Financial Accounting

Purpose of This Chapter

This chapter will provide an overview of the health-care industry and hospital financial

accounting and reporting issues. The reader will gain insight to the industry and to the

accounting and reporting issues facing hospitals today. This chapter will provide the framework for more detailed discussions in subsequent chapters.

The “Business” of Health Care

Make no mistake, health care is business—big business. At over 15 percent of the gross

national product (GNP), health-care spending continues to rise sharply. This creates tremendous pressure on hospital leaders to manage their organizations—whether organized as

community-based/not-for-profit, for-profit, or academic medical centers—more effectively

than many other businesses. Operating efficiently and generating a return on investment

is crucial for all hospitals, regardless of ownership, to provide replacement equipment and

new technology to keep up with the demands of consumers. For some hospitals, another

important aspect of efficient operations is making interest payments on bonds and other

indebtedness or making dividend payments to shareholders. For other hospitals, especially

rural facilities, efficient operations simply equates to survival.

Mission and Community Focus

Hospitals are guided by a mission and a focus on the community. This characteristic distinguishes hospitals from most other businesses. Today’s health-care managers, including

pharmacy directors, must balance between making solid business decisions and providing

services or programs for the community. With limited resources, health-care leaders often

must choose carefully how resources are used and which needs the hospital can reasonably

meet.

Another area that distinguishes hospitals from most other businesses is the number of

stakeholders involved. How many other businesses provide services to customers (patients)

as ordered by independent practitioners (physicians not typically employed by the...