revenue recognition for health care providers...partner -bkd, llp brent beaulieu, cpa vp finance...

12/7/2017

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REVENUE RECOGNITION

FOR HEALTH CARE

PROVIDERS

Tracy Young, CPA

Partner - BKD, LLP

Brent Beaulieu, CPA

VP Finance – Baptist Health

ASU 2014-09 REVENUE FROM CONTRACTS WITH

CUSTOMERS

• Effective for Public Business Entitles (and certain NFPs) years beginning after December 15, 2017

• All other entities years beginning after December 15, 2018

• Principles based approach instead of a rules based approach

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Recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration

to which the entity expects to be entitled in exchange for those goods or services

CORE PRINCIPLE

Identify Contract with a CustomerIdentify Contract with a Customer

REVENUE RECOGNITION PROCESS

Identify Performance ObligationsIdentify Performance Obligations

Determine the Transaction PriceDetermine the Transaction Price

Allocate the Transaction PriceAllocate the Transaction Price

Recognize Revenue When/As a Performance Obligation is SatisfiedRecognize Revenue When/As a Performance Obligation is Satisfied

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TRANSITION APPROACHES

Transition

Approach

2017 2018 Date of Cumulative

Effect Adjustment

Full Retrospective Restate for all

contracts

Apply to all contracts January 1, 2017

Retrospective Using

One or More Practical

Expedients

Restate for all

contracts except

contracts covered by

practical expedients


Cumulative Effect at

Date of Adoption

No contracts

restated; reported

based on legacy

guidance


BAPTIST HEALTH: TRANSITION CONSIDERATIONSBH

• Impact on bottom line not expected to be significant;

however, components will shift noticeably

• Cumulative vs. Retrospective options

• Comparability for users

• Interim reporting considerations

• PY restatement for each interim period if retrospective?

• Different methods for interim vs. year end?

• Availability of info & time required vs. practical impact

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• All Entities that enter into contracts with customers

� Public, private, not for profit

� Regardless of industry

• All contracts with customers except

� Lease contracts

� Insurance contracts

� Financial instruments

� Guarantees

� Non-monetary exchanges in the same line of business to facilitate sales to customers

• Excludes

� Contributions

� Collaborative agreements

SCOPE

BAPTIST HEALTH (ARKANSAS) PROFILE

• Not-for-profit health system

• $1B operating revenue

• Hospitals, clinics, post-acute, retail

• Other = Ref Lab, Food, Schools, Sales Tax, 340b, eICU

• Risk Arrangements: CIN, CPC, PCMH, MSSP (new), PACE

• Retirement community & nursing home

• Consolidated JVs (ASC & OP activity)

• For-profit management and non-patient care activities

• Real estate / rental income

• Foundation (grants and contributions)

• No Health Insurance (JV which is not consolidated)

BH

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AICPA REVENUE RECOGNITION TASK FORCES

• Develop a new Accounting Guide on Revenue Recognition

• Guide to provide helpful hints and Illustrative examples on

how to apply the standard

• Guidance will not be prescriptive but instead intended to be a

resource

• Full implementation issues will be posted for comment after

review from the overall Revenue Recognition Working Group

and FinREC

• List of issues by industry is posted on the AICPA website

• www.aicpa.org

HEALTH CARE ISSUES IDENTIFIED

• Revenue recognition for self-pay patients – Comment period

closed, included in AICPA Revenue Recognition Guide

• Application of Steps 1 and 3

• Application of the portfolio approach - Comment period closed,

included in Guide

• Identifying the performance obligation and recognition of

refundable and non-refundable entrance fees for CCRC’s

• Future Service Obligations for CCRC’s

• Significant Financing Components

• Disclosure requirements - Comment period closed

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HEALTH CARE ISSUES IDENTIFIED

• Contract acquisition costs

• Determination of the transaction price as it relates to third-

party estimates - Exposure period until December 1, 2017

• Bundled payments and risk sharing arrangements - Exposure

period until December 1, 2017

• Performance Obligations

• Current practice

� Gross charges, net of self-pay discounts recorded as contractual adjustments

� Bad debt expense recorded and presented separately as a reduction to net patient service revenue if an entity does not assess collectability

• New guidance

� Record revenue at amount entity expects to be entitled to

� Bad debt expense presented as operating expense

� Use of judgment in determining what constitutes bad debt versus implicit price concessions

• No change in charity care guidance

SELF-PAY REVENUE

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STEP 1 – IDENTIFY CONTRACT(S) WITH A CUSTOMER

COLLECTABILITY

• Before applying the model in the standard to a contract, it must be probable that the entity will collect substantially all of the consideration to which it is entitled in exchange for the goods and services that will be transferred to the customer

• If this collectability threshold is not met, a contract with a patient does not exist within the scope of the standard

• A health care entity may make this determination based on past experience with that patient or class of similar patients

• Assessment is based on both the customer’s ability & intent to pay as amounts become due

• May be difficult for entities to assess

• No such thing as cash basis

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BAPTIST HEALTH: CONSIDERATIONS

• Contract is with patient

• Insurance supports probability of collection

• Patient portion varies which impacts collectability

• Patients often present without insurance (EMTALA)

• Medicaid/SSI pending (do they qualify? charity? timing?)

• Insurance coverage identified later in process

• Changes in responsible party (MVA, TPL)

• System operational differences

• EMTALA vs. Other (clinics, urgent-care, retail, home)

• New patients vs. recurring patients

• Tax-exempt vs. for-profit activities

BH

STEP 3 – IDENTIFYING THE TRANSACTION PRICE

• Transaction price is the amount of consideration an entity expects to

be entitled to

• Transaction price reflects the effects of the following:• Variable consideration

• Significant financing component

• Consideration payable to a customer

• Noncash consideration

• Consideration is variable if explicitly stated, or if• Customer has valid expectation arising from entity’s customary business

practices that entity will accept an amount that is less than the stated contract

price

• Other facts and circumstances indicate that the entity’s intention is to offer a

price concession to the customer

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STEP 3 – FACTORS OF AN IMPLICIT PRICE CONCESSION

• Business practice of not performing a credit assessment prior to

providing services (for example required by law or regulation, or

have a mission to provide medically-necessary or emergency

services prior to assessing a patient’s ability or intent to pay)

• Continuing to provide services to a patient class when experience

indicates that it is not probable it will be collected

• Does not have to be communicated to the patient

• FinREC believes that the health care entity has implicitly provided

a price concession to the patient, even if it will continue to

attempt to collect the full amount of charges


• Explicit price concessions

• Contracts & single-service agreements

• Cash-pay schedules (i.e. cosmetic procedures or commodity services)

• Implicit price concessions

• Emergency care or medically necessary

• Verify insurance but patient portion at different risk

• Request payments up front when scheduled

• No credit check for most health care services due to mission

• Clinic and retail practices differ some

• Especially in JV operations

BH

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• Recognize what we “expect” and is “probable” to be collected

• Traditional allowance model relies heavily on aged-approach for

relatively broad bucket

• Decreasing value as it ages with zero value after XX days old

• Once “bad debt” only recognize value if subsequently collected

• Some areas of special treatment (key items, MVA)

• New estimate models will not rely as heavy on aging

• More refined estimate of expected amount on front end

• Will require more detailed approach

• Plan type, service type, etc.

BH

CONSTRAINT OF REVENUE

• Required to evaluate whether to “constrain” amounts of

variable consideration in the transaction price

• Estimate of implicit price concessions should incorporate the

entity’s expectations of cash collections at a level at which it is

probable that the cumulative amount of revenue recognized

will not result in a significant revenue reversal

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• End result may not be significantly different, but should make sure

thought process is complete

• Factors impacting risk of revenue reversal

• Factors outside of our control

• Long period of time before final amount determined

• Limited experience with contract type

• Wide range of historic price concessions

• Balance between being too aggressive or too conservative

• Need to estimate appropriately, but cash basis not allowed

BH

• Entities can apply the standard or aspects of it to a portfolio of

contracts or performance obligations with similar characteristics

(i.e., portfolio approach)

• Entities must reasonably expect that the financial statement effect

of using the portfolio approach will not differ materially from

applying the standard on a contract-by-contract basis

• Key considerations

� How to apply a portfolio approach

� How to establish portfolios

� How to determine effect would not differ materially

PORTFOLIO APPROACH

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• Portfolio approach may be applied to all aspects of the model or

only to certain steps

• If establishing portfolios, an entity will need to use judgment to

determine the size, composition and number of portfolios

� Health care entities may consider segregating by payor class,

type of service and other categories

• An entity also will need to consider materiality and documentation

requirements

PORTFOLIO APPROACH

BAPTIST HEALTH: CONSIDERATIONSBH

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• Have already moved most to a case-level allowance model (home grown)

• Month-end value assigned to each A/R account balance

• Better insight into key-account impacts

• Ability to see impact of change from estimate to actual

• Limited input needed from IT when changes required

• Considering use of a robust tool designed for this purpose

• Technology limitations with home-grown model

• Expand method outside of hospital accounts

• Faster analysis available

• Expected to assist in meeting new Rev Rec requirements

BH


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• HC entities need to consider specific facts and circumstances to

determine if an enforceable contract exists

• Currently, there is no concept of cash basis in the standard

• Medicaid pending status patients

� Use of historical information

� Use of portfolio approach

• Explicit versus Implicit price concessions

• Day 1 versus Day 2 accounting

� Where do subsequent changes to variable consideration get

reported?

• Practical implementation

SELF PAY REVENUE RECOGNITION ISSUES

• When a health care entity performs a credit assessment prior

to providing services to a patient and expects to collect

substantially all of the discounted charges

• For example, an elective procedure in which historical

experience supports collection of substantially all of the

discounted charges

An organization will need to evaluate when it is performing

credit assessments prior to providing services

SO WHEN WOULD THERE BE BAD DEBT EXPENSE?

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• Accounting estimates vs. Rev Cycle adjustment classification

• Charity adjustment for reporting purposes

• Uninsured discount (70%)

• Concession (30%)

• Charity (100%)

• Transfers to collection agency – how posted in system?

• Adjust code drives final reporting: bad debt vs concession

• Key reporting categories will need to be coded correctly

• Charity, bad debt & price concessions

BH


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• Disclosures to enable the users to understand the nature, amount,

timing and uncertainty of revenue and cash flows from customers

• An entity shall disaggregate revenue recognized from contracts with

customers depending on the nature of that revenue

• i.e major payor type, geographical considerations, timing of goods and services

• Aggregated amount of the transaction price allocated to

performance obligations that are unsatisfied, including methods,

inputs and assumptions

• Timing and satisfaction of performance obligations

• Entity to disclose both qualitative and quantitative information

DISCLOSURES

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DISCLOSURE REQUIREMENTS

Understand nature, amount,

timing, and uncertainty of

revenue and cash flows

Disaggregation of

revenue

Contract balances

Performance

obligations

Significant

judgments

Costs to obtain or

fulfill a contract

#AICPAhealth

DISAGGREGATION OF REVENUE FOR HEALTHCARE

Example

categories

Type of customer

(e.g., Medicare,

Medicaid, Self-Pay)

Timing of transfer of

goods or service

Type of service (e.g.,

hospital, nursing

home)

Geographical

location

Type of contract (e.g.,

percent of charges,

cost, fixed, capitated)

#AICPAhealth

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Does ASC 606 require a health care

entity to disclose the amount of the

implicit and explicit price

concessions granted to customers?

DISCLOSURES – IMPORTANT CHOICE FOR HEALTH

CARE ORGANIZATIONS

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• Quantitative and Qualitative Disclosures

• Contracts with Customers

• Significant Judgements

• Assets Recognized

• Level of Detail

• Need enough to explain, not so much it confuses

• Performance Obligations

• Transaction price

• Allocation and subsequent changes

• Explicit vs implicit discounts?

• Practical expedients


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• Determination of the transaction price for third party

settlements

• Medicare/Medicaid cost report settlements

• RAC accruals

• Risk adjustments for Prepaid Health plans

• Other

• Use method which entity expects to better predict the

amount of consideration to which it will be entitled

• Use of Expected Value (probability-weighted amount)

• Use of Most Likely Amount (single most likely amount in a range of

possible considerations)

THIRD PARTY SETTLEMENTS

• Required to evaluate whether to “constrain” amounts of variable consideration included in transaction price

• Objective of the constraint – include variable consideration in the transaction price only to the extent it is “probable” that a significant revenue reversal will not occur

• Estimates must be updated each reporting period


Expected value Most likely amount

• Sum of the probability-weighted amounts in

a range of possible outcomes

• Most predictive when the transaction has a

large number of possible outcomes

• The single most likely amount in a range of

possible outcomes

• Most predictive when the transaction has

two possible outcomes

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• Transition guidance for modified retrospective approach

• Evaluate contracts to determine if substantially all of the

revenue was recognized under legacy GAAP (before the date

of initial application.

• If all or substantially all of the revenue has not been

recognized, the contracts with patients subject to retroactive

settlement by that payor for the open cost report year would

be considered open contracts and FASB ASC 606 will need to

be applied to those contracts for purposes of determining the

cumulative effect adjustment at the date of initial application.



• “Most Likely” Examples

• Open year cost report reserves

• Some current year cost report estimates (bad debt, GME, DSH?)

• Bed tax settlements

• Critical access year end settlements?

• “Expected Value” Examples

• RAC Reserves

• Risk arrangement performance

• Cost report audit results?

• Cost report appeals – likely probability weighted with constraints

BH

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BUNDLED PAYMENT ARRANGEMENTS

• Step 1 - Identification of the contract

• FinREC believes the contract is with the patient not the

third party payer

• Step 2 – Performance Obligation

• Care Coordination is not necessarily a performance

obligation. Need to assess each contract and in addition

consider implied promises and if so are they a distinct

performance obligation

BUNDLED PAYMENT ARRANGEMENTS

• Step 3 – Transaction price considerations

• Variable consideration

• Constraint of revenue

• Use of portfolios

• Significant financing component

• Do you have historical information to estimate the variable

consideration

• Exposed an example for CJR

• Currently working on examples for Capitation

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• BH has none, but following is example

Quality Adjusted

Target Price Per

Patient

Probability

Probability

Weighted

Amounts

Below acceptable 24,500 5% 1,225

Acceptable 25,000 20% 5,000

Good 25,500 60% 15,300

Excellent 26,000 15% 3,900

Probability-weighted quality-adjusted price per patient 25,425

Maximum Quality Adjusted Target Price 2,600,000$

Estimated Quality Adjusted Target Price 2,542,500$

PY3 Adjustment (57,500)$

BH

RESOURCES FOR RISK SHARING ARRANGEMENTS• ASC 954-605

• HFMA P&P Board Statement 11, Accounting and Reporting by Institutional Healthcare Providers for Risk Contracts, revised 1997

• AICPA Health Care Audit Guide

• FASB Concepts Statement No. 5

• SEC Staff Accounting Bulletin 104 (SAB Topic 13)

• HFMA P&P Board white paper on Risk Accounting

#AICPAhealth

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HFMA RISK ACCOUNTING PAPER

• Examples of different types of contracts specifically covered by ASC 954-605

• Fee for service

• Discounted fee for service and per diem payments

• Capitation or prepaid health care services

• Not Specifically covered in 954-605

• Bundled payments

• Pay for performance contracts

• Shared savings/shared loss contracts

• Risk Pools

HFMA RISK ACCOUNTING PAPER

• P&P Statement 11

• Risk pool settlements if known, should be recorded when

the contract term coincides with the providers fiscal period

• When those periods are different or settlement is

unknown, the provider should record an estimate of the

settlement based on actual year to date and experience

and other relevant data.

• These views are consistent with ASC 944-605 for insurance

revenue recognition

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WHAT TO DO NOW?New standard’s effect on revenue and trends in key performance

indicatorsNew standard’s effect on revenue and trends in key performance

indicators

Effect on internal control over financial reportingEffect on internal control over financial reporting

Effect on tax filingsEffect on tax filings

Approach taken by industry and other peersApproach taken by industry and other peers

Cost of implementationCost of implementation

Business effectBusiness effect

WHAT TO DO NOW?

Read the standard & related resourcesRead the standard & related resources

Identify a champion or task force to study the new standardIdentify a champion or task force to study the new standard

Engage Reimbursement, IT, and Finance staffEngage Reimbursement, IT, and Finance staff

Identify revenue streams and the related portfoliosIdentify revenue streams and the related portfolios

Concentrate on Disclosure and if any changes are needed to gather the

information

Concentrate on Disclosure and if any changes are needed to gather the

information

Educate audit committees & boardsEducate audit committees & boards

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• Considering robust modeling tool to automate more of process

• Ability to clearly document impact as well

• Rev Cycle grouping and mapping revisions

• Payer categories and adjustment codes

• GL adjustments to capture new categories

• Document thought process and revised policies in an auditable

fashion

• JV and other misc operations ability to materially meet standards?

• Communicate with board, leadership, rating agencies & bankers

BH

THANK YOU

Tracy Young

Partner

Little Rock, Arkansas

[email protected]

Brent Beaulieu

VP Finance

Baptist Health

Little Rock, Arkansas

[email protected]

revenue recognition for health care providers...partner -bkd, llp brent beaulieu, cpa vp finance...

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