5 Essential Financial Management Best Practices for Federally Qualified Health Centers

Every successful healthcare organization is built on the foundation of sound financial management. That’s a rule that’s particularly true for federally qualified health centers (FQHCs). As organizations providing vital healthcare services to underserved communities, FQHCs face a distinct set of challenges in managing their finances while maintaining compliance with federal regulations — challenges that can only be overcome with reliable accounting and bookkeeping.

The financial health of these organizations directly impacts their ability to deliver quality care. Yet many FQHCs struggle with complex grant requirements, medical billing intricacies and the specialized accounting knowledge needed to navigate both healthcare and nonprofit regulations simultaneously. In recent years, these challenges have intensified with the influx and subsequent decline of COVID-related funding. FQHCs with robust financial practices have found it easier to cope with these issues.

The following best practices represent critical areas where FQHCs should focus their accounting and finance efforts to ensure long-term sustainability. Getting these practices right isn’t just good business; it’s essential to fulfilling your organization’s mission.

Best Practice #1: Precise Grant Management

Federal grant funding is an integral resource for most FQHCs, but it’s a funding source that comes with plenty of complexity. A comprehensive approach to accounting for grant funding is essential for both operational success and compliance.

Federal grants for FQHCs come with specific stipulations about allowable expenditures, requiring detailed tracking systems. Most grants cover operations, wages and salaries. But other specialized grants are only permitted to be expensed against certain projects, such as infrastructure improvements or specified medical testing.

Proper grant management requires:

• A tailored chart of accounts: Design your accounting system to easily identify and categorize expenses by funding source.
• Documentation of allowable expenses: Maintain clear documentation of what expenses are permissible under each grant’s terms.
• Performance obligation tracking: Document the specific requirements that must be met to satisfy each grant’s terms.
• Regular reconciliation: Perform frequent reconciliations between grant reporting and the general ledger to identify discrepancies.
• Proper revenue recognition: Remember that when money is received does not dictate when revenue should be recognized. Performance obligations determine timing.
• Specific grant reporting capabilities: Take care to understand the reporting requirements of each funding source, and configure your organization’s financial systems to generate reports that align with these requirements.

The consequences of inadequate grant tracking extend beyond compliance issues — they can directly impact an FQHC’s financial stability. When tracking systems fail to properly allocate expenses, organizations risk inadvertently using restricted funds for unintended purposes. And that can trigger additional audit activities and/or funding clawbacks.

Best Practice #2: Revenue Cycle Management

Effective revenue cycle management can be challenging for FQHCs, which derive their revenues from a wide range of sources. With revenue from government programs, donors, insurance companies and private payers, success demands leaders pay attention to how effectively their organization collects revenue.

Key practices to a robust revenue cycle include:

• Data-driven collection estimates: Base uncollectible account estimates on historical collection patterns, adjusted for current trends in payer mix and reimbursement rates.
• Timely billing practices and policies: Implement consistent frameworks that ensure medical encounters are billed promptly.
• Proper coding expertise: Make sure billing staff is thoroughly trained in medical coding to minimize the potential for claim rejections.
• Regular aging analysis: Review accounts receivable aging reports monthly to identify issues and address them proactively.
• Documentation of performance obligations: Maintain clear records that support revenue recognition decisions.

FQHCs that excel in managing their accounts receivable typically dedicate significant resources to this area. It’s an important task; revenue cycle management directly impacts cash flow, allowing organizations to fully fund their operations and expand services. Without these practices in place, centers may face cash shortages despite providing billable services, ultimately limiting their ability to serve their communities effectively.

Best Practice #3: Robust Internal Controls and Compliance

Strong internal controls are essential for FQHCs to maintain financial integrity and compliance with the extensive regulatory requirements that affect virtually every aspect of their operations. These controls provide the framework for accurate financial reporting and help prevent fraud or misuse of funds.

Effective internal controls and compliance measures include:

• Documented policies and procedures: Maintain comprehensive documentation of all financial processes to ensure consistency. Consider documentation of responsibilities by position/title (rather than individual) to eliminate need for revision after any personnel changes.
• Separation of duties: Divide financial responsibilities among multiple staff members, particularly for tasks related to the disbursement of funds.
• Regular reconciliations: Perform monthly reconciliations of all accounts by ensuring sub ledgers can be tied back to the general ledger.
• Grant compliance reviews: Conduct regular internal reviews to proactively meet grant policies. Compile regular reports on performance as required by each grant.
• Information system controls: Implement appropriate access controls for financial systems and safeguard patient data.
• Regulatory monitoring: Stay informed about evolving regulations and adjust practices accordingly.
• Consider single audit obligations: Prepare your organization for the single audit process. This audit is required for all organizations that expense over $1,000,000 of federal funding in financial years beginning on or after Oct. 1, 2024.

FQHCs that adopt a proactive approach to compliance typically experience fewer disruptions during audits and reviews. Building compliance considerations into routine financial processes helps ensure that meeting regulatory requirements becomes part of the organization’s culture (rather than a reactive scramble when audits occur).

Best Practice #4: Strategic Financial Leadership

The financial stability of FQHCs depends heavily on having qualified leadership with the specialized knowledge needed to navigate healthcare finance and nonprofit regulations. The roles of the CFO and the controller are particularly critical for maintaining continuity.

Effective financial leadership of a FQHC requires a unique combination of skills. These leaders must understand medical billing and healthcare reimbursement models and be familiar with nonprofit accounting concepts like fund accounting, grant management and compliance. Leadership continuity is also important, as organizations with stable financial leadership experience fewer challenges.

FQHCs that invest in building and maintaining strong financial teams produce more reliable financial statements, which in turn makes them more attractive to potential donors and grantors. Given the specialized nature of FQHC operations, recruiting and retaining qualified financial professionals can be a challenge. Many FQHCs augment their existing teams with nonprofit accounting consultants or consult their auditors throughout the year as questions arise.

Best Practice #5: Financial Sustainability Planning

While federal grants provide essential support, depending too heavily on these funds creates financial vulnerabilities — a risk that’s become clear in recent times as COVID-related funding has expired. Successful FQHCs develop comprehensive strategies for financial sustainability and minimized risk. These strategies include:

• Diversifying revenue sources: Reduce dependency on any single funding source or grant program to increase resilience. Research and apply for new funding sources, from state grants to funding from private foundations or donors.
• Expanding billable services: Identify opportunities to offer additional services that align with the needs of your community and generate revenue.
• Developing partnerships: Consider collaborating with other organizations to create new service delivery models and funding opportunities.
• Building reserves: Establish financial reserves to help weather fluctuations in revenue.

FQHCs that proactively plan for financial sustainability can better fulfill their missions through changing economic and funding landscapes, ensuring continuous service to their communities.

Elevate Your FQHC’s Financial Strategy with James Moore’s Expertise

For many communities, federally qualified health centers represent a critical access point to healthcare services. Ensuring these organizations remain financially sound is fundamental to your organization’s mission of protecting and expanding healthcare access for vulnerable populations.

Strong financial management practices are foundational to the mission of FQHCs. By implementing these five best practices, they can strengthen their financial operations, maintain compliance with complex regulations and position themselves for long-term sustainability.

James Moore has extensive experience providing audit, tax, and consulting services to federally qualified health centers. Our team understands the unique financial challenges FQHCs face and can provide tailored solutions that help your organization advance its mission.

Contact us today to discuss how we can help strengthen your financial foundation and ensure compliance with complex regulatory requirements.

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