Principal principles: Critical accounting and financial concepts for healthcare leaders

Financial acumen is deeply interwoven in the provision of healthcare, impacting every healthcare leader and how they lead their practice and care for patients. Healthcare leaders can be embedded in a variety of private, academic/academic-affiliated and company-based organizations, which range from small to large and single specialty to multispecialty. Issues requiring financial acumen include daily operations, brick-and-mortar expansion, acquisition of community practices, potential mergers and partnerships with implications for technical and professional revenues and expense management. Significant expenditures on staff and expensive equipment are oftentimes involved.Financial competence is a key differentiator for successful physician and administrative leader partnerships in today’s unpredictable and ever-changing healthcare landscape. Volatile and uncertain environments compel healthcare leaders to seek out and host conversations on methods to become more financially competent. Leaders are discovering the need to be well versed in accounting and finance as it relates to their healthcare practice. To encourage these conversations and to develop financially competent physician and administrator leaders, organizations can embed financial accountability and thought-provoking cost analysis experiences into everyday practice management.There continues to be a need for healthcare leaders and teams to understand and apply the most relevant accounting and finance principles. The intent is to enhance leader credibility and extend the value of stewardship throughout the organization to patients, colleagues and other stakeholders. At Mayo Clinic the organizational value of stewardship is defined as sustaining and reinvesting in the mission by wisely managing human, natural and material resources.1Financial accountability ties directly to the organizational mission, vision, values and strategy in order to achieve mission-advancing financial performance: a balanced scorecard outcome.2

Integrating strategic planning concepts3 with financial stewardship may be best represented with an integrated value equation as illustrated in Figure 1.

Financially competent healthcare leaders understand and leverage the relationship between several key foundational organizational elements. Figure 1 integrates the key elements of strategic planning with a customer focus, the stewardship of financial management with an orientation toward organizational excellence through process, and relationship management.

Current leaders and those in the succession pool to become future leaders at Mayo Clinic partner with administrative leaders (nursing, shared services, operations) across the enterprise to enhance and elevate their collective financial acumen. Embedding the language of finance and the practice of accounting into daily interactions, conversations and operations by employing a systems approach to financial management4 is a viable place to start. Leaders at Mayo Clinic focus on the following four strategies:

• Strategy 1: Integrating six pillars of accounting 
• Strategy 2: Understanding the three financial statements
• Strategy 3: Defining cost terminology
• Strategy 4: Leveraging breakeven analysis 

Definitions, practical solutions and guiding questions are offered for each of the four strategies.

Strategy 1: Integrating six pillars of accounting

The profession of accounting is highly complex and not likely to be understood completely by clinicians. However, healthcare leaders will benefit from an understanding of six pillars that serve as a foundation for the discipline.

1. Matching principle: All expenses are matched with the revenues they helped earn in the same accounting period so that profitability is accurately summarized.5
2. Objectivity: Being as unbiased as possible so that the user interprets the information with a high level of credibility.6
3. Conservatism: Being prudent, so that the likelihood of unfavorable variances is minimized.7
4. Materiality: An accounting standard should be applied considering the extent of impact on the organization.8
5. Full disclosure: All information that would provide an accurate assessment of the financial statements have been reported so that informed decisions are optimized and possible conflicts of interest are identified.9
6. Consistency principle: Accounting and financial calculations are consistent from one accounting period to the next.10

 
The radiology practice (the inspiration for this article) and other specialty practices at Mayo Clinic have been positively impacted by the application of the six pillars. The pervasive integration of radiology as a diagnostic and interventional specialty with all other medical specialties has a substantial impact on overall health system performance. These pillars are variables that affect analyses for justifying additional allied health staff and expensive equipment for service expansions with new and existing modalities. Understanding and utilizing these six pillars in all financial analyses increases the probability of approval when requests are submitted.

Strategy 2: Understanding the three financial statements

Three financial statements collectively provide the information that describe the financial health of a practice: the balance sheet, the income statement and the cash flow summary.11 The three statements are highlighted below.

Balance sheet

A balance sheet “summarizes an organization or individual’s assets, equity and liabilities at a specific point in time rather than in a range of time.”12 The balance sheet provides a place to depict and report on the accounting equation (“assets = liabilities + owner’s equity”).13 Revised with the medical practice in mind, the equation can be described as what is owned by the practice, what is owed and the summary of net worth. This fundamental equation serves as the basis of the balance sheet. Key questions every healthcare leader should ask about the balance sheet to determine the financial health of the practice include the following:

• Is practice equity growing?
• Are accounts receivable (A/R) being actively managed to optimize liquidity?
• Are assets being managed in a way to optimize profitability?
• What are the vital metrics that describe the liquidity and solvency of the practice?

Income statement

The income statement provides an understanding of the profits and how revenue and expenses are being incurred. Gross and net revenues (after deductions) are summarized along with the details and trends in expenses. The income statement reveals revenues earned “in a particular calendar period (often referred to as the top line) offset by the expenses incurred in earning those revenues to arrive at the profit earned or loss incurred by the company for that particular period (popularly referred to as the bottom line).”14 Key questions a healthcare team may ask to understand the income statement include:

• What are the vital metrics that describe the efficiency and profitability of the practice?
• What are the trends in revenue and expenses driving the bottom line?
• Is profitability growing, and what environmental factors will affect future profitability?

Cash flow summary

Cash flow is an essential metric to monitor. The cash flow summary provides an explanation of the sources and uses of cash from operating (running the business), investing (asset management) and financing (leverage and shareholder investment) activities. The cash flow statement “captures when these payments are made and thereby assists in the assessment and planning of the cash requirements of a business.”15 Key questions the healthcare team may ask to understand cash flow include:

• Where is the cash coming from (operations, investing or financing)?
• How is the cash being utilized (operations, investing or financing)?
• What did the practice buy and sell (identify the investments)?

 
The understanding and use of these financial statements by radiology leaders is exemplified by the impact of expensive asset acquisitions of MRI, CT and other imaging and intervention equipment. These assets are significant investments that will affect the accounts (cash, assets, liabilities, equity, revenue and expenses) on the three financial statements. This is true for other specialties with similar opportunities.

Strategy 3: Defining cost terminology

Cost management will be an increasing focus for all healthcare leaders, which is complicated by the various types of costs normally encountered when managing a practice. Effective physician and administrator partners are able to ask each other the right questions to understand and define the type of cost being discussed and the implications of decisions on cost behavior. Table 1 contains examples and descriptions of the types of costs leaders may need to define and discuss to evaluate potential opportunities or decisions.

Clarity is essential when discussing costs. Clear and transparent communication about practice costs includes a shared language and common understanding. The effectiveness of conversations increases and decisions are made more quickly with improved accuracy when everyone is on the same page.

Strategy 4: Leveraging breakeven analysis

Breakeven analysis is a fundamental concept for healthcare leaders and offers a powerful tool to model impacts on the bottom line given changes in volumes, pricing and cost management, both variable and fixed. Understanding how the cost curve will change with various investment opportunities will inform leadership decisions, which will affect the financial health of the practice. Figure 2 offers a visual illustration of the relationship of fixed and variable costs compared with the associated revenue that will eventually turn into profit or loss.

Radiology leadership teams at Mayo Clinic have utilized this analysis tool as an essential step in evaluating decisions. By conducting these analyses, leaders can answer the following questions:

• Should we consider expanding or reducing our current hours of operation?
• When should we consider purchasing another CT scanner?
• Is it time to invest in a new imaging modality for our practice (e.g., a PET/CT or PET/MR)?

Conclusion

Continuing to build credibility by equipping leaders with accounting and finance skills is essential to the future of healthcare. Leveraging the understanding and strategies summarized in this article and embedding this content into organizational learning, leadership development programs and partnership conversations will support the succession pool by developing financially competent leaders. Future leaders possessing strong clinical expertise and a need to enhance business acumen may be offered stretch assignments and action learning opportunities16 in which they are immersed in projects that rely on financial competence and work with teams to drive results leveraging sound financial decisions.

Healthcare leaders who are responsible for the financial health of a practice will benefit from continuous learning opportunities, including lectures and action learning experiences, to elevate the collective organizational financial competence. Physician and administrator partnerships that focus on financial accountability are “essential to the overall collective result of the organization.”17 Financially proficient physician and administrative teams have the opportunity to leave a legacy of sustaining organizational excellence18 by deploying these critical accounting and financial concepts in their practice and intentionally developing the healthcare leaders of tomorrow.

Notes:

1. Mayo Clinic. “Mayo Clinic Mission and Values.” Available from: mayocl.in/36mdv33.
2. Kaplan R, Norton D. The strategy focused organization: How balanced scorecard companies thrive in the new business environment. Boston: Harvard Business Review Press, 2001; 41.
3. Napier R, Sidle C, Sanaghan P. High impact tools and activities for strategic planning: Creative techniques for facilitating your organization’s planning process, 1st edition. New York: McGraw-Hill Education, 1997.
4. McLaughlin D, Olson J. Healthcare operations management, 3rd edition. Chicago: Health Administration Press, 2017.
5. Cunningham B, Nikolai L, Bazley J. Accounting: information for business decisions. Mason, OH: Thomson South-Western, 2014; 141 and 74.
6. Ibid., 42.
7. Ibid., 667.
8. Ibid., 313.
9. Ibid., 748.
10. Berman K, Knight J. Financial intelligence: A manager’s guide to knowing what the numbers really mean. Boston: Harvard Business School Publishing, 2013, 31.
11. Beauchamp NJ, 3rd, Beauchamp NJ, Jr. “Basics of finance and accounting.” J Am Coll Radiol. 2014;11(6):541-542.
12. Medverd JR, Prabhu SJ, Lam DL. “Business of radiology: Financial fundamentals for radiologists.” AJR Am J Roentgenol. 2013;201(5):W683-690.
13. Cunningham, 131.
14. Medverd, 684.
15. Ibid., 686.
16. France TJ, Menaker R, Thielen KR. “The Importance of a Radiologist-Administrator Partnership to Future Health Care.” J Am Coll Radiol. 2019;16(8):1,114-1,118.
17. The Arbinger Institute. The outward mindset: Seeing beyond ourselves. San Francisco: Berrett-Koehler Publishers, 2016.
18. Menaker R. “Leadership strategies: Achieving personal and professional success.” J Med Pract Manage. 2016;31(6):336-339.