REVENUE RECOGNITION FOR HEALTH CARE PROVIDERS

Transcription

1 REVENUE RECOGNITION FOR HEALTH CARE PROVIDERS Tracy Young, CPA Partner -BKD, LLP Brent Beaulieu, CPA VP Finance Baptist Health ASU 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 1

2 CORE PRINCIPLE 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 REVENUE RECOGNITION PROCESS Identify Contract with a Customer Identify Performance Obligations Determine the Transaction Price Allocate the Transaction Price Recognize Revenue When/As a Performance Obligation is Satisfied 2

3 TRANSITION APPROACHES Transition Approach 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 Cumulative Effect at Date of Adoption Restate for all contracts except contracts covered by practical expedients No contracts restated; reported based on legacy guidance Apply to all contracts January 1, 2017 Apply to all contracts January 1, 2018 BAPTIST HEALTH: TRANSITION CONSIDERATIONS 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 3

4 SCOPE 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 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) 4

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 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 5

6 HEALTH CARE ISSUES IDENTIFIED Contract acquisition costs Determination of the transaction price as it relates to thirdparty estimates - Exposure period until December 1, 2017 Bundled payments and risk sharing arrangements -Exposure period until December 1, 2017 Performance Obligations SELF-PAY REVENUE 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 6

7 STEP 1 IDENTIFY CONTRACT(S) WITH A CUSTOMER COLLECTABILITY Before applying the model in the standard to a contract, it must be probablethat 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 7

8 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 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 8

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 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 9

10 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. 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 10

11 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 PORTFOLIO APPROACH 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 11

12 PORTFOLIO APPROACH 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 12

13 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 13

14 SELF PAY REVENUE RECOGNITION ISSUES 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 SO WHEN WOULD THERE BE 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 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 14

15 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 15

16 DISCLOSURES 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 16

17 DISCLOSURE REQUIREMENTS Performance obligations Contract balances Significant judgments Disaggregation of revenue Understand nature, amount, timing, and uncertainty of revenue and cash flows Costs to obtain or fulfill a contract #AICPAhealth DISAGGREGATION OF REVENUE FOR HEALTHCARE Type of customer (e.g., Medicare, Medicaid, Self-Pay) Timing of transfer of goods or service Example categories Type of service (e.g., hospital, nursing home) Type of contract (e.g., percent of charges, cost, fixed, capitated) Geographical location #AICPAhealth 17

18 DISCLOSURES IMPORTANT CHOICE FOR HEALTH CARE ORGANIZATIONS Does ASC 606 require a health care entity to disclose the amount of the implicit and explicit price concessions granted to customers? 18

19 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 19

20 THIRD PARTY SETTLEMENTS 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 Expected value Sum of the probability-weighted amounts in a range of possible outcomes Most predictive when the transaction has a large number of possible outcomes Most likely amount The single most likely amount in a range of possible outcomes Most predictive when the transaction has two possible outcomes 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 20

21 THIRD PARTY SETTLEMENTS 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 21

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 22

23 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) RESOURCES FOR RISK SHARING ARRANGEMENTS ASC 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 23

24 HFMA RISK ACCOUNTING PAPER Examples of different types of contracts specifically covered by ASC Fee for service Discounted fee for service and per diem payments Capitation or prepaid health care services Not Specifically covered in 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 for insurance revenue recognition 24

25 WHAT TO DO NOW? New standard s effect on revenue and trends in key performance indicators Effect on internal control over financial reporting Effect on tax filings Approach taken by industry and other peers Cost of implementation Business effect WHAT TO DO NOW? Read the standard & related resources Identify a champion or task force to study the new standard Engage Reimbursement, IT, and Finance staff Identify revenue streams and the related portfolios Concentrate on Disclosure and if any changes are needed to gather the information Educate audit committees & boards 25

26 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 THANK YOU Brent Beaulieu VP Finance Baptist Health Little Rock, Arkansas Tracy Young Partner Little Rock, Arkansas 26