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Best Practices in Implementing the New Revenue Recognition
Standard
Washington Alaska HFMA Fall ConferenceOctober 16, 2019
Clark Nuber Offices – Bellevue, WA
Presented By: Vincent Stevens, CPA, CGMA
Cale Middleton, CPA
• Arizona Native
• Graduate from Arizona State University
• Been with Clark Nuber for 20 years
• Current practice focus:– Lead the firms Healthcare and Life Sciences Practice
– President Elect – WA/AK HFMA
– Co-Author of Knowledge Based Audits of Health Care
Entities, published by CCH (a Wolters Kluwer Company)
– Past Featured Speaker at the AICPA
National Not-for-Profit Industry Conference
– Wife, four kids, three grandchildren, two dogs, and
two alpacas
– One semi-famous painting
Vincent Stevens Profile
Cale Middleton Bio
▪ Gonzaga University Alumni
▪ Native of Washington
▪ Spent 8 years in public accounting before transitioning to corporate accounting with MultiCare.
▪ Been with MultiCare just over 15 months now.
▪ Have learned a lot on how complex healthcare is and the accounting is just as complex.
▪ Big NFL football fan (Go Hawks!) and always a fan of Gonzaga Basketball (Go Bulldogs!).
▪ Husband and one big fat cat
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Overall Objectives
• Revenue Recognition (ASC Topic 606)
– Overview of standard
– How it applies to healthcare entities• Implicit Price Concessions
• Portfolio Approach
• Presentation and disclosure best practices for healthcare entities
Background
Objective of Standard
Remove inconsistencies
in current requirements
• Improve comparability
Provide a more robust framework
• Principle based for addressing revenue issues
Improve disclosure
requirements
• Provide more useful information
Reduce the number of
requirements
ASU 2014-09
Revenue From Contracts with Customers (Topic 606)
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• Simplify the preparation of financial statements
Core Principle
• The core principle of this Topic is that:
– an entity recognizes 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.
Definitions
• Contract:
– An agreement between two or more parties that creates enforceable rights and obligations.
• Customer:
– A user or reseller.
– A party that has contracted with an entity to obtain goods or services that are an output of the entity’s ordinary activities in exchange for consideration.
Definitions
• Performance Obligation:
– A promise in a contract with a customer to transfer to the customer either:
• A good or service (or a bundle of goods or services) that is distinct
• A series of distinct goods or services that are substantially the same and that have the same pattern of transfer to the customer.
• Revenues:
– Inflows or other enhancements of assets of an entity or settlements of its liabilities (or a combination of both) from delivering or producing goods, rendering services, or other activities that constitute the entity’s ongoing major or central operations.
5-Step Model
Contract
Promises
Revenues
5-Step Model
An entity recognizes revenue in accordance with that core principle by applying the following steps:
1. Identify the contract(s) with a customer.
2. Identify the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to the performance obligations in the contract.
5. Recognize revenue when (or as) the entity satisfies a performance obligation.
Key Points for Step 1
Five components to a contract:
1. Needs to have commercial substance.
2. Approval by both parties
3. Identifiable rights = assets being transferred.
4. Identifiable payment terms.
5. Probable you are going to collect substantially all of the consideration to which you are entitled.
✓A legally enforceable contract needs to meet the above requirements and can be written, oral or implied by an entity’s customary business practices
Collectability Issues
If collectability criteria is not met, a patient contract does not exist within the scope of
the standard
Collectability determination may be based on past
experience with the patient or class of similar patients
Assessment is based on both the patient’s ability & intent to pay as amounts
become due
Collectability may be difficult for healthcare
entities to assess
No such thing as the cash basis
Step 1: Considerations for Providers
• How does the contract meet the requirements of the new standard (Continued)?
– Collection is probable – biggest issue and generally rely on historical experience with patient or patient group (portfolio approach – practical expedient)• Insurance supports probability of collection
• Patient portion varies which impacts collection
• Patients of present without insurance (charity care?)
• Medicaid pending
• Insurance coverage identified later in process
• Changes in responsible party
• Self-pay (implicit collection rate/amount)
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Key Points for Step 3
• Based on customary business practices, the amount the entity expects to be entitled to in exchange for transferred goods/services.
• May be fixed, variable or both
• Factors to consider:– Variable consideration
– Constraining estimates of variable consideration
– Significant financing components
– Explicit & implicit price concessions
– Noncash consideration
– Payables to customers
Implicit Price Concessions
Factors to consider
Is it the health care entity’s customary business practice for the source of health care revenue to not perform a credit assessment prior to providing services
Does the health care entity continue to provide services to a patient (or patient class) even when it is not probable that the entity will collect substantially all of the discounted charges (gross or standard charges less contractual adjustments or discounts) in the contract based on historical experience
Implicit Price Concessions
If either factor is present
FinREC believes if either one of the factors is present than the health care entity has implicitly provided a price concession to the patient (or patients in the patient class), even if it will continue to attempt collection of the full amount of discounted charges
Implicit Price Concessions
▪Net revenue▪Contractual Adjustments – From Payors and
from Patients (Self-Pay)
▪Reserves for Bad Debt▪Charity Care
▪Handling of contractual adjustments, estimates for uncollectible accounts and self-pay discounts. ▪Analysis of “expected value” of revenue from
different portfolios.
▪Charity Care – Not an implicit price concession and is covered under a separate Codification section (ASC 954-605).
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Self-Pay
▪Self-pay accounts are not 100% collectible. We always expect to collect only a small percentage of the full charges from individuals who are not insured with a balance on their account.
▪This portfolio of contracts is analyzed for collectability and the amount expected to be collected based on historical experience is used to record the net revenue. This difference is deemed to be Variable Consideration.
▪The “Expected Value Method” is used to determine this variable consideration as permitted under ASC 606.
▪The difference between the full charge and the expected amount to be collected is considered an implicit price concession.
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Variable Consideration Reassessment
An entity is required to update the estimated transaction price at the end of each reporting period
If an entity experiences subsequent adjustments that result in decreases to patient service revenue, the entity should re-assess whether its estimation process is still appropriate
Subsequent adjustmentsFinREC believes that changes in the entities expectation of the amount it will receive from the patient (or patient class) will be revenue unless there is a patient-specific event that is known to the entity that suggest that the patient no longer has the ability and intent to pay the amount due and therefore the changes in its estimate of variable consideration better represent an impairment (bad debt)
Will I Have Bad Debt Expense
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
Thus bad debt would be recognized as an expense
This may be the case for elective surgery in which historical experience supports probable collection of substantially all of the discounted charges
Health care entities will need to think through each revenue stream and service type to determine whether you will have bad debt
Bad Debt Observations
Acute care setting:• Likely that in most inpatient settings credit risk is not
evaluated and therefore you would have implicit price concessions
• Some outpatient settings where credit risk is evaluated could result in a credit loss impairment and therefore bad debt expense
SNF, HHA, CCRC:• Most perform credit risk assessment• Generally, services are not provided to individuals deemed
unable to pay• Change in financial circumstances or unknown at the time
services were provided would result in bad debt expense
Step 5: Recognize Revenue
• Obligations satisfied at a point in time
– Retail such as pharmacy
• Obligations satisfied over a period of time
– Generally as medical services are provided
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Portfolio Approach
Practical expedient – Entities can apply the standard to a portfolio of contracts or performance obligations with similar characteristics.
– 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
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Key Considerations of Portfolio Approach
Other considerations
• How will you comply with the materiality & documentation requirements?
• Will you apply the portfolio approach to only certain steps or all aspects of the model?
• How will you determine the size, number and composition of your portfolios?
– Payor class, type of service, other categories?
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What portfolios will you have?
How will you collect data on your portfolios?
How will you determine the
effect will not differ materially?
Portfolio Determination Considerations
• Common considerations for grouping contracts with similar characteristics for health care entities
– Type of service: inpatient, outpatient, skilled nursing, home health
– Type of payors: insurance, government program, self-pay
– Timing of when the contracts were entered into at or near the same time
• May include some or a combination of the above considerations in the determinate of a portfolio
• A healthcare entity may reclassify the remaining self pay balance (co-pay or deductibles) into a separate portfolio after insurance company has paid
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Portfolio Approach
▪ Elected to group the contracts with similar characteristics into a portfolio of contracts and assess the proper revenue recognition treatment for the entire portfolio and not on a contract by contract basis. The following are the portfolios that have been identified:
▪ Inpatient: Commercial insurance, Medicare, Medicaid, Self-pay
▪ Outpatient: Commercial insurance, Medicare, Medicaid, Self-pay
▪ Other operating revenue: Behavioral health services and other miscellaneous contracts, other ancillary goods and services
▪ For each of these portfolios, we determined how the transaction price would be determined.
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Common Questions
Will my systems change? Who should be involved in the implementation process?
Will I have bad debt expense or contract assets?
How will bond rating agencies and investor community look at the new standard?
How will this standard impact other regulatory reporting such as the IRS Form 990, community benefit reporting and cost reports?
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Lessons Learned
• Medicaid pending
– Historical information may not be adequate to see how patients are resolved
– May to look at rate of conversion based on materiality
• Self-pay revenue– May have multiple self-pay portfolios
• Geographically
• Co-insurance and deductibles, high deductible plans, true self-pay, etc.
– How does your system capture secondary payer
– Use judgment on when credit risk is performed
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Lessons Learned (Continued)
• Bundled payments– Determine if additional care coordination after patient discharge is a
separate performance obligation
– Reconciliation process – true up the estimate
• Control changes– Update/document changes to controls
– Monthly control to calculate variable consideration
– Annual control to review portfolio approach
– Analyze new programs/agreements/revenue streams under ASC 606
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Lessons Learned (Continued)
• Change methodology to account for upfront implicit price concession– Consider running dual methodology until comfortable with changes
– Average daily method to be used
– May still consider aging as a secondary look but this could mean variable consideration methodology was not
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Disclosures
Disclosure Requirements
Both qualitative and quantitative information is required
Users Understand
nature, timing & uncertainty of revenue and cash flows
Disaggregation of Revenue
Significant judgements and
changes in judgements
Revenue and impairments recognized
Assets recognized to to obtain or fulfill a
contract
Performance obligations
Contract balances
Disaggregation of Revenue
Potential categories for a health care entity
Timing of transfer of goods or service
Type of service
Type of payer, e.g. Commercial,
Medicare, Medicaid, Self-Pay
Type of Contract
Geographic
Disaggregation of Revenue
Revenue By Payer
Disaggregation of Revenue
Revenue By Region, Service Line, Reimbursement & Timing
Excerpt from AICPA Revenue Recognition Guide
Disaggregation of Revenue
Excerpt from AICPA Revenue Recognition Guide
Disclosure Requirements Considerations
• Level of detail
– Enough to explain, not so much it confuses
• Disaggregations disclosed
– How many?
• Performance obligations
– Over time or at a point in time
• Transaction price
– Allocation & subsequent changes
– Optional disclosures• Implicit price concessions
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MOST LIKELY AMOUNT
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Revenue Disclosure Comparison
2017 Revenue Policy Disclosure
Net Patient Service Revenue
Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party
payors, and others for services rendered. The basis for payment to MHS under the third-party
governmental and private payor agreements includes prospectively determined rates per discharge,
discounts from established charges, and per diems.
Net patient service revenues were billed to the following payors for the years ended December 31, 2017
and 2016:
2017 2016
Payors:
Medicare and Medicaid 42% 41%
Regence 13 14
Premera 13 12
First Choice 5 4
Other 27 29
100% 100%
Other Operating Revenue
Other operating revenue includes revenue from cafeteria sales, retail pharmacy, laboratory revenue
from community providers, medical office rental income, contributions without donor restrictions, grant
revenue, contracted behavioral healthcare revenue and other miscellaneous revenue.
2018 Revenue Policy Disclosure
Patient Service Revenue
Patient service revenue is reported at the amount that reflects the consideration to which MHS
expects to receive in exchange for providing patient services. These amounts are due from patients,
third-party payors, and others and include the variable consideration for retroactive adjustments to
revenue due to final settlement of audits, reviews, and investigations. MHS bills the patient and third-
party payors several days after the services are performed or when the patient is discharged from the
facility, whichever is later.
Other Operating Revenue
Other operating revenue includes revenue from cafeteria sales, retail pharmacy, laboratory revenue
from community providers, medical office rental income, contributions without donor restrictions, grant
revenue, contracted behavioral healthcare revenue and other miscellaneous revenue.
Revenue Disaggregation Comparison
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MHS has determined that the best depiction of its revenue is by its mix of payors as this shows the
amount of revenue recognized from each portfolio. Patient service revenue disaggregated by payor
for the year ended December 31, 2018 is as follows:
Net patient service revenue for the year ended December 31, 2017 is as follows:
2017
Gross patient service charges $ 8,530,562
Contractual discounts (6,056,622)
Charity care (gross) (132,245)
Provision for bad debts (gross) (36,390)
Net patient service revenue $ 2,305,305
2018
Payors:
Medicare $ 781,842
Medicaid 494,737
Premera 359,764
Regence 303,390
Aetna 165,488
First Choice 108,990
Kaiser Permanente 108,539
Self-pay 10,924
Other 446,697
$ 2,780,371
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Revenue Disclosure Comparison
2017 Revenue Valuation Disclosure 2018 Revenue Valuation Disclosure
Net patient service revenue is reported at the estimated net realizable amounts from patients,
third-party payors, and others for services rendered. The basis for payment to MHS under the
third-party governmental and private payor agreements includes prospectively determined rates per
discharge, discounts from established charges, and per diems. MHS evaluates collectability of
revenue based on major payor groupings and uses historical experience to make estimates as
required regarding expected levels of collection based on contractual rates with third-party payors.
Revenue is recognized as performance obligations are satisfied. Performance obligations are
determined based on the nature of the services provided by MHS and are recognized either over time
or at a point in time. Revenue for performance obligations satisfied over time is recognized based on
actual charges incurred through a point in time in relation to total actual charges incurred. MHS
believes that this method provides a useful depiction of the provision of services over the term of the
performance obligation based on the inputs needed to satisfy the obligation. Generally, performance
obligations satisfied over time relate to patients in the hospitals or clinics receiving inpatient or
outpatient services. MHS measures an inpatient performance obligation from time of admission to
time of discharge and an outpatient performance obligation from the start of the outpatient service to
the completion of the outpatient service. Revenue for performance obligations satisfied at a point in
time are recognized when goods or services are provided to patients and customers and it is not
required to provide additional goods or services.
Third Party Settlements
Variable price considerations for third party settlements such as:
– Medicare/Medicaid cost report settlements
– RAC accruals
– Risk adjustments for prepaid health plans
– Other
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• Sum of the probability-weighted amounts in a range of possible outcomes
• 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
EXPECTED VALUE MOST LIKELY AMOUNT
Third Party Settlements
• Must evaluate whether to “constrain” variable consideration included in transaction price.
• “Constrain” – Include variable consideration in the transaction price only to the extent that it is “probable” that a significant revenue reversal will not occur.
• Must update estimates each reporting period
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Modified Retrospective Transition 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 contract with patients subject to retroactive settlement by that payor for the open cost report year would be considered open contracts & 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.
Questions?
Vincent Stevens, CPA, CGMA
425.990.7608
Cale Middleton
253.459.8190
