update for health care providers on revenue recognition standard

November 29, 2017

FLORIDA HOSPITAL ASSOCIATION WEBINAR SERIES

Update for Health Care Providers

on Revenue Recognition Standard

Prepared for Florida Hospital Association Webinar Series Page 1

Revenue Recognition

To replace old guidance where revenue recognition was

defined in many different ways

Previous guidance was more industry specific

Effective date for new standard

Public companies and certain not-for-profits annual periods

beginning after December 15, 2017

Nonpublic companies annual periods beginning after December

15, 2018


Revenue Recognition

Step 1 Determine whether you have a contract with a

customer

A contract is approved and the parties are committed (written or

oral)

A contract identifies the rights of the parties (it is evident what

each party is giving and/or receiving)

A contract has payment terms (how much or what is being

exchanged for the goods or services being provided – an

estimate is acceptable)

A contract has commercial substance – the exchange is actually

worth something (intended to prevent companies from loaning

money to customers to buy goods or services to inflate prices

Under a contract collectability is probable – are you going to get

your money?


Revenue Recognition

Step 2 Identify the performance obligations (i.e. who’s

doing what?)

Must specify each performance obligation into distinct pieces or

bundles

If a customer can use or benefit from a specific good or service on

its own, or with other readily available resources, that is

considered distinct

However, if a good or service is dependent upon other items that

are part of the contract that item is not considered distinct.

Therefore, there are situations where a bundle of goods or

services could make up one distinct performance obligation


Revenue Recognition

Common Payment Methodologies

Fee-for-service

Per diem

Per case

Episodic

Capitation

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Revenue Recognition

Step 3 Determine the transaction price (what you expect

to be paid)

Variable consideration – will any factors alter the amount you will

ultimately collect

Constraining estimates of variable consideration – are there

events that will significantly reduce the amount of consideration

you will receive – even things outside of the entity’s controls

Significant financing component – is the customer paying after

you deliver

Noncash consideration – if no cash payment, goods or services

should be measured at fair value of what is being exchanged for

goods and services

Consideration payable to a customer – do you owe anything to

the customer other than the good or service


Revenue Recognition

Step 4 Allocate the transaction price

Based on separate performance obligations

Think about if you were to sell each of the performance

obligations to separate customers what would be the standalone

price per performance obligation

Must think about whether a discount relates to a specific

performance obligation or a general discount that applies

proportionately to all performance obligations


Revenue Recognition

Step 5 Recognize revenue when (or as) performance

obligations are satisfied

When transfer of control occurs you can recognize the revenue

If control is transferred over time the revenue is recognized over

time


Revenue Recognition

AICPA has established Health Care Entities Revenue

Recognition Task Force

Charged with developing revenue recognition implementation

issues that will provide helpful hints and illustrative examples for

how to apply the new revenue recognition standard

Thus far, the Task Force has listed 10 implementation issues on

the AICPA website


Revenue Recognition

Task Force Implementation Issue 1

Consideration of the following regarding self-pay balances:

Application of Step 1 (determine if there is a contract) and Step

3 (determine the transaction price) for health care services

provided to self-pay patients, including uninsured patient

balances and self-pay balances arising from co-payments and

deductibles.

This implementation issue will discuss evaluating whether

a contract exists and what (including consideration of

implicit price concessions) the transaction price is to

arrangements for health care services provided to self-pay

patients and balances arising from co-payments and

deductibles. This implementation has been finalized and

included in AICPA Guide Revenue Recognition.


Revenue Recognition

Task Force Implementation Issue 1a

This implementation issue, being submitted to the FASB, provides

two views over the initial accounting for implicit price concessions

for services provided to uninsured patients and two views for the

subsequent accounting for these types of contracts and whether

changes in the estimates of variable consideration represent

changes in price concessions or impairments. This

implementation has been submitted to FASB.


Revenue Recognition


Application of the portfolio approach to contracts with patient

This implementation issue will discuss how to apply the

portfolio approach to revenue from self-pay patients and third

party payors. This implementation has been finalized and

included in the AICPA Guide Revenue Recognition.


Revenue Recognition


CCRC: Identifying and satisfying the performance obligation(s)

and recognizing the monthly/periodic fees and nonrefundable

entrance fees under Type A or “life care” contracts for continuing

care retirement communities.

This implementation issue will discuss the performance

obligations under a typical Type A (life care) continuing care

retirement community (CCRC) resident agreement and, given

these performance obligations, how a Type A CCRC will

estimate a transaction price and recognize nonrefundable

entrance fees and monthly/periodic fees received from

residents under the new model. This implementation was

resubmitted to AICPA RRWG.


Revenue Recognition


CCRC: Identifying the performance obligations(s) and

recognizing the performance obligation (s) to provide future

services and use of facilities.

This implementation issue will describe the changes to a

continuing care retirement community’s calculation of the

obligation to provide future services and use of facilities as a

result of the new model. This implementation was re-

submitted to AICPA RRWG.


Revenue Recognition


Significant financing component – CCRC contracts, and patient

and third-party payor amounts in arrears

This implementation issue will discuss how CCRCs assess

whether a significant financing component exists in

determining the transaction price for its resident contracts, as

well as how CCRCs and other health care entities will assess

whether a significant financing component is applicable to

patient and third-party payor amounts in arrears. This

implementation was re-submitted to AICPA RRWG.


Revenue Recognition


Disclosure requirements of ASU No. 2014-09

This implementation issue will discuss judgements related to

disclosure requirements under ASC 606 for health care

entities. This implementation was out for exposure until

August 1, 2017.


Revenue Recognition


Accounting for contract costs

This implementation issue will discuss how health care

organizations will account for certain costs of acquiring and

fulfilling contracts under the new model. This implementation

was submitted to FinREC-September 2015.


Revenue Recognition


Consideration of FASB ASC 606, Revenue from Contracts with

Customers, for third party settlement estimates


organizations will account for revenue earned under

arrangements with government programs (for example,

Medicare or Medicaid), which typically contain a variable

element that requires providers to estimate the cash flows

ultimately expected to be received for services provided. This

implementation was out for exposure until September 1, 2017.


Revenue Recognition


Risk Sharing Arrangements

This implementation issue will discuss the interplay between

health care organizations and health care providers that

receive fee for service payments from the Centers for

Medicare and Medicaid Services for services provided to

Medicare patients. This implementation is out for exposure

until December 1, 2017.


Revenue Recognition


Performance Obligations


organizations (other than CCRCs) need to identify the

promised goods and services in a contract with a patient and

determine which of them represent separate performance

obligations in order to apply the revenue recognition guidance.

This implementation was submitted to the AICPA RRWG.


Revenue Recognition

Revenue Recognition Audit and Accounting Guide –

Chapter 7 Health Care Entities

Paragraphs 1 – 5 are being held for future additions related to

Steps 1 – 5

Paragraph 6 – Revenue Streams Related to Arrangements for

Health Care Services Provided to Uninsured and Insured Patients

with Self-Pay Balances, Including Co-Payments and Deductibles


Revenue Recognition

Paragraph 6 Takeaways

A health care entity may consider if it has a written contract with

the patient by considering whether the patient signed any forms,

such as a patient responsibility form, which would be considered

a written contract.


Revenue Recognition


If health care entity determines it does not have a written contract

(for example, the patient refuses to sign a patient responsibility

form), it may consider if it has an oral or implied contract based on

the entity’s customary business practices.


Revenue Recognition


If the patient schedules health care services in advance (for

example, elective surgery), the health care entity may consider if

it has an oral or implied contract.


Revenue Recognition


New guidance uses a different model than historic assumption

that transaction price is amount billed to patient. Under new

guidance, transaction price is amount the provider expects to be

entitled to. Where services are provided to uninsured patients,

the transaction price for revenue is likely to be much less. The

new standard permits the transaction price to be estimated using

a portfolio of contracts.

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Revenue Recognition

Example from Standard

The hospital’s average collection rate from uninsured patients is

ten cents on the dollar. Although the patient’s gross charges for

services were $10,000, the example indicates that the transaction

price the provider can expect to be entitled to is $1,000 ($10,000

X 10%).

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Revenue Recognition

Example from Standard

This example uses a portfolio approach in making that evaluation.

The fact pattern indicates that the hospital does not have any

prior experience with this patient, therefore it is implied that the

hospital is as likely to collect from this patient as from other

patients in this payer classification (or portfolio).

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Revenue Recognition


In a situation where a patient was admitted through the

emergency room while unconscious or against their will, the

health care entity may perform an analysis of the specific facts

and circumstances to assess enforceability, including looking at

customary business practices.


Revenue Recognition


In certain situations, a health care entity may be unable to

evaluate an uninsured patient’s commitment to perform his or her

obligations (for example, pay for services rendered) or determine

if is probable that it will collect the consideration to which it is

entitled until it obtains certain information about the patient. Until

that determination is made, a contract with the customer cannot

be presumed to exist in the revenue model.


Revenue Recognition


A health care entity may make the determination of whether it is

probable it will collect the consideration to which it is entitled

based on past history with that patient or by determining that the

patient qualifies for the health care entity’s charity care policy.


Revenue Recognition


A situation could occur where a patient is admitted to the

emergency room of a health care entity and is unresponsive. The

health care entity may be obligated to provide services to the

patient as required by law. If the health care entity subsequently

determines that the patient is uninsured, it may try to qualify the

patient for Medicaid coverage. This process could take from

several weeks to over a year. Although the party responsible for

payment has not yet been determined, the health care entity may

have historical information for pending Medicaid patients to

determine the transaction price based on the percentage of those

contracts it estimates will a.) qualify for Medicaid, b) qualify under

the charity care policy, and c) become uninsured self-pay


Revenue Recognition

Example

A patient is admitted to the emergency room and is unresponsive.

Provider determines the patient is uninsured, and attempts to

assist the patient in qualifying for Medicaid. If the hospital has

historical information on the ultimate payer class for this individual

– for example, Medicaid or self-pay – the contract is with the

scope of the standard.

If the provider doesn’t have historic information on the ultimate

payer class, the contract only falls within the scope of the

standard once the payer class is confirmed. However, if the

ultimate payer class is determined to be charity care, the

collectability threshold isn’t met, and the contract doesn’t fall

within the scope of the standard.

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Revenue Recognition


An approach based on the use of historical information may be

applied to an individual contract or a portfolio of similar contracts.


Revenue Recognition


A health care entity may apply the guidance to a portfolio of

contracts if it reasonably expects that the effects on the financial

statements would not differ materially from applying to an

individual contract.


Revenue Recognition


Health care entities will continue to not recognize revenue from

charity care


Revenue Recognition


A situation may occur where an uninsured emergency room

patient, for which the health care entity has not previously

provided service, is designated to a payor class based on its

review of the patient’s information.


Revenue Recognition


A health care entity should consider the historical cash collections

from a customer class (for example self-pay) to estimate the

transaction price for a patient.


Revenue Recognition


In determining whether a health care entity has provided an

implicit price concession to a patient with a self-pay balance, the

entity needs to determine whether the customer has a valid

expectation arising from the entity’s customary business

practices, published policies, or specific statements that the entity

will accept an amount of consideration that is less than the price

stated in the contract. It is important to note than an implicit price

concession does not have to be specifically communicated or

offered to the patient by the entity.


Revenue Recognition

Example – Explicit Price Concession

If a patient is determined to be self-paying, and qualifies for the

provider’s uninsured patient discount policy, which is a 50%

discount, this discount is an explicit price concession and reduces

the transaction price from the gross charge of $30,000 to the

$15,000 which is actually billed to the patient.

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Revenue Recognition

Example – Implicit Price Concession

If we continue with the previous example, the gross charges for

services were $30,000 and the amount billed to the patient is

$15,000. However, if the provider has a history of only collecting

17% of the self-pay balance after the explicit price concession,

there is an implicit price concession of an additional $12,500.

Therefore, the provider would expect to collect $2,500. The

provider would record patient revenue and accounts receivable of

$2,500.

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Revenue Recognition

Example – Bad Debt

If we continue with the previous example, we have an explicit

price concession of $15,000 reducing gross charges from

$30,000 to $15,000 under the provider’s uninsured patient

discount policy. We also have an implicit price concession of

$12,500 based upon the providers historical collection percentage

of 17% to record net patient service revenue of $2,500. If upon

collection efforts, the provider is unable to collect the $2,500 from

the patient, the provider will need to record bad debt expense of

$2,500.

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Revenue Recognition


In estimating the transaction price, a health care entity may

determine that it has not provided an implicit price concession,

but rather it has chosen to accept the risk of default by the patient,

and that uncollectible amount better represents impairment losses

or bad debts.


Revenue Recognition

Third-party Settlement Estimates

Under existing standards, a provider makes its best estimate of

third-party settlement amounts based on its knowledge and

experience about past and current events. Under the new

standard, that process will be modified to estimate consideration

using either the expected value (probability-weighting of

alternative outcomes) or most likely amount, whichever is the best

predictor of the future outcome. The estimate should be

recognized only to the extent is probable that a significant

reversal of cumulative revenue will not occur. The end result may

not change the amount accrued in connection with the estimate,

but it will represent some change in the process to develop and

document the estimate.

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Revenue Recognition

Implementation Considerations

Continue to monitor developments of the AICPA Health Care Task

Force

Look for updates to Chapter 7 on Health Care Industry in the

AICPA Revenue Recognition Guide

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Revenue Recognition

Recap

Old/current guidance industry specific

New Guidance from FASB – authoritative – not industry specific

AICPA created Health Care Industry Task Force

Chapter 7 of AICPA Revenue Recognition Guide is non-

authoritative but will help us understand how to implement new

standard

Several implementation issues that have been raised by the

AICPA Health Care Industry Task Force that are still open and in

process of resolution

Stay tuned but prepare to implement

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PERSHING YOAKLEY & ASSOCIATES, P.C.

800.270.9629 | www.pyapc.com

For questions or comments, please

contact the PYA representative below:

Mike Shamblin

[email protected]

800-270-9629

mailto:[email protected]

update for health care providers on revenue recognition standard

Healthcare