and provide services to those
who cannot pay.
-How to control costs but offer expensive treatments
to special populations, such as the terminally ill or
premature infants.
-How to control costs and still offer services that are
typically reimbursed below cost, such as certain types
of transplants or other special surgical procedures.
-How to control costs and not over-restrict the use of
specialty care.

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 Accounting
• It is an information system that reports on the
economic activities and financial condition of
a business or other organization.

• There needs to be a system or set of rules so

you are able to compare entities to each
other.
 How accounting can help you
• Help you prepare a budget and keep on target.

• Realize how much cash you have and if there

is enough to pay bills.

• Uncover places where costs can be cut.

THE ACCOUNTING PROCESS
Accounting consists of three basic activities—it
 identifies,

 records, and

 communicates

the economic events of an organization to interested users.

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 ILLUSTRATION
THE ACCOUNTING PROCESS
Communication
Identification Recording Accounti
ng
Reports
Ge
r
7 M ald Tr
e
Fre acCau nholm
d er l
icto y Driv
nN e
B

200
0

Prepare
accounting reports
SOFTBYTE
Select economic events Record, classify, Annual Report

(transactions) and summarize

The accounting process includes

the bookkeeping function. Analyse and interpret
for users 18
Who Uses Accounting Data

INTERNAL
USERS

Illustration 1-2
Questions that internal
users ask

LO 1
Who Uses Accounting Data

EXTERNAL
USERS

Illustration 1-3
Questions that external
users ask
LO 1
 Generally Accepted Accounting Principles
Generally Accepted Accounting Principles (GAAP) – Standards
that are generally accepted and universally practiced. These
standards indicate how to report economic events.
Financial Statements
Various users 
 Balance
Balance Sheet
Sheet
need financial 
 Income
Income Statement
Statement
Statement

 Statement of
of Owner's
Owner's Equity
Equity
information 
 Statement
Statement of
of Cash
Cash Flows
Flows

 Note
Note Disclosure
Disclosure

The accounting profession

has developed standards Generally
Generally Accepted
Accepted
Accounting
Accounting Principles
Principles
that are generally accepted
(GAAP)
(GAAP)
and universally practiced.
LO 2
Measurement Principles

HISTORICAL COST PRINCIPLE (or cost

principle) dictates that companies record assets
at their cost.

FAIR VALUE PRINCIPLE states that assets and

liabilities should be reported at fair value (the
price received to sell an asset or settle a liability).

LO 2
Assumptions

MONETARY UNIT ASSUMPTION requires that companies

include in the accounting records only transaction data that can
be expressed in terms of money.

ECONOMIC ENTITY ASSUMPTION requires that activities of

the entity be kept separate and distinct from the activities of its
owner and all other economic entities.
 Proprietorship
Forms of Business
 Partnership
Ownership
 Corporation

LO 2
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Forms of Business Ownership

Proprietorship Partnership Corporation

 Owned by one  Owned by two or  Ownership

person more persons divided into
 Owner is often  Often retail and shares of stock
manager/operator service-type  Separate legal
 Owner receives businesses entity organized
any profits, suffers  Generally under state
any losses, and is unlimited corporation law
personally liable personal liability  Limited liability
for all debts  Partnership
agreement

LO 2