Revenue recognition guidance under FASB is effective for public business entities and not-for-profit entities that have issued, or are conduit bond obligors for, securities that are traded, listed or quoted on an exchange or an over-the-counter market for fiscal years beginning after Dec. 15, 2017.
This means Jan. 1, 2018, for organizations with a Dec. 31 year-end and July 1, 2018, for organizations with a June 30 year-end. For all other entities, the guidance is effective for fiscal years beginning after Dec. 15, 2018.
While implementation guidance is still being finalized, a significant portion of health care industry information is now available to assist with implementation.
So, what do you do now? First, regardless of your organization’s effective date, start now! The impacts of changes will vary by entity, but ultimately, all will be impacted.
There are four key matters considered to have the greatest potential impact to the health care industry:
Let’s look at the patient accounting system. We’ll cover the other areas in future articles.
Patient Accounting System
First, and most important, the patient accounting system should be reviewed to determine if modifications are necessary to ensure adequate information will be available both for implementation and financial statement disclosure purposes. Significant payors should be reviewed to determine the appropriate level of disaggregation, which may be at a level below the primary payor. This needs to be done both to consider the expected final reimbursement as a result of contractual adjustments and implicit price concessions, and for disclosure purposes.
The definition of implicit price concessions is new, but the concept is fairly consistent with how health care entities currently view these accounts. It is different than a true bad debt expense because the entity really didn’t expect to collect the full balance when the service was performed based on history. This doesn’t mean the balance will not be billed in full or attempted to be collected in full. Instead, it acknowledges that a significant portion of self-pay will not be ultimately collected, and that the portion not paid is not the result of subsequent credit or similar changes to the patient.
The Portfolio Method
The guidance allows the measurement of revenue to be performed using a portfolio method, which is a grouping of similar accounts, as long as the result of using the portfolio method wouldn’t result in a material difference than if the accounts were evaluated individually. In designing or modifying the existing process to estimate the collectability of receivable balances (and ultimately the revenue recognized), current methods generally consider some level of disaggregation by payor. Based on recommendations in the implementation guidance, additional disaggregation may be necessary to appropriately comply with the portfolio method rules. The most common areas of disaggregation include:
The two areas with the highest potential impact during implementation will be self-pay and commercial insurances. This is because both of these “payor classifications” have the potential for collectability to vary significantly depending on the underlying patients, such as differences between uninsured patients and those with balances remaining after a primary insurance payor. The portfolios should also be analyzed for other potentially significant factors, such as large balance patients that may have estimated collection amounts that vary from the average portfolio.
In addition, an area that should also be reviewed further is patient accounts in which the payor may not be known at the time of service. Most commonly this is in the area of Medicaid pending accounts. If there are a significant amount of pending accounts, a process needs to be established to track the ultimate payor and related reimbursement of these accounts. In the example of Medicaid pending, ultimately a patient will generally either end up as Medicaid, self-pay (uninsured), charity, or commercial. Without a history of similar account resolutions, the revenue recognition guidance will generally result in a delay in recognition until the payor is actually known. The rationale is that if the payor is not known, the expected reimbursement cannot be calculated. If appropriate support is not available for this area, it could significantly delay revenue recognition upon implementation.
Once portfolios are preliminarily established, a follow-up question often asked is, “How can we determine if it is materially different if we don’t perform an analysis at the account level?” One way to measure this would be by performing a retrospective review of the estimate. This is often something completed by an auditor during the audit process but really should be completed internally. The goal is to determine the actual results of prior estimates of the allowance. Depending on the patient base, this may need to be performed multiple times (i.e. quarterly instead of annually) or over longer time periods (i.e. six months, 12 months, two years, three years, etc.). Significant differences between original estimates and actual results are an indication that additional modifications or disaggregation may need to be considered.
In addition to the measurement of revenue, adequate patient information is needed to create required disclosures. Public business entities and not-for-profit entities with conduit debt (as discussed above) have new disclosures that require an entity to disaggregate revenue recognized from contracts with customers into categories that depict how the nature, amount, timing and uncertainty of revenue and cash flows are affected by economic factors. Within the health care industry, it is generally expected that revenue be disaggregated and disclosed by payor, based on how each payor impacts the nature, amount, timing and uncertainty of revenue. In addition, other potential factors need to be considered, such as geographical considerations, market or type of contract, and different operating segments or service lines. While nonpublic entities don’t have this quantitative disclosure requirement, they do still have a qualitative disclosure of similar factors.
The above information includes some of the matters expected to impact health care entities in general; however, the actual guidance, the AICPA Health Care Audit and Accounting guide, and other implementation materials should be reviewed to determine if there are any additional considerations for your organization.
The time to begin is now.
Questions about revenue recognition changes and how it affects your organization? Contact an Eide Bailly professional today.