ACCOUNTING FOR BUSINESS COMBINATIONS & REIMBURSEMENT CONSIDERATIONS. Revisit GAAP rules for Business Combinations for NFP Entities

Transcription

1 CPAs & ADVISORS experience clarity // ACCOUNTING FOR BUSINESS COMBINATIONS & REIMBURSEMENT CONSIDERATIONS Susan Miller, CPA, FHFMA, Partner Tracy Young, CPA, Partner AGENDA Revisit GAAP rules for Business Combinations for NFP Entities Discuss Reimbursement Considerations related to Business Combinations 2// experience clarity 1

2 ASC , NFP ENTITIES: MERGERS& ACQUISTIONS Guidance Issued with FASB Statement No. 164, which was codified with ASU (ASC ) Applied prospectively for merger or acquisition dates on or after reporting periods that begin on or after December 15, 2009 Framework is very similar to that used by for-profit entities under FASB Statement No. 141(R) (ASC 805) FASB recognized certain unique features to combinations involving NFP organizations Goodwill accounting is the same as for-profits under FASB Statement No. 142 (ASC 350) 3// experience clarity SCOPE Applies to transactions or other events that meet the definition of either a Merger of NFP Entities or an Acquisition by a NFP Entity Does not apply to the following: Joint venture formation Acquisition of asset or group of assets that are not a business or a NFP activity Combinations between entities under common control Transactions for which control is obtained but for which the target is not required or permitted to be consolidated 4// experience clarity 2

3 KEY TERMS Merger of NFP Entities: Governing bodies of two or more NFP entities cede controlof those entities to create a new NFP entity Cede control: Merging entities do not retain shared control of the new entity Must have newly formed governing body Acquisition by a NFP Entity: A NFP acquirer obtains control of one or more businesses or NFP activities Initially recognizes the acquired entity s assets/liabilities in the acquirer s financial statements Business: integrated set of activities and assets capable of being conducted and managed for the purpose of providing a return in form of dividends, lower cost or other economic benefits 5// experience clarity KEY TERMS (CONT) NFP Activity: integrated set of activities and assets for the purpose of providing benefits as a fulfillment of an entity s purpose or mission Predominantly supported by contributions and return on investment: contributions and investment returns expected to be significantly more than the total of all other sources of revenue 6// experience clarity 3

4 DISTINGUISHING BETWEEN A MERGER AND AN ACQUISITION Usually simple, but can be less clear in certain circumstances Example of merger Three separate NFP hospitals decide to join operations Create one new entity with newly created governing body with members from each of the three legacy boards Three legacy boards give up control to new board (i.e., the new board is not controlled by one of the old boards) Example of acquisition NFP hospital purchases 75% interest in a physician practice Doctors retain the other 25% interest has control over physician practice and would or could consolidate into hospital s financials 7// experience clarity MERGERS VS. ACQUISITIONS (CONT) Previous examples fairly straight-forward What about these scenarios? One entity dominates the process leading up to the combination One entity appoints significantly more of the newly formed governing body, retains significantly more key management or substantially implement all of its pre-existing business practices, operating policies, etc. One entity has significantly stronger financial capacity or one was experiencing significant financial difficulty Cash changed hands between entities Accounting is based on professional judgment based on weight of the evidence 8// experience clarity 4

5 ACCOUNTING FOR EACH Mergers accounted for at carry-over basis GAAP balances of assets, liabilities and net assets from previous entities carry over to the new entity No fair value adjustments Newly created entity in the merger is the reporting entity Not appropriate to present comparative results Operating results are reflected from transaction date forward Acquisition same method as for-profits, with some unique items to the NFP industry Identify the acquirer Determine the acquisition date Recognize and measure the identifiable assets acquired, liabilities assumed and any noncontrolling interest in the acquiree Recognize and measure goodwill, a charge to statement of operations or contributions received 9// experience clarity ACQUISITION ACCOUNTING First three steps on previous slide are generally straight forward Standard does discuss certain unique elements of NFP entities associated with recognizing and measuring identifiable assets acquired, liabilities assumed Fourth step is recognizing and measuring goodwill, charge to statement of operations or contribution received 10// experience clarity 5

6 RECOGNIZING & MEASURING GOODWILL, CHARGE TO STATEMENT OF ACTIVITIES OR CONTRIBUTION RECEIVED Residual amount is left after accounting for fair value of assets acquired, liabilities assumed (could be positive or negative) If consideration (i.e., sales price) transferred at acquisition date is greater than the fair value of the assets acquired, net of liabilities assumed, goodwill should generally be recognized If seller s operations are predominantly supported by contributions and return on investments, the amount would be recognized as a separate charge in the statement of operations If consideration (i.e., sales price) transferred at acquisition date is less than the fair value of assets acquired, net of liabilities assumed, an implied contribution has occurred 11// experience clarity RECOGNIZING & MEASURING GOODWILL, CHARGE TO STATEMENT OF ACTIVITIES OR CONTRIBUTION RECEIVED (CONT) What about a long-term lease of a hospital that is struggling financially? Most likely would be an acquisition Need to refer to specific terms of arrangement How would this be recorded if no consideration is transferred? Assets and liabilities would need to be recorded at fair value as usual Residual will either be a charge to the statement of operations (negative net assets) or implied contribution received (positive net assets) 12// experience clarity 6

7 EXAMPLE FINANCIAL STATEMENT Unrestricted Revenues, Gains and Other Support Net patient service revenue (net of contractual discounts and allowances) $ XXX,XXX $ XXX,XXX Provision for uncollectible accounts XXX,XXX XXX,XXX Net patient service revenue less provision for uncollectible accounts XX,XXX XX,XXX Other operating revenue X,XXX X,XXX Total unrestricted revenues, gains and other support XX,XXX XX,XXX Operating Expenses Salaries and wages XXX,XXX XXX,XXX Employee benefits XX,XXX XX,XXX Supplies XXX,XXX XXX,XXX Professional fees XX,XXX XX,XXX Other operating expenses XXX,XXX XXX,XXX Depreciation and amortization XX,XXX XX,XXX Interest XX,XXX XX,XXX Total operating expenses XXX,XXX XXX,XXX Operating Income (Loss) X,XXX X,XXX Other Income (Expense) Investment return X,XXX X,XXX Equity in earnings of equity investees X,XXX X,XXX Assumption of hospital net assets through long-term lease obligation 10,000 - Total other income XX,XXX XX,XXX Excess of Revenues Over Expenses $ XX,XXX $ XX,XXX 13// experience clarity DISCLOSURE Should disclose items related to acquisition to enable readers to evaluate the nature and financial effect of the acquisition Example on following slide 14// experience clarity 7

8 EXAMPLE DISCLOSURE On,, the acquired the net assets of, (the Acquiree) a not-for-profit hospital that provides health care services in the, area. As a result of the acquisition, the will have an opportunity to expand its service area to include several counties adjacent to those it currently serves. The also expects the acquisition will allow it to provide more comprehensive health care services in its current service area and achieve cost savings through elimination of certain duplicative administrative and other functions. The acquisition was accomplished by the becoming the sole member of the Acquiree, and no consideration was or will be transferred for the acquisition. The incurred $ of third-party acquisition-related costs in connection with this acquisition. These costs are included in purchased services and professional fees in the statement of operations. The following table summarizes the amounts of the assets acquired and liabilities assumed recognized at the acquisition date. Current assets $ 4,000 Property, plant and equipment 10,000 Current liabilities (2,700) Long-term debt (1,300) Total identifiable net assets contribution received $ 10,000 15// experience clarity REIMBURSEMENT CONSIDERATIONS What does the buyer do with the provider agreement and the provider number of the seller? 16// experience clarity 8

9 OPTION ONE RETAIN SELLER S AGREEMENT AND PROVIDER NUMBER Buyer Accepts Provider Agreement of Existing Provider Existing Provider 17// experience clarity WHY OPTION ONE? Simple approach (maintains status quo) may have special payer designation that the buyer cannot obtain (rural referral center, sole community, Medicare dependent, etc.) may already be qualified for participation in the other special programs like 340B to which buyer most likely will never qualify may be receiving other special payments, such as low-volume add-on (scheduled to expire 9/30/17) Potentially receive two separate EHR payments (soon to expire) 18// experience clarity 9

10 RISKS ASSOCIATED WITH OPTION ONE Past sins of the seller could attribute to the buyer RAC issues Cost report settlement items related to years prior to the acquisition Prior meaningful use attestations and payment issues OIG and other compliance/billing issues Malpractice and other legal issues Ways to mitigate? Include language in sales agreement that seller is still responsible for past sins 19// experience clarity WHY DO ANYTHING ELSE? Other options could maximize reimbursement 20// experience clarity 10

11 OPTION TWO RETAIN SELLER S AGREEMENT AND BILL UNDER BUYER S PROVIDER NUMBER Buyer Accepts Provider Agreement of Existing Provider Buyer s Provider 21// experience clarity WHY OPTION TWO? Buyer may have special payer designation that the seller cannot obtain (rural referral center (RRC), sole community, Medicare dependent, etc.) For example, RRC providers have certain advantages related to wage index reclassifications (seller could possibly reclassalong with buyer to better wage index area) Buyer may already be qualified for participation in the other special programs like 340B to which seller most likely will never qualify may have higher Medicaid share, which could possibly add to DSH reimbursement of buyer (i.e., could add to buyer s already existing DSH add-on %) 22// experience clarity 11

12 WHY NECESSARY TO RETAIN SELLER S PROVIDER AGREEMENT IN OPTION TWO IF BILLING UNDER BUYER S NUMBER? Effective October 1, 2013, payments under the Disproportionate Share (DSH) program changed 25% of the payment is based on the legacy calculation; 75% is now referred to as the Uncompensated Care Payment (UCP) The UCP payment in a given year is based upon cost report data previously reported 23// experience clarity WHY NECESSARY TO RETAIN SELLER S PROVIDER AGREEMENT IN OPTION TWO? (CONT) CMS-1607-F provides for CMS policy when hospitals merge States that when the seller s provider agreement is not retained by the buyer, the data from the seller s cost report would not attribute to the buyer August 22, 2014 Federal Register addressed hospital mergers Defined merger to be an acquisition where the Medicare provider agreement of one hospital is subsumed into the provider agreement of the surviving provider Buyer cannot voluntarily terminate the Medicare provider agreement of the seller UCP data can then attribute to buyer 24// experience clarity 12

13 RISKS ASSOCIATED WITH OPTION TWO Since provider agreement is subsumed by buyer, basically the same risks as previously stated Past sins of the seller could attribute to the buyer RAC issues Cost report settlement items related to years prior to the acquisition Prior meaningful use attestations and payment issues OIG and other compliance/billing issues Malpractice and other legal issues Ways to mitigate? Include language in sales agreement that seller is still responsible for past sins 25// experience clarity OPTION THREE RETAIN SELLER S AGREEMENT AND BILL UNDER SELLER S PROVIDER NUMBER Buyer Accepts Provider Agreement of Existing Provider s Provider s Provider 26// experience clarity 13

14 WHY OPTION THREE? Similar options but reversed may have special payer designation that the buyer cannot obtain (rural referral center (RRC), sole community, Medicare dependent, etc.) Buyer may now be able to reclassto another area if seller is a RRC may already be qualified for participation in the other special programs like 340B and buyer may now be able to participate Similar risks associated with this option as well since provider agreement is maintained 27// experience clarity OPTION FOUR BLEND OF PREVIOUS OPTIONS Keep separate at beginning Buyer Accepts Provider Agreement of Existing Provider Existing Provider 28// experience clarity 14

15 OPTION FOUR BLEND OF PREVIOUS OPTIONS but later, merge the provider numbers together Buyer Accepts Provider Agreement of Existing Provider Buyer s Provider 29// experience clarity WHY OPTION FOUR? Maybe the seller qualifies for special payments that are about to expire such as EHR incentives or low-volume payments or benefit of MDH status, etc. Want to maintain two separate provider numbers for a period of time However, once special payments expire, may be beneficial to merge and bill under buyer s provider number 30// experience clarity 15

16 OPTION FIVE REJECT SELLER S AGREEMENT AND PROVIDER NUMBER Why? in case seller won t accept clause in sales agreement to be held accountable for past sins Buyer Rejects Provider Agreement of Existing Provider Buyer s Provider 31// experience clarity HOW TO BILL UNDER ONE PROVIDER NUMBER IN A PURCHASE? Must meet certain criteria in order to bill under the one provider number Per the State Operations Manual (SOM), Chapter 2, section 2024 Merger/Multiple Campus Criteria State Survey Agency ascertains whether to continue to certify the hospitals separately or to certify as a single hospital (i.e., hospital with a main campus and an additional location) Each location of a single hospital must meet applicable condition of participation requirements All locations must comply with applicable state licensure laws All locations of the surviving hospital must meet the criteria found in section 2004 of the SOM (i.e., provider-based rules) 32// experience clarity 16

17 OPTION SIX REJECT SELLER S AGREEMENT AND PROVIDER NUMBER AND START FRESH Buyer Existing Provider Rejects Provider Agreement of and Obtains New Agreement Newly Obtained Provider 33// experience clarity WHY OPTION SIX? Potentially can t bill as one provider number won t accept clause in sales agreement to be held accountable for past sins Other considerations with option six Will possibly hold up cash flow until new provider agreement and number are in place 34// experience clarity 17

18 COMPLETION OF 855 Form 855 required for various items, including change of ownership What boxes to check and when to check certain boxes can be very confusing Recommend discussing with MAC on the front-end or seeking outside advice Improper completion can hold up cash flow 35// experience clarity 36// experience clarity 18

19 THANK YOU FOR MORE INFORMATION// For a complete list of our offices and subsidiaries, visit bkd.com or contact: Susan Miller, CPA, FHFMA// Partner smiller@bkd.com// Tracy Young, CPA// Partner pyoung@bkd.com//