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Posted on August 29th, 2012, by

Health care industry is one of the most important elements of our society and at the same time it remains one of the most costly and disputable services due to high fees, complexity of the whole medical science etc. Public opinion polls have shown that health care and its costs remain a subject of primary concern for people, they are listed first together with such problems as crime and unemployment. This very fact indicates the importance of proper financial management in the sphere of health care, and the necessity for strict regulation in this area.

This essay is dedicated to discussing general accounting principles (GAAP) and their application in financial management of health care, and to analysis of ethical issues regarding health care services and its financial aspects as well as fraud and abuse treatment and prevention in health care industry.

1. GAAP

Financial management is inevitably linked to an enormous amount of documents and papers containing financial information, and for efficient functioning of the organization and of all economical system in general there should exist some common principles for preparing and reporting financial information (Epstein & Nach & Bragg, 2008, p. 274). These principles are called Generally Accepted Accounting Principles (GAAP). These principles are quite general because they need to apply to different areas of financial management with various specifications. However, to know and implement GAAP is necessary for any specialist dealing with financial information.

The basic principles of GAAP are (Bradford, 2007, p.153):

  • Consistency (all information is gathered and during each period it is given in the same form if there is no important reason for changes)
  • Relevance (the given information is appropriate and may be used for estimating financial situation of the company)
  • Reliability (the information is reliable and can be verified by auditors)
  • Comparability (the given information can be used to compare financial state of the company with other companies in this area).

These principles are important in every sphere of business, but are crucial to health care industry because it is a rapidly developing and highly competitive area. In my opinion, comparability is one of the most important principles because it allows the investors as well as clients choose the best companies in the field and analyze the state of affairs of the company (Epstein & Nach & Bragg, 2008, p. 262). Taking into account that the sphere of health care is vital for the people, one can see that the need for strict compliance of health care business with GAAP is absolutely necessary.

2. Fraud and abuse in health care industry

While health care is one of the most costly and also most important spheres of business, there is also very high risk of fraud and abuse in this area. Such incidents do not only lead to financial losses and damage to the budget, but in the case health care fraud is discussed in public, these events lead to distrust for the whole health care industry and to worsening of attitude to companies working in health care. Therefore, transparent and reliable management is necessary in this sphere. Financial management in health care is regulated by HFMA ”“ Healthcare Financial Management Association.

“The whole healthcare industry is under a magnifying glass,”¯ says HFMA President Richard L. Clarke (Sandrik, 1993, 90). “Increased costs and continuing issues related to technology and access for the uninsured are focusing the public’s attention on health care. Because of this increased scrutiny, people are calling into question today practices that 10 or 15 years ago might have been acceptable”¯. No wonder that regulatory measures and compliance regulations have become more strict in health care recently.

Around 1,3 billion of dollars were spent on Health Care Fraud and Abuse Control Program (HCFAC) in 2008 (McLean, 2002, p. 283). The main directions of the program were control and prevention of improper and wasteful payments, preventing false test charges and non-existing claims for supplies. Methods of financial control used in this program were usually the following:

  • Checking statistical information
  • Auditing medical reviews and provider cost reports
  • Fraud detection (by financial documents)
  • Secondary payer reviews

One of the main slogans of this program was “best offence is good defense”¯.

This means that in order to avoid penalties and sanctions health care providers need to elaborate and implement a compliance plan, which guarantees that financial practice, policies and culture of the organization comply with general requirements. Necessary elements of such plan are:

  • Compliance program that obliges all employees to be informed about and to comply with laws and regulations concerning financial management
  • Ethical code of the organization or program of ethical awareness which can help employees to be informed about illegal actions
  • Methods of reporting about possible abuse
  • Ethical training for all employees and special program for those working with financial documents and financial issues.

Conclusion

Ethical code and corporate compliance are important in the whole sphere of financial management, and especially in the sphere of health care, because it is a vital element of economy and a subject of public opinion as well. Moreover, specialists dealing with financial management in health care should also understand and comply with GAAP. It is necessary for the organization to become a successful player in health care branch.

However, there are a number of specialists that vote for compliance of financial standards not with GAAP, but with IFRS ”“ International Financial Reporting Standards. In my opinion, the shift from GAAP to IFRS is important because the country’s health care industry is not a closed system and there is active interaction with foreign suppliers and clients. Therefore, the standardization of financial reporting principles and ethical codes, especially in health care, is an important issue for the health care industry.

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