Accounting Types For Home Care and Hospice Agencies

Robust home care and hospice accounting processes ensure the agency’s compliance, success, and profitability. But a lack of understanding can cause challenges in measuring expenses and revenue, primarily since healthcare facilities feature multiple layers of economic components.

Not just this, but the various parties involved in home care and hospice agencies add to the complexity. It includes the patients, healthcare providers, insurance companies, and pharmaceutical companies. For this reason, it’s a must for healthcare services to identify the ideal accounting method.

Selecting the suitable accounting method for a nursing home entails identifying the size of the business, tracking revenue and expenses, and determining which way offers transparency. If you’re unsure how to choose the best type of accounting, keep reading!

Below we’ll discuss in-depth the two popular and effective accounting methods for your home care and hospice and their benefits. Further in the article, we’ll also offer vivid examples to help you make the ideal decision:

Activity Based (AKA Cost Accounting)

Activity based accounting is an efficient method for home care providers, allowing you to record cash and revenue when you receive it. Unlike most types of accounting, this method is straightforward to use.

With activity based accounting, professionals can add revenue and expenses after a transaction gets finalized. But it’s more than that! The accounting method helps homecare and hospice agencies to determine where a particular service or product breaks even, pull profits and creates losses.

Moreover, activity based accounting improves processing and outcomes with innovative procedures, including capacity determination and activity-based accounting. The primary benefit of activity-based accounting- and other concepts- is that it accounts for a service’s direct and indirect costs. That way, you can break down the expenses and income from multiple services, such as nursing care, and service type, like supplies.

Furthermore, activity based accounting empowers home care and hospice agencies to make informed decisions by offering accurate and on-time insights about the expenses of products and services. It also facilitates pricing strategies, enhances performance evaluation, and provides better cost control.

Besides, activity based accounting encourages forward-thinking agencies to embrace innovative tools and software. The result? In real-time, you can access in-depth and accurate reports on direct/indirect and fixed/variable costs. You’ll also find it easier to analyze the expenses and profits in different business areas!

Take, for example, a home health care agency that offers various services to clients, including nursing care, assisted living, and physical and occupational therapy. The agency uses activity based accounting to identify the expenses and profitability of each service and determine ways to reduce costs. How?

First, home healthcare service providers utilize activity based accounting to note the direct costs of their services. These include the nurses, therapists, and health care providers’ salaries and supplies or equipment necessary for effective patient treatment. In addition, the agency identifies indirect costs, such as utilities, rent, and administrative expenses.

Once the home care agency allocates the costs, it can analyze profitability and losses. For instance, the health care providers might compare the price of physical therapy to the total revenue generated by this service to determine whether to increase or decrease the fees. Or they might leverage activity-based accounting to determine which service offers the highest profitability rates.

Therefore, activity based accounting empowers home care agencies to make informed decisions about pricing, resource allocation, and service offerings. Additionally, they can eliminate unused capacity, create accurate annual reports, and serve large volumes of clients with their existing workforce. As a result, healthcare providers who take advantage of this accounting method can enjoy enhanced profitability while offering exceptional quality patient care!

Benefits of Activity Based / Cost Accounting

Activity based accounting offers home care and hospice agencies numerous unique benefits, including:

• It enhances your understanding of overhead costs and gives insights into cost drivers
• Eliminates unused capacity and lost time to improve productivity
• Reveals hidden issues due to data validation, inappropriate activity, and cost relationships
• Offers precise activity tracking to determine direct and indirect costs and explain cost behavior
• Facilitates improved performance management by providing detailed information on expenses and revenue
• Strategizes cost management by leveraging capacity determination, activity-based accounting, and utilization metrics

Accrual Based Accounting

Accrual-based accounting entails recognizing revenue and expenses when the home care or hospice agency earns or incurs them, regardless of when they receive the money. The primary benefit of this accounting method is that it accurately reflects your healthcare’s financial performance.

In addition, it offers a clear picture of your hospice agency’s financial health and transactions that will occur over a specific period, such as a quarter of a year. For instance, if you provide long-term care to a client from January to March and won’t receive payment until March, the revenue would be recognized in January under accrual accounting.

Similarly, if your home care agency incurs supplies expenses in December but doesn’t pay them until January, in accrual basis accounting, the costs would appear in December.

Unlock Unmatched Home Health and Hospice Accounting with Knight Home Care Financial

Take your home care and hospice agency to the next level with Knight Home Care Financial’s professional accounting services. Whether you’re a start-up or large home healthcare agency, our expert team can help you identify insightful data and convert them into meaningful actions.

Not just this, but our robust packages include accounting, back office, cost reporting, and tax preparation services. That means you can sit back and relax while we take care of complex accounting tasks, year-end reporting, and filing taxes!

The Bottom Line

Selecting the ideal accounting method to enhance your home care and hospice agency’s performance can be tricky. But once you determine your healthcare needs and goals, you can make the correct business decision! Allow us to take the burden of accounting tasks off your shoulders by visiting our website. Contact us today to discover the ins and outs of activity based and accrual accounting and ways to improve your healthcare agency.