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12/7/2017
1
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
12/7/2017
2
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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3
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
Apply to all contracts January 1, 2017
Cumulative Effect at
Date of Adoption
No contracts
restated; reported
based on legacy
guidance
Apply to all contracts January 1, 2018
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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4
• 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
12/7/2017
5
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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6
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
12/7/2017
7
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
12/7/2017
8
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
12/7/2017
9
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
BAPTIST HEALTH: CONSIDERATIONS
• 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
12/7/2017
10
BAPTIST HEALTH: CONSIDERATIONS
• 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
12/7/2017
11
BAPTIST HEALTH: CONSIDERATIONS
• 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
12/7/2017
12
• 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
12/7/2017
13
BAPTIST HEALTH: CONSIDERATIONS
• 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
BAPTIST HEALTH: CONSIDERATIONSBH
12/7/2017
14
• 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?
12/7/2017
15
BAPTIST HEALTH: CONSIDERATIONS
• 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
BAPTIST HEALTH: CONSIDERATIONSBH
12/7/2017
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BAPTIST HEALTH: CONSIDERATIONSBH
• 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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17
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
12/7/2017
18
BAPTIST HEALTH: CONSIDERATIONSBH
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
12/7/2017
19
BAPTIST HEALTH: CONSIDERATIONSBH
• 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
BAPTIST HEALTH: CONSIDERATIONSBH
12/7/2017
20
• 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
THIRD PARTY SETTLEMENTS
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
12/7/2017
21
• 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.
THIRD PARTY SETTLEMENTS
BAPTIST HEALTH: CONSIDERATIONS
• “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
12/7/2017
22
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
12/7/2017
23
BAPTIST HEALTH: CONSIDERATIONS
• 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
12/7/2017
24
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
12/7/2017
25
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
12/7/2017
26
BAPTIST HEALTH: CONSIDERATIONS
• 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
Brent Beaulieu
VP Finance
Baptist Health
Little Rock, Arkansas